How to Read an Exchange Order Book?


How to Read an Exchange Order Book?

An order book is a real-time list an exchange uses to record all oustanding passive orders placed on a marketplace. An order book represents the interests of buyers and sellers, offering a window into the supply and demand dynamics of a given market.

To become comfortable reading order books, it is essential to understand the fundementals of how an exchange works.

When a trader places an order to sell on the exchange, it is called an »ask«, and when a trader places an order to buy, it is called a »bid«. When the exchange finds a counterparty to an order, it will fill the order, closing both the bid and the ask. When this happens a trade is successfully executed. There are many different types of orders, but the primary ones are:

Passive orders, like the limit and stop order, are orders to buy or sell at a specified price or better. Passive orders are placed in the exchange order book and remain there until they are cancelled (by the trader), or consumed by the exchange. They are considered »passive« trades because they do not move the market price.

Active orders, or market orders, are requests to buy or sell at the best-available price in the current market. In a highly liquid market, market orders are executed almost instantly. Market orders are not shown in the order book, instead they are shown in the trade history column to indicate market activity. They are considered »active« trades, because they move the market price to the level of the last order they consume.

Here is an example of an order book on the USD/ market on Bittrex. An entry in the order book contains the price (ask or bid), the size of the order and the total amount to get executed. The SUM column is a running total of the combined orders at this price level.

Order books are organized in such a way that the highest bid and lowest ask are always on the top of the order book, as they are the first to get consumed.

The order book depth can be seen in the bottom corners. Looking at our picture, we can see that the cumulative total of BTC orders is 300 BTC, while the selling total is 60 BTC.

The market depth can also be represented visually in a graph. It sums all buy orders (ascending) and all sell orders (descending) into a chart and stacks them onto each other and displays the consolidated order values on a stacked area chart.

Buy side example:

The buy side represents all open buy orders. Once bids are matched with an appropriate ask, the trade can be executed. When there is an abundance of buy orders (demand) at a specific price level, something known as a buy wall is formed.

Buy walls have an effect on the price of an asset because if the large order cannot be filled, neither can buy orders at a lower bid. The price will not be able to sink any further since the orders below the wall cannot be executed until the large order is fulfilled – in turn helping the wall act as a short-term support level.

Looking at the USD/BTC order book at Bittrex, we can see that there is an order placed to buy 0.002 BTC at the price of 6507 USD. This is also the current highest bid, meaning that is highest price the market is willing to pay. 

Sell side example: 

Conversely, the sell side contains all open orders above the last traded price. The opposite of a buy wall is formed when there is an abundance of sell orders (supply) at a specific price level, known as a sell wall. If there is a very large sell order unlikely to be filled due to lack of demand at a specified price level, then sell orders at a higher price cannot be executed – therefore making the price level of the wall a short-term resistance.

In the picture above we can see that there is an ask placed to sell 0.001 BTC at the price of 6510 USD. This is also the current lowest ask, meaning that is lowest price the market is willing to sell for.

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