When you trade crypto on an exchange, you will find a table of changing numbers in red and green in real-time. It is called the order book. This tool can help traders determine the most suitable price to sell or buy an asset. In this article, we’ll take a closer look at what an order book is and how to read it.
The order book is a real-time feature that tracks the demand and supply of crypto assets on trading exchanges. It displays a table containing information about all purchases (bid or buy) and sales (ask or sell) of a crypto trading pair. Examples of trading pairs include BTC/USDT, ETH/USDC, SAND/USDT, and others.
In the order book, there are several important elements, which are as follows:
Volume or total: The total amount of crypto assets bid or asked for at each price.
Order books used by centralized exchanges (CEX) such as Binance and Coinbase are centralized and controlled by their respective platforms. The platform controls the entire operation, including the custody of traders’ funds, order handling, liquidity management, and order book management.
Besides the standard order book used on CEXs, there is also a decentralized order book used on DEX. Read more in the article What is Decentralized Order Book?
In every crypto transaction, two parties must be involved: the seller and the buyer. When you buy a crypto asset, it means that someone is willing to sell the asset to you, and vice versa. The transaction will be executed on the order book when the prices submitted by the buyer and seller match.
The order book actually displays the limit order queues of other people. People who trade with market orders (sell or buy an asset at the market price), will not appear in this feature as they execute the transaction immediately without waiting in the order book queue.
Limit orders allow traders to set orders and wait for the best price, while market orders are executed immediately at the market price.
So, basically, the order book shows how many limit orders (buy and sell) are active in real-time. The buy limit order queue is shown in green (bid), and the sell limit order queue is in green (ask).
You can read it from the centre which shows the traded price; for example, the price of BTC/USDT in the image below is at 28,453.03 US dollars.
In the ask column (sell), the price will increase from bottom to top, indicating that sellers want to get the highest possible selling price. While in the bid column (buy), the price will decrease from top to bottom, indicating that buyers want to get the cheapest possible buying price.
This is the basic principle of reading an order book, where traders try to get the most profitable price according to their position, either as a buyer or seller.
For more details, check out the example of an order book on the BTC/USDT crypto asset below.
If you want to sell 20 BTC/USDT via market order, the order will be executed gradually from the best bid price of 28,453.03 to the next best bid price. The last traded and best bid prices will be updated once your order is filled.
Market Depth is a real-time measure of limit order volume. It indicates the ability of a trading platform or centralized exchange (CEX) to execute large orders without affecting the price. Market depth is also a key indicator of the liquidity of a CEX.
The deeper the market depth (the more liquid), the smaller the market impact of large orders and the lower the risk of price manipulation.
From the image above, for example, you want to buy 5,000 BTC/USDT through a market order on an exchange.
With a lower market depth on Exchange A, you would have to buy at a different price and spend more money, pushing the price up.
To buy $5,000 BTC on Exchange A, you must buy 1,000 contracts five times at $9,200, $9,300, $9,400, $9,500, and $9,600. You would spend $5,000 to buy 0.532 BTC in total. When your order is executed, the best ask price will be pushed to $9,700.
With deeper market depth on Exchange B, you can efficiently execute orders at the same price, resulting in lower trading costs and minimal price impact.
You can easily execute the order on Exchange B because there are 10,000 BTC/USDT sell orders at the best ask price of $9,200. Thus, you spend $5,000 to buy 0.543 BTC; the best ask price remains at $9,200 after the order is executed.
As such, better market depth on Exchange B results in lower trading fees and less impact on the price. It benefits you and other traders.
The order book in crypto trading is a good tool for determining the entry price to sell or buy. Here’s how to use the order book that can help you make decisions for trading:
Using the order book is a skill that requires practice and a deep understanding of the market. Combine information from the order book with technical and fundamental analysis knowledge to make better trading decisions.
But keep in mind that the order book changes in real-time, so constant monitoring is required to understand the ongoing price trends. These are essential skills in crypto trading that can help you make better decisions.
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