I see people asking on several forums how to read an order book in a crypto currency exchange. Here is a simple tutorial explaining the basics. This will help any new crypto investor to understand how and where to place their orders.
The order book
The order book displays all orders that are currently placed for a specific trade pair on an exchange (I use DeepOnion/BTC on cryptopia as an example here). There are buy orders (people who want to buy ONIONs for BTC) and sell orders (people who want to sell their ONIONs for BTC). Deals are made wherever a buy order finds a seller or a sell order finds a buyer.
Order books usually display several indicators: price, amount and Total (BTC). Example (order book picture): in the buy orders, the first buyer (currently highest bid) is willing to buy 210 ONIONs @ 11,866 sat per ONION. This means if you happen to hold ONIONs, this is the highest sell price you can get if you want to sell 210 ONIONs instantly. You would receive a total 2,499,673 sat for for selling 210 ONIONs (Total (BTC)). The order disappears from the order book upon completion. If you want to sell more, you’d have to settle the next, lower sales price.
Market depth chart / Order Book Depth
The market depth chart displays these orders in an easily understandable manner. It puts all buy and sell orders into a chart and stacks them onto each other. To do that, market depth charts use an additional indicator: Sum (BTC). This indicator sums up all existing orders sorted by ascending (sell orders) or descending (buy orders) prices. It then displays the consolidated order values on a stacked area chart (the market depth chart).
Now how do you read that? Say you are an investor and want to buy 1,000 ONIONs. In the given example, you would be able to buy your first 216 ONIONs @ 12.984 sat. From there on, it gets more expensive. You would have to buy a large part of the existing sell orders and by doing that, you would reduce supply at these price levels and drive up the lowest price in the sell orders accordingly. The same applies in the buy order book. If someone dumps a large number of ONIONs, the market price corrects downwards.
Reading the market depth chart
The market depth chart gives you an instant idea about the supply and demand situation. In that chart, you can easily identify sell / buy walls. Back to the screenshot — in this specific example, there is a BUY wall @ 9,000 sat. In order to drive the price lower than that, someone (or all sellers combined) would have to sell ONIONs worth more than 3.56 BTC. Mind you though — these buy and sell walls can instantly show up and disappear.
The market depth chart also gives you an indication (by comparing the buy orders and sell orders visually) whether the price will most likely move up or down. As a rule of thumb — if buy orders (demand) outweigh sell orders (supply), price might increase. And yet again, order books can change in seconds and present a completely different picture to any crypto investor.
I find it a good tool to place my orders at the right levels. It’s only an indicator though, so be careful when working with market depth charts.
Happy trading.
