When faced with crypto's lightning fast velocity, the ability to capture a real-time view of trading activity can be an influential tool for crypto traders to wield. Good news: the order book provides just that.
An order book is a list of every pending buy and sell order for a specific cryptocurrency. It's used by exchanges to match buy orders and sell orders, and determine the price of an asset. As a result, the order book is an essential tool for crypto traders, as it shows the volume of user transactions and market liquidity.
As a trader, you can use the order book to your advantage, studying the data it contains to inform your next position. We're here to help. In this article, we'll explore what an order book is, what its various components are, and how to use the order book to help you make crypto trades.
TL;DR
An order book is a list of the current pending buy and sell orders for a particular pair of assets. It's used by exchanges to match orders and determine the price of an asset.
The order book typically shows the price of an asset, the quantity being traded, and the cumulative quantity of the asset being bought or sold.
Traders use the order book to inform their trading decisions. It gives insight to market depth, liquidity, and potential support and resistance levels.
Order books do have certain limitations, such as giving narrow insight limited to one single exchange, the potential for false and misleading signals, and that historical data isn't visible.
Breaking down the crypto order book
We've established what the order book is — a list of the pending buy and sell orders on a crypto exchange for a specific asset. The visual seen above shows what a typical order book looks like on the OKX exchange, for the BTC/USDT spot pair specifically. Let's take a look at all the elements of the order book.
Price
On the far left is the column marked 'Price'. For the figures in red, that's the ask price (or the sell price) a trader wants to sell the asset at, in this case, BTC. The figures in green show the bid price (or the buy price) traders want to buy the asset at.
On the OKX exchange, the prices run top to bottom from highest to lowest for both ask and bid prices, which impacts how orders are matched (there's more on order matching below). The prices towards the middle of the order book are more competitive and closer to the true market price. Meanwhile, prices at the top of the order book for the ask price and the bottom for the bid price represent traders attempting to get the best price possible.
Amount
'Amount' refers to the quantity of the asset being traded at the price shown. It's important to keep in mind here that traders can buy and sell full units of a cryptocurrency or portions of a unit.
Total
'Total' refers to the cumulative quantity of the asset being bought or sold at the stated price. It can be used as a measure of overall liquidity at specific price points.
You'll also see a figure in the middle — shown in our BTC/USDT example as 62,365.3. That's the mid-market price, which shows the average price between the best ask and bid price.
Meanwhile, you'll find two percentage figures at the bottom of the order book — one each for the buy and sell orders. This represents the volume of trade on the exchange, providing a measure of market liquidity.
And, the horizontal bars — seen in red or green depending on the order — provide a quick visual representation of the total amount of an asset being bid on or offered at that specific price point.
Key terms to know
Now that we've looked at the details of the order book, it's important to understand some key terms as you trade using the order book.
Top of the book
The lowest ask price and the highest bid price. These orders will most often be filled first.
Bid-ask spread
The difference between the highest bid price and the lowest ask price. A smaller spread usually means that liquidity on the exchange is high — meaning there are many buyers and sellers. A higher spread suggests low liquidity, which can bring greater price volatility.
Market order
A market order is an order placed by a trader to buy or sell an asset at the best available current price in the market. Market orders allow traders to open a position immediately.
Limit order
A limit order is an order placed by a trader to buy or sell an asset at no more or no less than a specific price, depending on if it's a buy or sell order. Limit orders give traders greater control over the prices they receive.
Slippage
When the executed price differs from the price a trader expects. High slippage usually happens when liquidity is low, where prices can rise and fall quickly.
Stop-loss
A risk management tool that allows traders to set a price point where their open trade will automatically be closed. The stop-loss helps traders to minimize their losses when prices move against their expectations.
Take profit
Another risk management tool traders use to automatically close a position that’s grown in value, with the intent of locking in a gain.
How does the order book match orders?
Let's look now at how the order book matches buy and sell orders. As mentioned above, the order book structures bid and ask prices from highest to lowest. When an order comes in, the exchange will give the best available price from those in the order book — known as the top of the book. If the quantity of the bid and ask order match, the order will be filled. If the quantities don't match, the order with the next best available price (the new top of the order price) will then also be used, and so on.
Here's an example. A buy market order for 20 BTC is received, and the best sell price is for a quantity of 15 BTC. The exchange will use the 15 BTC sell order to cover two thirds of the buy order. The next best sell order is for 10 BTC, so the exchange will use 5 BTC from this order to cover the rest of the original buy order.
How to use the order book in your trading
Now that we understand what the order book is and how it works, how can you use it in your own trading?
Identifying support and resistance levels
The order book can give you clues as to where support and resistance levels might be found. If a number of buy orders are seen at a specific price level, this may indicate a support level. Conversely, a group of sell orders at a certain price point could hint at an area of resistance.
Pricing your order
By giving visibility to the best available buy and sell orders, you can use the order book strategically to price your order, in an attempt to gain a favorable price. Using our BTC/USDT example above, if you were looking to sell BTC, you could place a sell order for around 62,365.3 in the hope that you can capture the best price. However, keep in mind that this price isn't guaranteed, because better sell orders will also be in play. In this scenario, using a limit order might be beneficial, as it could give you more control over the final price your position will be executed at.
Analyze market depth
The order book can be used to measure the overall market depth for an asset, which is closely linked to liquidity. A deep market for a pair suggests a high volume of traders on both the bid and ask side, which should theoretically mean fine grained prices. The opposite is also true, as low market depth suggests prices can be easily moved by large market orders. Many traders will look at market depth in the context of their risk tolerance before deciding whether to trade a pair. If they're risk averse, pairs with a low market depth and volatile prices might not be a wise move.
Advantages and limitations of order books
Although the order book can be a useful tool for traders, it's important to be aware of both its limitations and advantages.
Advantages
Transparency: Every trader gains access to the same real-time pricing data, including volume and the current best available prices.
Finding entry and exit points: Because order books can be used to identify support and resistance levels, traders can use the feature to place effective entry and exit points for their trades. That's because support and resistance levels often signal a change in an asset's price action once reached.
Visibility to manipulation: Studying the order book can help you identify market manipulation. Typically, this will see multiple traders place large orders to influence current supply and demand. With this visibility, honest traders can close their positions and adjust their strategy to avoid a loss.
Convenient trading of crypto pairs: The order book is vital in allowing exchanges such as OKX to offer users easy access to multiple trading pairs for spot trading. Traders on major exchanges benefit from the high liquidity available, which can help them gain a favorable price with lower slippage.
Limitations
Narrow view of a single exchange: Order books are limited in the breadth of their insight, as they only show market depth and price action from a single exchange. The prices found on one order book, therefore, may not represent an asset's true value.
Limited information: Because order books only show current orders and not past trades, they may not reveal the true sentiment towards an asset. Here, also looking at past performance is key to understanding the full picture.
False signals: Order books are sometimes prone to flashing false signals, often caused by large orders placed to manipulate the market. Some traders may make the mistake of reacting to these false signals without proper technical analysis, and lose out as a result.
The final word
Put simply, the order book provides you with valuable information to help you make more informed trading decisions. By giving a transparent view of both bid and ask orders being placed on an exchange in real-time, you can build a picture of market sentiment and activity, helping you with price discovery. Although the feature isn't without it's limitations, such as the narrowness of its insight and the potential for false signals, it's another valuable tool for guiding your decision making amid crypto's inherent volatility.
Interested in learning more about technical analysis to help you make smarter trading decisions? If so, check out our guides to bear flag patterns, the moving average convergence divergence indicator, and stochastic oscillator.
FAQs
In crypto, an order book is a list of all pending buy and sell orders received by an exchange. The order book is used to match these buy and sell orders together, so traders can open a position at the most favorable price available.
Many would agree that it's wise to include the order book in your technical analysis and research. You can use the order book to identify support and resistance levels, judge liquidity in the market, and predict the degree of slippage you may encounter from a trading pair.
While the order book as an electronic list can't be directly manipulated, it is possible to manipulate the prices shown in the order book. This typically involves a number of traders placing large orders to drive the price of an asset up or down. However, because of the feature's transparency, it's possible to spot this manipulation in real-time and act accordingly.
Most exchanges do, but not all. Exchanges may present their order books differently, but generally they'll feature the same components for ease of use. If you're familiar with an order book from trading stocks, an order book from a crypto exchange will likely be familiar.
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