A trader who wishes to earn from the crypto market regularly would undoubtedly conduct technical analysis.

For this reason, I’ll teach you how to analyze the “Order book depth”.

The “Order book depth” is a trading tool that will help you as a trader to monitor the possible price action of an asset on a particular exchange.

By the time you’ve finished reading this post, you’ll know how to read the “order book depth”, so you’ll be able to place a profitable trade.

Without further ado, let’s dive in!


Post Summary

This is what I will cover:

  1. What Is An Order Book Depth?
  2. How To Read An Order Book Depth Chart
  3. How To Calculate An Order Book Depth At Each Price Level
  4. What Causes The Change In An Order Book Depth?
  5. Can An Order Book Depth Be Manipulated?
  6. Conclusion

Pay keen attention!


What Is An Order Book Depth?

First and foremost, the order book depth is commonly known as the “Depth of the Market (DOM).”

It is one of the sophisticated features of the trading interface that can help a trader to conduct technical analysis on an asset they want to trade.

Generally, it is a graph that displays the supply and demand curve of an asset as it is entered into the order book.

Order book shows you a collection of the available buy and sell orders of a crypto according to price levels

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The larger the “buy and sell orders” at different entry prices, the higher the depth of an asset.

Furthermore, order book depth is represented in real-time to give a general view of how liquid an asset is.

This helps traders to determine how likely the price of an asset will be affected when compared to its “bid and sell” depth (more on this later).

Performing a regular check on the order book depth is extremely useful to a day trader or a scalper.

This is because it provides them with signals to short-term price changes which they can profit from.

Keep reading!!!


How To Read An Order Book Depth Chart

In this part, I will use screenshots to walk you through all the information that would help you to read and analyze an order book depth chart.

You will find the order book depth by tapping the “Depth” button on an exchange trading platform.

Step I

A depth chart consists of two sides which I refer to as the “2 branches of a depth chart.”
  • Buy/Bid Depth

This is the branch of the order book depth that displays the different sizes of an asset, say BTC, that people want to buy at specified varying price levels.

It is depicted in green colour.

  • Sell/Ask Depth

This branch, on the other hand, displays the size of BTC that people wish to sell at specific price levels.

And it is shown in red colour.

Step 2

Also, a depth chart is made of the Y-axis and the X-axis.

  • Y-axis

This is the vertical side of a depth chart. It shows you the amount of the base currency of a trading pair that people want to buy/sell within a price level.

Let’s assume it is a BTC/USDT trading pair. BTC is the base currency while USDT is the Quote currency.

  • X-axis

This is the horizontal side of a depth chart and it shows you the different price levels (usually in dollars) of the quote currency.

Note that you can zoom in and out to have a closer look at the Y and X-axis.

These axes are peculiar to both the Buy/Bid depth and the Sell/Ask depth.

Step 3

“Buy walls” and “Sell walls” are basically the steps that you see on the 2 branches of a depth chart ( Buy/Bid depth, Sell/Ask depth).

  • Buy Wall

A ” Buy wall” indicates large buy orders at a specific price level.

  • Sell Wall

Sell wall indicates large sell orders at a specific price level.

It is worth noting that these two features of an order book depth can have a big impact on a crypto asset’s price.

To explain this further:

A Buy wall has a great tendency of driving the market up

While a Sell wall can drive down the value of an asset.

Also, When the “Sell walls” are far higher than the “buy walls,” it becomes more difficult to push up the current price of a coin and vice versa

However, there may not be a significant change in price value if the Sell wall and the Buy wall are equal at a price level.

As a crypto trader, having this information is unquestionably beneficial.

This is because it will help you to predict a potential asset price change and correctly modify your entry or choose whether to enter or exit a trade.

Step 4

This shows you the difference between the highest buy price and the lowest sell price at a specific price level on the order book.

For, if the highest BTC buy price at a price level in an order book is $58K and the lowest selling price is $59K, the spread is $1K.

That’s all there is to an order book depth; we’ll go through how it is calculated in the next section!


How To Calculate An Order Book Depth At Each Price Level

Calculating a depth chart depends on the branch of the order book you want to calculate.

And the rule goes like this:

  • The size of of an order book depth is the sum of the demand or supply that exist at, above or below a price level on the “order book“.

Now, if you want to calculate a depth chart:

  • Firstly, point or navigate your cursor to the X-axis and select a price level
  • When you do that, the size of the base currency to be bought or sold at that price level you have selected will display on the Y-axis.

For a better understanding, I will be using a screenshot to explain this further below.

Here, we will calculate the Buy/Bid Depth.

Step 1

The depth chart

Looking at the screenshot closely, you will find that:

  • I pointed my cursor at the $48,916 price level on the X-axis
  • And on the Y-axis, I found that the size of the base currency to be bought at that price level is 6

This simply implies that traders have placed different orders to buy a total of 6(say BTC) at or above the $48,916 price level.

Having said that, we’ll go to the “Order book” to double-check our result.

Step 2

The Order book

Here on the order book, you will find that the total sum of BTC pending “Buy orders” above the $48,916 price level is approximately 6. 🤗 

You can go ahead and calculate the “Sell/Ask Depth” using the same method we used here, and you will get the appropriate result.

Furthermore, it is worth noting that if you want to conduct your calculation as I did here, you will need to turn off your internet connection.

This is because the “Order book depth” with the “Order book” is regularly updated in real-time and will disrupt your calculation.

However, you do not need to do this calculation each time you want to check your order book depth. The result always stands true.

What I did here was to show you what goes on behind the scene.

Sure you already have this knowledge, and it will come in handy if you want to teach someone what you’ve learned here, or if you want to test it out for yourself.

Let’s dive into the next section!


What Causes The Change In An Order Book Depth

The Order book depth, you see, is a tug of war between buyers and sellers.

Buyers want to buy at the lowest possible price, while sellers want to sell at the highest possible price.

As a result, both parties would continuously adjust and enter trades to get the best advantage based on market trends.

However, changes in the price of an order book can drastically be influenced for two major reasons:

1. Positive News

Positive news can instantly drive up the price of cryptocurrency from its current price.

In this scenario, sellers will immediately follow suit to adjust their pending “sell order” and increase their “ask price”.

For instance, it is considered positive news in the crypto space if the government of a country officially declares Bitcoin to be legal money

Also, the hype around a crypto asset is one of the influencing factors that may have a significant impact on its price in an upward trend.

2. Negative News

Inversely, negative news can swiftly push down the price of cryptocurrency from its current price.

And in this scenario, buyers will remove their “buy orders” or update them with a lower price.

While sellers will hastily try to sell off their holdings by updating their existing orders with lower prices.

One thing to note is that FOMO rules the market when negative news happens.

Negative news can come in the form of a country prohibiting cryptocurrency.

Owing to these factors, the Order book depth adjusts thus:

  • The branch of the “Sell/Ask Depth” will adjust right above the “Buy/Bid depth” if the supply is above demand at a price level.
  • On the other hand, the branch of the “Buy/Bid depth” will adjust left above the “Sell/Ask Depth” if the demand is above supply at a price level.

Additionally, there can also be an imbalance of the order book depth.

This happens when one branch of the Order book depth is significantly above the other.

This will assist you in determining whether there is more demand for a crypto asset than there is supply, and vice versa.

We will move over to the next section…Tag along!


Can An Order Book Depth Be Manipulated?

Yes! 

The depth of an order book may be manipulated, which is something you should bear in mind when you do your analysis.

It happens when a large “buy or sell order” is artificially created to give the impression of a “Buy or Sell wall”.

This is deceptive, and if a trader responds to such a false “Buy, Sell Wall,” he will lose money.

Such manipulative “buy or sell orders” are being referred to as “spoofing” in the crypto space.

Spoofing is basically defined as the act of placing a “buy, sell order”  with the intent to cancel before execution.

As such, a fraudulent person can create a large “sell or buy order” only to generate interest in a price level.

He will, however, cancel the trade when the market approaches the price at which the order was placed.

Scroll down and see my conclusion.


Conclusion

This brings today’s post to an end.

I hope you enjoyed the article and learnt a lot from it.

Well, if you did, why don’t you just tell me:

Have you been misreading the depth chart before this post?

How helpful did you find this post?

Put down your thoughts in the comment section below and I will respond.

If you found this post helpful, please share it using the social media icons below. Cheers!


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