Trading Basics: What is an order book?

This article, ‘Trading Basics: What is an order book’ talks about the order book in exchanges and how you can use it to make a better trading decision.

If you’re a cryptocurrency enthusiast and you have moved beyond buying only Bitcoin and Ethereum on fiat exchanges like Coinbase or Gemini, then part of your wealth strategy would have included buying altcoins.

Altcoins are mainly found on the Altcoin exchanges like Binance, Bittrex, Poloniex, Bitfinex among others.

If you’re familiar with buying stock through a brokerage, you would have noticed an interesting feature on these crypto exchanges that are typically not found on the stock brokers: the Order Book.

What is a Cryptocurrency Order Book?

Simply put, the order book is a list of buy and sell orders for a specific crypto, organized by price level. It shows the number of cryptocurrency being bid or offered at each price.

It means you’ll be able to see the number of coins being offered or request for, at each price level.

 

Features of the Order Book

An order book gives you useful information when buying or selling a cryptocurrency.

Let’s use Binance’s as an example:

First, it shows you the last traded price of the coin or market price. (The big red bolded number)

Next, it shows buyer and seller interest.

Observing both will give you an idea of whether this coin is likely bullish or bearish.

For example, an order book with many buyers (more green) near the market price, it is likely that the coin will have a strong support that near the current price.

The converse is true. If there are many sellers near the market price of the coin (redder), it means that there is strong resistance and will likely cause prices to not go above a certain level.

With the charts from Gemini and Poloniex, this interaction can be seen clearer.

On Gemini, the continuous order book (the blue and orange chart) looks pretty balanced for Bitcoin purchases.

On Poloniex, it looks like Ethereum has slightly more buy orders than sell orders near the market price. Traders like to call it a buy wall.

In this case, it appears Ethereum may be slightly bullish in the very short run.

Third, it shows you volume and liquidity.

An order book can have many orders, or it can have a few. If the order book has a few orders only, it means to say it is illiquid. This means that there is not much trading on the platform regards to this crypto – which also implies that you probably won’t get a good price on your coin.

On the other hand, liquidity is often higher for popular coins like Bitcoin or Ethereum, but also in higher volume exchanges like those stated above (i.e. Binance, Bittrex, Poloniex, etc). This means that you’ll be able to both buy or sell a coin near the last traded price and also get it filled quickly.

This is good for traders because as a trader you’d want to move in and out of coins as fast as possible. Any delay in filling orders may mean you’re taking a greater loss or making lesser profits.

Here is the volume for Ethereum (ETH) and a lesser known coin Iconomi (ICN).

The differences in volume are obvious. This means you’ll be more likely getting your desired price for Ethereum and getting your order filled faster than with Iconomi.

A Word of Caution

Because these order books are limit buy orders set into the system by individual or collective accounts, they don’t actually imply a commitment to buy the coin at those prices.

Anybody can create those buy orders and then remove them in a few seconds. Sometimes, people can create these ‘fake’ buy orders or sell orders to create a false perception of demand, and then remove them as the market price approaches without any penalty.

Hence, the order book is not gospel and must be taken with a pinch of salt. You’d never know how many computers, robots and algorithms are behind these numbers, and how many of them are real.

While they are useful indicators of demand and supply, do not entirely rely on them. Use these order books as a part of a bigger overall strategy.

What do you think? Do you rely on order books to determine a time to buy? Comment on the section below!

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