What is the Order Book?
The order book refers to a list of buy and sell orders for specific coins organized by price level. By viewing the order book, traders can gain insight into the market’s buying and selling dynamics at various price levels, aiding them in making trading decisions.
The components of the order book
The order book is mainly composed of the following four parts:
- Buy orders: It lists out all sellers' ask prices and the quantities they aim to sell.
- Sell orders: It lists out all sellers' ask prices and the quantities they aim to sell.
- Price: It reflects the current buy and sell demands at different prices.
- Number of orders: It shows the amount of assets that the traders wish to trade at each price.
The top of the order book usually displays the highest bid and the lowest ask price, representing the buy and sell orders that are closest to being executed. On some platforms, such as Binance, the order book may show cumulative market liquidity in a bottom-up format, allowing users to visually understand market depth and the buy and sell intentions at each price.
How does the order book work?
Almost all trading platforms use order books to list the real-time orders for various assets, including stocks, bonds, currencies, and cryptocurrencies. The order book is updated in real time, reflecting the immediate trading intentions of market participants. Traders can observe the order book to gain more insights into market trends and use this information to develop trading strategies.
Visualization features of the order book
In the display of the order book, common visualization features include:
- Merged depth: Orders can be merged into a specific price level based on the user's selected precision, making it easier for quick analysis.
- Display the average price and the sum: Once selected, the system will display the average price and total sum of orders within the price range, helping users to view buy and sell order amounts more intuitively.
- Order book depth: The order depth of buy and sell orders is displayed using bar charts. Users can choose to view the number of orders at each price level or the cumulative order depth.
- Quickly switch between buy and sell directions : When users click on a price on the order book, the system will automatically switch to the corresponding buy or sell direction based on the click position and sync the price parameter for the quick order.
- View the order book depth : Users can click on the depth to view more detailed buy and sell order data, including cumulative order volumes at different price levels and more detailed trading intentions.
Market depth and liquidity
The order volume at each price level in the order book is referred to as 'market depth.' It represents the distribution of buying and selling forces at various price levels in the market. Higher market depth means greater liquidity, leading to more stable asset prices and reduced volatility. In contrast, lower market depth may result in significant price fluctuations caused by large individual trades.
By analyzing the order book and depth chart, traders can better understand short-term market trends and develop trading strategies accordingly.
