Robert Steinadler, a month ago

What are order books and how do you read them?

On the LiteBit Exchange platform, order books are available. In this article, we are going to explore what an order book is and how you can use them for your trading.

Order books reveal important information

Order books are located on the right side of the trading chart after you log into your LiteBit Exchange account.

The order book shows the best bid and the best ask price and reveals important information about the market depth. Next to the order book, you’ll find the market history. When clicking on it, the interface will show you the last trades that occurred, their size (amount) and the respective price of each trade. Time stamps sort the market history.

What is market depth?

Market depth is an important tool that measures the volume of limit orders. These limit orders are part of the order book. Limit buy orders are represented on the bid side (green) and limit sell orders are represented on the ask side (red). The depth of the order book shows you the liquidity of each market and, therefore the size of market orders it can sustain. A thin order book is often associated with high volatility since a sizable market order can cause price surges. The greater the market depth, the more unlikely it becomes that the price is getting pushed too hard.

Example: Bob wants to buy 10,000 EUR worth of BTC using a market order. The best ask price is 15,400 EUR offering a size of 0,1 BTC for that price.

Size

Price (EUR)

4,56 BTC

16,500

0,122 BTC

16,000

1,1 BTC

15,800

0,1 BTC

15,600

0,1 BTC

15,400

 In effect, Bob’s market order executes and he buys 0.1 BTC for 1,540 EUR, another 0.1 BTC for 1,560 EUR and 0.4367 BTC for 6,900 EUR. He bought a total of 0.6367 BTC at an average price of 15,705.98 EUR. After his order got filled it pushed the best ask price for Bitcoin to 15,800 EUR.

If Bob would have waited for the market depth to increase and more sizable limit sell order to show up, he might have saved money on that trade. On the other hand, should the order book getting thinner, he might end up spending more money on the trade since the market order would execute against higher price levels.

How to read the order book?

The order book shows you the active limit orders at each price level in real-time.

Taking the BTCEUR market as an example, you can find and derive the following information from its order book:

  • Prices: Sell limit orders are in red, and buy limit orders are in green.
  • Market size: This is the order quantity in Bitcoin or the respective crypto asset.
  • Spread: This is the price difference between the best ask and the best bid price.
  • Mid-market: The exact middle of the best ask and the best bid price.
  • Grouping: Choose to group orders in decimals or ones.

You can also change the size and position of each element on the trading dashboard. This also includes the order book if you like to minimize or maximize the panel and get a better view of the data.

How to use the order book?

As we already explained in the example above, you can use the order book to estimate how a market order is going to execute. You can also derive from the order book if the buy side or the sell side has a stronger momentum. Please note that market depth can change within seconds. Before making any conclusions about momentum, you should watch the order book and other data for some time. The momentum can indicate that the price is going up or down. With more limit buy orders coming in, the order book indicates that market participants turn bullish. Should the sell side increase, the order book reveals that additional pressure on the price could be a possible outcome.

Another use for the order book is to get a better idea where to place your limit order when buying or selling by taking the trading volume into account. For instance, if you like to sell Bitcoin and the volume for the last 24 hours was 1 BTC per hour, it might be a good idea to place your order within a suitable range in terms of size if you prefer to get your limit order filled quickly.

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Jan 12, 2023

Order types are basic tools for traders. They allow to add conditions to each order that determine under which circumstances they are executed. This opens up a door to more trading opportunities since conditional orders execute upon events that can change the direction of a trade or even the whole market.

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