How Does An Order Book Work?

When opposites attract

The financial world always works with the law of supply and demand, and between buyers and sellers, opposites yet essential to each other. Whereas the dynamic showdown of both in the trading of assets is so much visible in the order book of the crypto ecosystem. It is important that you understand the four pillars or an order book, and they are: bid, ask, amount, and price. They all appear on the sides of an order book, called the buy-side and the sell-side.

Market Order and Limit Order

As an order book is a ledger of outstanding orders, two primary order types exist: One type is the market order, which is an immediate buying or selling for the best price available at the moment. This is the immediate pairing of current buyers and sellers on the books. The other type is the limit order in which there is a buying or selling of a set number of cryptocurrencies at a specific price or higher.

Price and Amount. Count and Total

Price and amount have opposing information on display in the order book but both offer significance to one another. The amount shows the total units of the crypto to be traded, or “how many,” and the price displays how much per unit is valued, or “how much.” Order books also display count and total. Count informs how many orders are needed to reach a price level to produce the amount, while the total is the total of the combined amounts.

Buy Side

The buy side displays all open buy orders under the price last traded. Bid is the offer coming from the buyer expressing interest in purchasing a number of units at a specified price. If the bid is matched to a standing sell order, the trade is then processed. When buy orders are high on demand at a stated price level, a buy wall is created. But then, buy walls can affect the asset price due to the fact that if a large order is not filled, the same goes for buy orders at a lower bid. The price will not go any lower unless the large orders are filled. In other words, buy walls are a kind of a support level in the short term.

Sell-Side

In contrast, the sell-side represents all the open sell orders above the price last traded. It is an offer coming this time from the seller who asks somebody to buy his units at a specific price. A sell wall is formed when there is an abundant supply of sell orders at a specific level of pricing. When sell orders are high in supply which cannot be filled for lack of demand at a specified price, sell orders which are priced higher need to wait before being executed. If this happens, the price of the sell wall becomes a short-term resistance.

Spotting Manipulation

There are times when an order book is not accurate enough to represent the pulse of the market, not like historical data, trading volume, or current pricing. At any time at any point, cancellation of orders before execution can happen. Analysis can be challenging as order books are by nature temporary and manipulation is from time to time attempted. Traders may place large limit orders but leave it unfilled to project a market sentiment. If small traders see a wall ahead, they will move their orders ahead to avoid being absorbed by the wall. As many other traders will try to follow suit, another wall is created with legit orders. The manipulation comes when the unscrupulous trader will move up the limit orders and increase the price. It can be that the trader is reducing the size of his asset position, asks for a higher price, and then dumps his cryptos. Watch out for a large sell order after the removal of the bid wall.

Conclusion

An order book is a trader’s essential tool in making informed decisions when buying or selling cryptocurrencies. Information provided on display is real-time demand and supply market actions that include support and resistance zones, order imbalances, and even market manipulation. The revealed data are immensely helpful for any trader in strategizing and considering options to his advantage whether the market is bullish or bearish.

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