Investors who can read all the data available and useful to their financial activities are more likely to be successful.
People might think it is sufficient to spot the most suitable prices, but how to choose those prices when it comes to buying and selling assets?
Every trader and investor has a strategy, but there are some elements that everyone should be able to analyze. One of these elements is the order book: it can give you more information than you might think and, most importantly, it gives you a hint on what other traders are doing.
In this article, we will cover this topic in depth: you’ll learn what a crypto order book is, how to read an order book, and what types of order books are used by different crypto exchanges.
What’s an order book?
An order book is a sort of electronic ledger that tells you what the buying and selling orders on a specific exchange are.
Moreover, it’s important to note that this kind of ledger is used by centralized crypto exchanges, usually preferred by both crypto beginners and institutional investors. Their counterparts in DeFi are liquidity pools.
Every centralized crypto exchange includes the order book – but, as we will see, order books can be slightly different according to the crypto exchange you use.
As mentioned, the order book gives you insightful information. There are some elements that are usually included in every crypto order book:
- Bids – that is, buying orders,
- Asks – selling orders,
- The price at which the orders are placed,
- The total amount of cryptocurrencies involved.
For ease of data reading, asks are usually red, and bids are green.
You’ll find a different crypto order book for each pair, but the data refers to limit orders – that is, orders that traders and investors choose to place at specific target prices.
Knowing how to read an order book is an instrumental skill because it enables you to understand better what other traders are doing and the possible future behavior of the market.
Let’s analyze some practical examples:
- If you see that there are more buyers than sellers, it might mean that a new positive trend is about to start. On the other hand, if there are more sellers, a new downtrend might be behind the corner;
- If you realize that there are more buyers at specific price levels, those levels can represent possible support levels. This can help you to set your trading strategies better and read candlestick patterns. Again, the same reasoning applies if you spot price levels at which the number of sellers is higher since those levels might represent resistance zones;
- Moreover, the order book can help you to place orders that can make you a market maker. Market makers are those who place buying and selling orders at prices that are not used by other traders. Usually, crypto exchanges allow these traders to benefit from lower fees.
- In addition, order books allow you to have a better understanding of market depth. This indicator helps you understand the liquidity of a specific market: the more liquid the market is, the harder it will be for large orders to affect the price of an asset. Moreover, higher liquidity means that you have more opportunities to buy or sell assets quickly and easily.
When a market is not liquid, it’s easier for whales to manipulate the market, and order books are precisely one of the tools used to do that easily. For instance, a whale that wants to sell his assets at a higher price could post a large buying order at a price which is higher than the average price you find in the order book. Traders will then tend to think that big players believe in a rising price for that market and will tend to buy more, actually raising the price of the asset.
So, the more information you find in the order book, the better. We mentioned that not all exchanges provide the same structure for their order books, but the differences are usually small.
Let’s see the order books of some centralized crypto exchanges.
Order books on top of different crypto exchanges
The information you will always find on crypto order books is selling and buying orders, prices, and the total amount of assets involved.
But order books can differ in the information provided or in their structure. Let’s see some practical examples.
Binance, the largest crypto exchange by trading volume, has an intuitive order book where you can find selling and buying limit orders placed (not filled), the price, and the number of assets for each order.
You can also choose to see only asks or only bids, and you can select just a part of these orders to see what’s the average price. On the right side, you can also find market orders.
Binance’s order book. BTC/USDT pair.
The Kraken terminal is even more intuitive. You can find buying and selling limit orders and market orders, and the spread. The underlying bars show you market depth. Also, in this case, you can select orders to see the average price, but you can also fully customize the terminal.
Kraken’s order book, BTC/USD pair.
Let’s see the extended version of the order book of Poloniex. Here you can see the order book of the BTC/USDT pair.
Of course, you can find buying and selling orders, then the market depth – constantly updated – and more specific info in addition to the price, like the number of tokens involved, the price in both currencies, and the sum.
Poloniex’s order book. BTC/USDT pair.
Another example is the order book of CEX.IO. Here you can find the placed orders and the market depth charts in two different sections. The largest orders are constantly highlighted in the order book. You can also find a different ledger with filled orders.
CEX.IO’s order book. ETH/EUR pair.
Summary
The order book is a pivotal element of centralized crypto exchange. It guarantees a higher degree of transparency, but to use this to your advantage – whatever strategy you’re using – you should be able to read the data provided.
Order books are usually divided into two parts that show you buying and selling orders, the price at which the limit orders are placed, and the number of tokens involved in each order.
Order books may differ in structure or because of the information provided: some show only placed orders, and some also show filled orders – which is particularly useful when looking for fully transparent information. Some order books are so developed that traders could virtually use only the order book to trade without looking at price charts.
From order books, you can spot possible trends, resistance and support levels, and understand the level of liquidity of a specific market.
Of course, reading order books correctly requires patience and practice, but it’s absolutely worth it.
FAQ
What do you mean by order book?
An order book is a sort of electronic ledger you can find on centralized crypto exchanges. It records buying orders – bids – and selling orders – asks. Usually, bids are green and asks are red. You can use them to discover what other traders are doing, have a deeper understanding of what are the possible future market developments, and better set your trading strategies.
How do you use an order book?
Order books can give you a lot of useful information: you can spot the beginning of a new trend if you see more buyers than sellers or vice versa, you can spot possible resistance (when there are more sellers at specific price levels) and support (when buyers exceed sellers) zones, you can understand the liquidity of a market.