Using the orderbook to determine entries
It is important to understand what an order book is and how its market depth chart can help you in determining entries for your trades. This article will help you navigate through both.
The order book is a list of all outstanding limit orders to buy or sell a cryptocurrency. It is divided into a bid side and an ask side. In the former, prices are sorted from highest at the top to the lowest at the bottom. In the latter, it is the other way around. Each price level contains the following on Binance (order books on other exchanges might slightly differ):
- Amount: The number of units from the order at this specific price level attempting to be traded. In other words, how many coins (e.g., BTCs) are available to be purchased or sold at this price level.
- Total: How much it would cost you to buy or how much you would receive if you sold
When traders want to buy, they look at prices on the ask-side to find out what price the sellers are willing to accept. Vice versa, when they want to sell, they look at the bid-side to see how much buyers are willing to pay. Trade is executed once a buy order finds a seller or a sell order finds a buyer.
The depth chart is a graphical representation of the order book. It visualizes the present supply and demand of a cryptocurrency on the market. The x-axis displays prices, and the y-axis shows the total of coins/tokens from all submitted orders up to that price. The graph is split into two sections: bids on the left and asks on the right.
On the bid size, you should pay attention to the graph from right to left. At each price level, you can see how many coins/tokens you would be able to sell at or above this price. On the ask size, you look at the graph from left to right. At each price level, you can see how many coins/tokens you would be able to buy at or below this price level.
In the example below, you want to sell 500 SOLs as quickly as possible. On the bid side, you notice that you may sell to orders: 1, 2, 3, 4, and 5 in part. If you wanted to acquire 500 SOLs, you would look at the ask side and see that you could purchase the whole sell order 1 and a portion of sell order 2.
You will often notice the so-called walls. These are the price levels at which a significant number of buyers/sellers have placed their buy/sell orders. They “block” the orders at lower price levels (bid side) and higher price levels (ask side) from being filled.
In other words, to bring prices down/up to a certain level, all buy/sell orders from higher/lower price levels must be filled. When demand suddenly decreases, prices naturally go down. In contrast, when there is less supply, the prices increase. This is best exhibited when major walls disappear.
To conclude, a market depth chart is a helpful tool for visualizing supply and demand and determining which one is bigger. Also, it helps traders determine the right price levels for their entries.