Order book on a crypto exchange: how to analyze order book data

The image of a regular order book on the background of the stock chart

 

Trading on a crypto exchange is a complex and multifaceted process that constantly requires the attention of participants and the ability to read fresh data.  To find out the current offers for the purchase and sale of digital coins, the trader uses an order book, which, in turn, displays all the current orders of the trading participants.  The ability to quickly navigate the order book is able to optimize the trading process and focus on important and relevant information.

 

What is an order book

 

An exchange order book is one of the windows of the trading terminal, into which the data of current open orders from all participants in the trading process are displayed.  Depending on the trading platform, it can be in the form of a table or a graph with data.  In some cases, the order window may be displayed in a combined form.

 

First of all, you should familiarize yourself with the types of orders and their features.  A separate material on our website is devoted to this: order types

 

What data does the order book contain?

 

To read the order book data from traders, it is enough to understand what parameters the order has on the crypto exchange and how the asset exchange process takes place.

 

In fact, any order book is divided into 2 parts.  One of them contains the buyers' orders (Bid), and the other contains the sellers' orders (Ask).

 

Both parts of the stock book include:

 

  •      transaction price;
  •      volume of traded cryptocurrency;
  •      the volume of orders on a cumulative basis
  •      some exchanges also display the number of open orders at a given value

 

It works as follows.  For example, a trader wants to sell 2 coins of the Bitcoin cryptocurrency at a price of 10,000 USD for one coin.  The amount of his deal is 20,000 USD.  He places an order for the sale of cryptocurrency, which is instantly published in the order book, and then the trading core of the exchange automatically finds buyers who have opened counter orders to purchase an electronic bitcoin coin at the same or better price.

 

Bid orders

Asset buyers' orders are called bid orders.  Their peculiarity is that bid prices are always lower than the cost of offers for sale, which is quite logical.  In some cases, a cascade purchase of a cryptocurrency on an exchange at a price below the market price can lower its rate.

 

Ask orders

Ask orders are sellers' orders.  Their price is always higher than the bid value, since it is more profitable for sellers to sell their assets at a higher price.  If ask offers at an overpriced prevail in the auction, the quotes of the traded asset may increase.

 

The difference between the highest Bid and the lowest Ask is called the spread.  What is a spread and how to work with it, we will tell you separately.

 

Analysis of order book data

In fact, the analysis of the order book consists of tracking the behavior of buyers and sellers.  It is important to understand the basic principle of trading, which consists in overpricing by sellers and underpricing by buyers.

 

In order for transactions to be successful for both parties, the spread must be minimal.  At the points of reaching a compromise between traders, their orders are closed and the exchange of assets is completed.  In other words, when opposite orders (for example, Bid of this user and Ask of another user) have the same price, the exchange closes them, transferring the corresponding assets to the buyer and seller.

 

Opening and closing orders

A beginner trader must first understand how to read order book data in such a way as to open and close deals in a timely manner.  For example, if the chart shows that the cryptocurrency is getting cheaper and the ask price is gradually decreasing, it is quite appropriate to open a buy order just below the current average value.

 

In general terms, the same mechanism for opening deals works and vice versa.  Before opening an order to sell his asset, the trader waits for its growth and sets a higher price.

 

If you need to sell quickly an asset at the current price, a market order is opened.  It is executed instantly.  If the current price does not suit the trader, he can open a limit order, which will become active when the cryptocurrency rate reaches the price specified by the trader.

 

Afterword

The order book on the crypto exchange allows traders to quickly and accurately track the current asset prices, as well as correctly manage their trades.  Along with the chart of currency pairs, this information window reflects the current “mood” of the participants in the trading process, by which you can quickly navigate in building a trading strategy and achieve maximum profit.

Published: 2020-11-13