Order Book Meaning, Examples, Trading Strategies

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Due to this, it may not be a good idea to make trading decisions solely based on the state of order books. In that shell, as long as you place a buy order that is not cheaper than the current lowest sell price in the Sell Orders book, your order will be the first to be filled. And likewise, if you place a sell order that is no higher than the current highest bid price in the Buy Orders book, your order will again be the first to be executed. In technical analysis, you will be using tool like moving averages and the Relative Strength Index to determine whether to buy or sell an asset. In price action analysis, you will use the arrangement of a chart to determine whether it is a buy or sell. Second, there is time & sales tool that provides more details about the volume, price, direction, date, and time data for each trade.

A limit order book contains orders that a trader intends to buy or sell at a specific price based on their preferences and market condition. When the price hits the limit, the order gets executed automatically. With level 2 market data, traders can see how quickly orders get filled and replaced by new investors interested in this stock. This provides insight into the stock’s liquidity and whether or not it will be a good portfolio addition. When a large amount of limit buy or sell orders are placed at the same price level, it constructs a wall that limits price movement. The price is restricted from moving further down during a buy wall since traders would want to sell for the highest price.

Bid-ask spread

Reading an exchange order book for cryptocurrency can be a challenging task for novice and experienced traders alike. An exchange order book is a digital ledger that displays all buy and sell orders for a particular cryptocurrency on a specific exchange. This information is displayed in real time and can be used to gauge the current market sentiment and determine the potential direction of the cryptocurrency’s price.

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If the market price of an asset rises to $1,000 but no buy limit orders satisfy that offer, the market will have to wait for an aggressive seller to meet the closest bid in the limit order book. For instance, if the highest bid is placed at $950, an aggressive seller will start selling stock at $950 and pull the market down by $50 a share. In this screenshot you can see how the lowest level of liquidity shows clear differences in both buying and selling the asset. And, as we go down, the liquidity increases because there are those who want to buy or sell at more attractive prices for their own trading strategies.


The term “market depth” refers to a market’s ability to sustain large orders without moving the price significantly. The more buy and sell pending orders placed, the greater the depth of the order book. If the green side is higher than the red, there are more buying interests below the current market price, while a higher red shows more selling interest.

  • At this point, we can already recognize the level of information that an order book has and how relevant it is for trading operations.
  • The buy side represents all open buy orders (“bids”) below the last traded price.
  • He has been a writer since 2019, and his experience in the Fintech industry has inspired most of his articles.
  • Knowing how to time your purchase or when you want to make a sale can play a critical role in success — especially when dealing with small margins.
  • On the other hand, if you have a large spread, you will likely see less liquidity for those investments.
  • For this reason, it is vital that every trader understands how this element works and how to read the data reflected in this instrument.

In some order books, the terms “Bid” and “Ask” are used instead of “Buy” and “Sell.” The buyers are the ones who bid, while the sellers ask for a specific price to sell their positions. Every time a limit order is placed, it appears in the order book until it gets executed. The order book lists the amount traders are willing to pay for buy and sell orders, the amount, which is the quantity they want to trade, and the total amount involved. The continuous book provides insight into whether the price of a security is about to get unstable or change its historical pattern.

For example, say that you buy a share of Google for $1,000 and set a trailing-stop up at 10%. The trailing stop will how to read the order book your position if the price reaches $900, but if the price reaches $1,100, the new trailing stop will be $990 (10% below the $1,100). It essentially says that I am willing to buy or sell at this price, no higher, no lower.

Looking at an order book gives you a broad picture of the market-depth. Understanding the various types of orders and how they function is also an important part of being a responsible and successful trader. Each price level will show the given quantity of orders that participants are willing to buy or sell the asset. Almost every exchange uses order books to list orders for various assets such as equities, bonds, currencies, and even cryptocurrencies such as Bitcoin. Buy and sell information may show at the top and bottom of the screen or on the left and right sides. Note that most buy and sell walls appear in order books only for short periods.

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These are just a few of the many ways traders use order book data to make better trading decisions. Traders can also use the order book to identify potential support and resistance levels. A big cluster of buy orders at a specific price may suggest a support level, while a big chunk of sell orders at a specific price can be considered as a resistance area. At this point, we can already recognize the level of information that an order book has and how relevant it is for trading operations.

Level 1 vs. level 2 market data

DTTW™ is proud to be the lead sponsor of how to read the order bookrTV.LIVE™, the fastest-growing day trading channel on YouTube. Next, you need to understand the key terminologies in the order book. A buy or sell order which must be executed immediately in its entirety or else it will be cancelled.

However, even this data can be misrepresented to trick investors into believing a particular market sentiment exists. Market makers and institutional investors are also adept at trading under the radar, keeping their activity out of the spotlight. Level II market data provides the additional information needed to trade based on changes that occur in the bids and offers. A large buy wall shows that traders believe the price will not likely fall below the specific price level. A large order volume may be enough to drive the price upward if the trades get executed. When sellers see buy walls, they typically exit their positions as the price draws closer to the buy wall, increasing the chances of the trade reversing.

If a trader hesitates, the price can potentially fluctuate in a matter of seconds. For example, they can see how quickly the market is moving and know how focused they need to be. They an also see if the market is moving too fast for their tastes and wait to enter. The level 2 market data provides multiple levels of the best bids and offers that have been made for a particular stock. Traders can then tell how many buy and sell offers exist at the different price points by looking at this information.

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The order book also comes with a visual representation in the form of a line https://www.beaxy.com/ to better represent market information. The market depth chart visualizes the supply and demand for a cryptocurrency at different prices and in real time. The continuous book also allows traders to match orders automatically per their preferences and market supply and demand. For example, in the case of a limit trade book, the trader can set a price level for buying or selling a security. When the price hits that threshold, an order gets automatically fulfilled.

  • The order book has a buy and a sell side, revealing the needed information.
  • These functions are incredibly helpful when you wish to buy a very limited number of shares, for example when purchasing expensive stocks.
  • In this screenshot you can see how the lowest level of liquidity shows clear differences in both buying and selling the asset.
  • It is typically a chart that shows inflows and outflows into a stock.
  • Buy orders in the exchange are ranked by descending prices, so the highest bidding price is always located at the top of the buy order book.

It takes two to tango in the world of crypto trading, where a dynamic relationship between buyers and sellers is always on display in something called an order book. For example, the New York Stock Exchange provides Level I and II data for stocks listed on the NYSE. Mainly, it doesn’t just show the highest bid and offer, but also bids GALA and offers at other prices. Level II market data is more complex, because it shows all bids and offers, not just the highest.

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The function of the order book is similar, but the operations are slightly different as the order book here works in a decentralized manner. It is not maintained by any central authority but rather by a network of computers that run the underlying blockchain technology. Boost your trading impact and reaction time in over 80+ cryptocurrencies via instant access to your portfolio with the LiteBit app. Jan 06, 2023 Some terms commonly used in crypto need explanation, and it is obvious why. DYOR, FUD, WGMI, and many more terms and abbreviations are circulating in this space.

How Does an Order Book Work?

An order book is sort of like a ledger — it keeps track of a cryptocurrency (or other security) being bought or sold at given prices. In that respect, it may not be too difficult to envision how a major stock exchange, like the New York Stock Exchange or Nasdaq, might use one.

The highest bid and lowest ask prices are found at the top of the book. Binance order books show the cumulative size of liquidity for each side of the market (buy/sell) up to the top of the book. Buy and sell walls usually occur when large holders of any token aspire to control the prices in their best interests. To this end, groups of traders and wealthy individuals regularly create buy and sell walls to manipulate the markets.

But if information about the transaction is reported after it takes place, the impact on the market may be significantly lowered. Some brokers may provide LTC all of the data feeds for free, but they typically charge higher commissions to compensate. Forex brokers that provide Level II data usually don’t charge for it.

For example, a crypto exchange could have an order book for the BTC/USD trading pair. As traders add, remove, change, and execute orders, the order book will change. An order book is a list of all the pending (or “open”) buy and sell orders that are currently available for a specific trading pair. A key concept that you should understand before placing your first crypto trade on an exchange is the “order book”.


However, Level 2 data or market depth provides a more comprehensive breakdown of how the market values an asset. Besides showing the highest and lowest bid and ask prices of all the market players involved, this data also shows the number of shares they are trading at that price point. Essentially, order books are just a list of active bids and asks on a trading platform, but analyzing the data it holds can bring all kinds of insight to both large-scale investors and day traders. Investors are constantly looking for the best prices, but sometimes exchanges with lower prices may not have the liquidity required to sustain that price for a large order. This is known as slippage and is one of the many things analyzing order books can reveal.

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