Order Book: What It Is and Its Functionality

What Is a Depth of Market? 

In simple terms, depth of market (DOM) is a two-level table that contains orders to buy and sell assets from the stock exchange listing. In trading, it is also called the “Order book.” 

Order Book Structure 

To understand how to read order book, we advise you to study the features of its structure. It includes three parts: 

• Bid — the demand zone, which displays orders for the purchase of assets. It is located at the bottom and, as a rule, is highlighted in green. Information about the rates and the number of tokens that exchange users want to purchase is collected here. The bids are arranged in descending order of value, with the maximum price at the bottom of the list.
• Ask — the offer zone, in which requests to sell cryptocurrencies with prices and volumes are grouped. It is highlighted in red and is located at the top. Orders are displayed in ascending order, with the minimum Ask at the top of the list.
• Spread — the difference between the best buy and sell rates. Its values are located in the middle between the main sections. 

How Can Order Book Help a Trader? 

An order book allows you to form trading strategies more consciously. Crypto traders can rely on information about current market activity and the expectations of other participants. Studying an order book can and should be combined with technical and fundamental analysis. 

How to Read the Order Book? 

In an order book, you will see: 

• Support level — quotes that signal a growing demand for the coin; 
• Resistance level — the value at which the supply of tokens prevails over demand; 
• Depth — an indicator that indicates liquidity; 
• Spreads: narrow is a sign of a balanced market; wide warns of low interest in the token; 
• General trend — a high proportion of Bid orders is a signal of bullish sentiments; the prevalence of Ask orders is a signal of bearish sentiments. 

Having found out what order book shows, you will be able to conduct your independent analysis. If the demand for a cryptocurrency is high and the market depth is low, it means that there are many traders willing to buy it at the current rate. Low order volumes force buyers to compete with each other for available bids. The price of the asset reacts by rising. 

At a shallow depth, there is a growing supply; sellers begin to fight for buyers, and the asset price gradually declines. 

Pros and Cons of Order Book 

For a crypto trader, the study of the order book is an opportunity to: 

• find favorable entry and exit points; 
• predict price movements; 
• gain a broad understanding of the market. 

However, the order book also has disadvantages. It only displays quotes for a certain period. You may not have enough information to assess overall market trends. In addition, the information is often manipulated by big players, which distorts the real picture of the market. 

How to Use the Order Book in Trading? 

The main purpose of the order book is to place orders. 

Buy order 

This is an order from a trading participant who wants to buy crypto assets. There are two types of such orders: 

• Market — the order is executed immediately at the current market price; 
• Limit — the order allows you to set the execution rate yourself. 

A Limit order requires a sell order with the same price in the book. Otherwise, it will stay pending until such an offer appears or until you cancel it. 

Sell order 

It is a reflection of the investor’s intention to sell the coins at market or regulated value. Limit and Market classifications are also available for them. 

Ask orders help to manage risk. A trader can place a Market order, close the long position, and record a profit if they believe that the growth of the asset has stopped and the rate will fall in the future. The same scheme can be used to close short positions in time to minimize losses when the price reverses and starts to grow. 

Conclusion 

The order book contains information about transactions with cryptocurrency: trading volumes and prices. Traders use it to analyze the current market activity, identify key levels, and determine the optimal entry and exit points. 

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