Reading the order books for beginners
Reading the order books correctly can save you a lot of money. Reading the order books can be quite challenging, especially when you just started trading. This blog post will cover all the details you need to read an order book correctly and will give you a head start in trading cryptocurrencies.
In this blog post we will cover:
- How to read buy orders and where to place them
- How to read sell orders and where to place them
- When the transaction takes place
- Using order book charts for more details
- Whales, buy and sell walls
The order book
The order book consists of three parts:
- The buy orders
- The sell orders
- The order history
The order book is most of the time combined with a candlestick chart. Candlestick charts can give you a lot of information about the current and past sentiment of the market. You should use the candlestick chart in conjunction with the order book for making the best trade decisions. If you don’t know how to read candlestick charts then read the following blog post: “Reading candlestick charts for beginners”.
Let’s take a look at an order book example:
In this example, you see the order book of the market BTC_ETH. Before you continue reading, it’s important to know that every exchange uses a different kind of order books. If you are just starting out this can be very confusing. For example, Bittrex uses ASKS and BIDS for selling and buying cryptocurrencies.
The BIDS are on the left side and the ASKS on the right side. Other exchanges have the ASK on the left side and BIDS on the right side. Also, some exchanges use BUY and SELL orders instead of BIDS and ASKS. While they are exactly the same, the different names and positioning of these orders can be quite confusing.
The buy orders
They buy order book represents all buyers in the selected market. In this example, we used the market BTC_ETH. This means that every buyer in the order book wants to buy Ethereum with Bitcoins.
1: All the bids in the BUY order book
2: The amount (size) of coins the buyer wants to buy
3: The sum of the amount times the price ( 1 x 3 )
4: The total sum of the previous buy orders
5: The depth of the order book and total amount of coins
All the bids in the BUY order book
On the most right side of the BIDS order book on the Bittrex exchange, you see all the BIDS. This are the buy orders placed by people (or automatically with trading scripts) that want to buy ethereum with bitcoins.
In the BUY order book, the BIDS will always go down. The highest BID will always be on top. The lowest BID on the bottom. Keep in mind that the order book is much bigger and consists of many pages.
The amount of coins the buyer wants to buy
In the second column, you can see how much the buyer want to buy. In this case, the first buyer (or buyers) want to buy 92.36 ethereum. They want to pay 0.07100281 BTC for 1 ethereum.
The total of the amount times the price
The sum represents the amount times the price the buyer wants to pay. In the first example the buyer (or buyers) want to buy 92.36 ethereum times 0.07100281 BTC = 6.55 BTC. As you can see in the third column, the total price for this order is 6.55 BTC
The total sum of the previous buy orders combined
The sum represents all of the previous buy orders combined. The first sum will always be exactly the same as the total in column three. Simply because there are no previous buy orders in the order book.
The sum of the second order in the book represents the total of the current buy order (in this case 0.0005) plus the previous buy order (6.5583). The sum of these orders combined = 6.5583 + 0.0005 = 6.5588.
In this example, the total sum of all the buy orders in the first page of the order book represents a total of 16.2892 BTC.
The depth of the order book and total amount of coins
The depth of the order book can be shown by clicking through the pages. Order books can consist of many pages. In this case, you can also see the total amount of ethereum people want to buy.
Combining orders with other buyers
Everyone can place bid orders no matter the price. That means that one buy order may represent multiple buyers. Let’s assume there are 200 buyers. Every buyer wants to pay the exact same price, how would the buy order book look like?
In that case, there would be only one buy order in the order book. Sometimes one order can be very big because everyone wants to buy at that price. But you never know if the buy order is set by one or multiple persons.
The sell orders
The sell order book looks exactly the same. Only the columns are the other way around. This layout places the BID and ASKS next to each other so it’s easy to compare the prices.
1: All the ASKS in the sell order book
2: The amount (size) of coins the seller wants to sell
3: The sum of the amount times the price
4: The total sum of the previous buy orders
5: The depth of the order book and total amount of coins
In the buy order book, the highest BID is always on top. In the sell order book, the lowest ASK is always on top. Sellers can also combine their sell orders. You never know if one sell order is placed by one or multiple persons.
When does the transaction take place?
The order book consists of all buyers and sellers who don’t agree about the price. The buyers want to BID less than the sellers ASK. Only if the buyer and seller both agree about the price than the transaction will take place.
This can happen in multiple ways. Let assume you want to buy ethereum right away. Then you simply need to BID the same price as the lowest ASK. In that case, the buy and sell order match and you will buy ethereum right away. Your BID will never be seen in the order book. Only when the buyer and seller disagree about the price the order will appear in the order book.
The same happens when someone wants to sell for the highest BID. The order will be filled right away and will never appear in the order book.
For example, the first buyer in the buy order book BTC_ETH wants to pay 0.07100781 BTC for 1 ethereum. If you want to sell ethereum right away, you can fill in a sell order for 0.07100781 BTC. This order will never be put in the order book. The transaction will take place immediately because the buy and sell price match.
If you want to buy ethereum, you need to pay 0.07114997 BTC for 1 ethereum. If you fill in a buy order with 0.07114997 BTC for one ethereum. In that case, you will buy ethereum immediately. This order will never be put in the order book.
In the order book example, the buyer wants to pay 0.07100781 BTC for one ethereum. The seller wants 0.07114997 BTC for one ethereum. There is a price difference of 0.00014216 BTC. Sometimes the difference between BIDS and ASKS can be much higher. In theory, buy and sell orders can stay in order books for years.
Buy and sell orders can also be partially filled. Sometimes only 50% of your buy/sell order will be filled. It all depends on the BIDS and ASKS from both parties.
Market order history
The market order history will display all transactions that happened in the past. If you want to buy ethereum immediately and you fill in the lowest ASK right away, the transaction will take place and will never be seen in the order book. This transaction will be directly placed in the market order history book.
In the market order history, you can see the current sentiment of the market.
1: Recent buy or sell orders
2: The bid/ask of the recent buy/sell orders
3: Total amount of coins bought or sold
4: Total amount of the paid Valuta (in this case BTC)
The first column can give you information about the sentiment of the market. In this case, the last 10 orders were all sell orders. That could mean there is a downtrend in the price. But this entirely depends on the total amount of coins sold and the timeframe.
For example, the last 10 orders in the market history could take place in a timeframe of 10 days. That basically means the market is quite dead. The total amount of coins is also important. The last 10 sell order may consist of very small amounts. This can be very misleading.
Using order book charts for more details
It’s hard to read the buy and sell order books because they consist of many pages. You could click through all the pages. But that can take a lot of time and you could miss important information.
On Bittrex, you got the option to see the order book depth in a chart. This is a great way to instantly see the sentiment of the market. Let’s take a look at the order book chart of the BTC_ETH order book:
The arrow indicates where the buy and sell orders meet. On the left, you see the buy order book (green) and on the right the sell order book (red). This tells you that the market is quite stable. The buy and sell orders deeper in the order books are fairly the same.
In the next example, you can clearly see that there are more buyers than sellers:
This could mean there an uptrend. If you look at the corresponding candlestick chart you can see there is a clear uptrend for this coin. But do note the time frame is only 30 min.
If we change the timeframe to 1 day, you can see the uptrend started a few days ago:
Whales, buy and sell walls
A common term used then trading are whales. Whales are people (or multiple people) that own a high amount of coins relative to the amount of coins in circulation. For example, the owner of 100.000 bitcoins is considered a whale. Because there are 16.5 million bitcoins in circulation, 100.000 is quite a lot.
Ripple has a coin circulation of about 38 billion. Someone that owns 100.000 ripples (XRP) is not considered a whale. Why is this important? Because whales can manipulate order books.
Let’s take a look at the following order book chart:
You can clearly see that at some points the chart goes almost up vertically. These are called buy and sell walls. Most of the time these walls are placed by whales to manipulate the price.
By using the order book chart you can spot buy and sells walls right away. You can look in the order book to find out how big the buy or sell wall actually is. In this case, this sell wall can be found on the second page of the sell order book:
The total sum of this sell wall = 20 BTC. Unless you have $82.000 lying around, this sell wall is impossible to breach. The owner of this wall can basically do whatever he or she wants. In this case, the owner of this sell wall does not want the price to go higher than 0.00000401 BTC.
The same owner probably placed the buy wall in the buy order book:
This buy wall consists of 26 BTC. The owner of this buy wall does not want the price to go lower than 0.00000300.
Do note that these buy and sell walls are just for the show. Most of the time, they will never be filled. The owner will reposition these walls in order to make money.
Maybe you noticed the star just above the sell wall:
In this case, the star means we placed a sell order just above the sell wall. You could place a sell order under the sell wall. But it will never be filled in the short-term. On the other hand, this is exactly what the owner of the sell wall wants you to do: placing sell orders above the sell wall.
Does it matter? No, not really. It all depends on the price you paid. Let’s say you bought this coin for 0.00000380. You can easily sell this coin for 0.00000400 or even 0.00000395 and take your profits.
Now you know how to read order books. Always do your own research before you place buy or sell orders. Every market is different. Prices can go up and down. Nobody knows where the price will go tomorrow!