How to read an Order Book and how to use it !
What is an Order Book ? 📖❓❔
As you probably know, the price of an asset is the result of supply and demand, which evolve at each moment according to the market participants and their position with regard to this supply or demand.
There are two ways to interact directly with supply and demand, the first is to place a market order, which means that you buy/sell the asset in question at the current price and quantity of demand/supply. By interacting in this way you will be a market taker, as you will be taking liquidity or offering it to those who are known as market makers.
The orders placed by the market makers feed what is called the orderbook.
The other way of interacting directly with supply and demand is to come and build the market by feeding that supply and demand at other price levels. You are then called a market maker because you place an order that is not executed immediately, but which feeds a pending order book, and therefore feeds the market with liquidity.
Understanding Order Books 🧐
1 — The price represented in white corresponds to the last executed price
2 — The red lines above the price correspond to the pending sellers (the one from whom you will buy the asset).
3 — The lower green lines correspond to the pending buyers (the one to whom you will sell the asset).
4 — The asking price
5 — The total number of offers
6 — The total number of offers in USDT
All this information is constantly changing, as Market Makers put pressure on the walls by absorbing the liquidity present, and as Market Makers react to price changes and adjust their position on the order book.
Despite this continuous readjustment, the order book is a good tool for the short/medium term trader who could easily determine areas of particular interest.
Long term investors have less interest in following this type of tool given the lifetime of their positions.
How to use my order book 🧰
As I said before, short/medium term traders can use the book order as a tool to help them in their decision making (which is even more true in the stock market).
Indeed the market is attracted by liquidity, which means that if there is a large volume of orders at X$ and another large volume of orders at X$+15$ then the asset is likely to move between X$ and X$+15$ until resolution, i.e. a $15 spread.
What I am calling resolution here is the capitulation of one of the two large order volumes, if the wall at $X is absorbed by the sellers the price will automatically fall until it meets a new large volume and vice versa.
On short or medium term time horizons, the trader can use these volumes as a benchmark to take positions and to get out of these positions, thus ensuring that he is always “in” the market.
(this is adapted to a speculative activity, the sometimes brutal variation of volumes requires a rigorous management of the money).
Another good way to use the order book is to follow the volume and its differential (if there are more buyers or more sellers), they often tend to indicate the market trend. Generally, seeing large volumes on the order book will move the price in the same direction, therefore a positive volume delta for buyers will offer an advantageous momentum for them and vice versa.
Here is a brief overview of what the order book is and what we can do with it, hope it was useful to you !
Made with ❤️ by the SCFX-Community
