Centralized crypto exchanges facilitate seamless trading of digital assets by matching sellers and buyers using what’s known as an order book. In this guide, you will learn everything about an order book and its role in cryptocurrency trading.
What’s an Order Book?
In every crypto exchange, there is a section that displays sell and buy orders for a particular trading pair. This is called an order book. It offers traders important information regarding market demand or supply and helps them determine good trade entry points.
Note that the information on order books is delivered in real-time to enable traders to make appropriate trading decisions. However, you will notice that order books differ from one exchange to another in terms of visual presentation. Nonetheless, they all have the same features and functions.
An Order Book’s Components
Bid and Ask
Order books have three columns: amount, total, and price. The columns are found in both the buy and sell sections. The buy section usually displays bids (buy orders), while the sell section shows asks (sell orders). Asks indicate an asset’s supply, while Bids show its demand.
The “amount’ column displays the number of orders placed at a particular price level, while the “total” column shows the cumulative amount of orders placed at various price levels.
Market Depth Chart
This chart on the order book displays a crypto asset’s real-time demand and supply at different price levels. The market depth chart has vertical (y) and horizontal (x) axes. The y-axis show number of open orders, while the x-axis displays the prices at which orders have been placed.
So what’s market depth? It refers to the market’s capability to handle huge orders without prompting massive price movements. That said, the order book’s depth expands when traders place more sell and buy orders.
Important Terms
There are multiple terms you should understand to help you interact better with order books. They include;
Bid-ask spread: This is the difference between the lowest ask and the highest bid. Market markers take bid-ask spread as their profit.
Slippage: This is a scenario where an order is not filled at the expected price. Slippage happens when a crypto exchange has a thin order book, or the market is experiencing high volatility.
Limit order: When a trader instructs an exchange to execute an order at a particular price, that is known as a limit order.
Market order: This type of order is executed at the current market price.
Order book liquidity: Before explaining order book liquidity, it is important we define liquidity. It is a measure of the ability of a trading platform to execute trades. When an exchange’s order books are highly liquid, traders can easily complete trades.
Support and Resistance: A price level that attracts significant buying interest is known as support, while one that attracts selling interest is called resistance.
Stop loss: This is a price level at which a trader instructs an exchange to sell their position to avoid more losses.
Take profit: It is a price level set by a trader to exit the trade after achieving their desired profits.
How to Use Order Books in Crypto Trading
Market Trend Discovery
In case the market depth chart shows more buyers than sellers, then it may suggest a bullish trend is about to start. Conversely, if this chart indicates more sellers than buyers, it could signal an impending bearish trend.
Although this data can help you predict price movement, it is crucial to conduct a technical analysis to ascertain that a downtrend or uptrend is imminent.
Assess Liquidity
When a market depth chart has a thin horizontal wall, it means the liquidity of the crypto asset is low, and when the wall is wide, it suggests high liquidity. Checking the liquidity of an asset is vital as it determines the ease at which you can execute trades.
Conclusion
The above-mentioned use cases of an order book indicate the importance of this tool. So whether you are trading futures or options, you will need an order book to help you make proper trading choices.
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