How does an orderbook heatmap, superimposed on a price chart, help recognise trading opportunities ?
There are many well known indicators that can be applied to price charts, helping a trader identify areas of support and resistance.
The above Bitcoin Futures price chart has the Icimoku cloud, SMA and Bollinger Band indicators applied.
The Icimoku cloud is a very powerful indicator if used correctly. It can give very accurate trend analysis when analysing the price interaction with the cloud (green and red areas in the chart).
The SMA gives a very good idea of recent historical bearish/bullish strength of price, where if the price continuously closes below the moving average (purple line below the main chart), it shows weakening bullish momentum.
Bollinger Bands can provide a reasonable characterisation of when a price is on the verge of breaking out. One example of this is when the bands (blue lines in the chart) are very tight for a period of time and then expand.
The APEX:E3 Orderbook Heatmap Indicator
An orderbook heatmap provides the necessary market color to more easily discover areas of support and resistance. This is not a well known indicator as generating it is non-trivial. The main ingredients include tracking a fast ticking orderbook, analysing thousands of orders across the bid-ask depth, storing and maintaining it and converting it to a realtime heatmap, where each cells intensity is a measure of the strength of the orders size at that depth.
Looking at the above chart on the right hand side, at position 4, the heatmap has a consistent darker shade implying that this is an area where there are large resting bids. Typically when the price meets an area such as this, the resting bids act as an absorption for the incoming liquidity from which the price tends to bounce in the other direction. When the price interacts with the hotspots shown at 1, 2 and 3, it can exhibit a more predictable behaviour, from which a trading strategy can be derived.
Normally a trader would have to observe the orderbook, on a derivatives exchange, to formulate a long/short strategy. Using the heatmap, a trader can do this at a glance. For example once such strategy could consist of taking a long position in Bitcoin/USD at 5 and a short position at 6.
APEX:E3 bots, articles and software solutions are for information purposes only and not investment advice. Please seek investment advice from a trained professional or compliant source.