Reading order books for beginners
Reading the order books correctly can save you a lot of money. It can be quite challenging, especially when you just started trading. This article will cover all the details you need to read an order book correctly and will give you a headstart in trading.
Reading time: 11-15 minutes (2.909 words)
1. The order book
What do you think the orderbook represents?
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The order book is most of the time combined with a candlestick chart. Candlestick charts can give you a lot of information about the current and past sentiment of the market. You should use the candlestick chart in conjunction with the orderbook for making better trading decisions. If you don’t know how to read candlestick charts then read the following article: “Reading candlestick charts for beginners”. You don’t necessarily have to use the candlestick chart that is offered on the exchange. Because these charts do not have many options most of the time. For chart reading I would recommend Tradingview:
Use Tradingview to (back)test your strategies and add hundreds of indicators created by the community.View tool on Tradingview.com
Let's take a look at an order book example from an exchange called Bittrex:
In this example you see the order book of the market BTC_ETH. Before you continue reading, it’s important to know that every exchange uses different kinds of order books. If you are just starting out this can be very confusing. For example, Bittrex uses ASKS and BIDS for selling and buying cryptocurrencies. Other exchanges have the ASK on the left side and BIDS on the right side. Also some exchanges use BUY and SELL orders instead of BIDS and ASKS. While they are exactly the same, the different names and positioning of these orders can sometimes be quite confusing.
Update 2021: Bittrex is not using these terms anymore. It simply displays the bids in green and asks in red and uses BUY and Sell when you want to place orders.
2. The buy orders
The buy order book represents all buyers in the selected market. In this example we used the market BTC_ETH. This means that every buyer in the orderbook wants to buy Ethereum with Bitcoins.
- Aggregate total
- The amount (size) of coins in BTC
- The amount (size) of coins in ETH
- The bid price in BTC
The price in column four represents the current bids or buy orders. The highest bid is always on top. As you can see, every bid after the first bid is dropping in price.
Can you know how many buyers are in the top position in the order book?
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In the third column you can see how much the buyer wants to buy. In this case, the first buyer (or buyers) want to buy 4.405 ethereum. They want to pay 0.07158187 BTC for 1 ethereum.
Column two represents the total (in BTC) for each individual order (4.405 * 0.07158187). The agg. total in column one is all total from column two combined. Although the first agg. total will always be the same as the first total in column two.
2.1 The depth of the order book and total amount of coins
The depth of the order book can be shown by clicking through the pages.
Above the buy orders you can see the total depth of the order book displayed in Bitcoin:
In this case, all combined buy orders represent a total of almost 21 bitcoins. The total buy order book looks like this:
You can check your personal order history by clicking “open orders” or “closed orders”. Do note that the display and location of these options vary between exchanges and brokers.
3. The sell orders
The sell order book looks exactly the same. The quantity, total and agg. total is calculated in the same way as buy orders.
In the buy order book, the highest BID is always on top. In the sell order book, the lowest ASK is always on top. Sellers can also combine their sell orders. You never know if one sell order is placed by one or multiple persons.
4. When does the transaction take place?
The order book consists of all buyers and sellers who don’t agree about the price. The buyers want to BID less than the sellers ASK. Only if the buyer and seller both agree about the price, then the transaction will take place.
Let's assume you want to buy ethereum right away. Then you simply need to BID the same price as the lowest ASK. In that case, the buy and sell order match and you will buy ethereum right away. Your BID will never be seen in the order book. Only when the buyer and seller disagree about the price, the order will appear in the order book. The same happens when someone wants to sell for the highest BID. The order will be filled right away and will never appear in the order book. Both will appear in the trade history.
5. Market order history
The market order history will display all transactions that happened in the past. If you want to buy ethereum immediately, this transaction will be directly placed in the market order trade history book.
The history is pretty explanatory. In this case it displays the amount (quantity) of coins in ETH and the price in BTC. Green numbers mean someone bought Ethereum and red numbers means someone sold Ethereum.
6. Using order book charts for more details
It’s hard to read the buy and sell order books because they consist of many pages. You could click through all the pages. But that can take a lot of time and you could miss important information. On Bittrex, you have the option to see the order book depth in a chart. This is a great way to instantly see the sentiment of the market. .
Let's take a look at the order book chart of the BTC_ETH order book:
Both buyers and sellers are equally represented. The steep lines up are created by whales setting up huge buy and sell orders. These can be used to manipulate the markets.
What are whales in the context of trading or investing?
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You can look in the order book to see how big these walls are:
In this case, someone has set a buy order of 66 ETH (4.7 BTC) which is worth around $330.000 with current market prices.
In the above example someone placed some small sell and buy walls. $330.000 seems a lot of money but for someone who owns a few thousand of ethereum it’s peanuts. If you are placing buy or sell orders make sure you don’t put them after a buy or sell wall because your order may take a very long time before it gets filled.
7. How to place orders in the order book
So how do you place orders in the order book? There are various ways depending on the broker or exchange you are trading on. In the case of Bittrex you have the following options:
You have two basic order types:
If you place a limit order, you can determine at what position in the order book you want to place your order. You can put limit orders for all prices you want. For example, if you only want to pay 0.0000001 BTC for 1 ETH then that’s totally fine. But your order will be placed somewhere at the very last page on the order book. And the chance that this order will be filled within a few years is practically zero. All the orders listed in the order books are actually limit orders.
When you place a market order you will buy at the market price. Meaning you will buy or sell for the price that is at the top of the orderbook. For example:
If you place a market buy order you will buy ETH for 0.07155846 as this is the first order in the sell order book. If you want to buy more than is listed in the first spot you will buy more for a slightly higher price. In the above example, the agg. total is 0.8944 BTC. So if you want to buy ETH and set a buy order for 1 BTC you will buy up at least every order in the above sell order book. Because the agg. total is only 0.8944 BTC and you want to buy for 1 BTC.
7.1. Conditional orders
Conditional orders are orders that will only be filled when specific conditions are met. In the case of bittrex there are a few conditional orders:
- Stop Limit
Stop limit is used when you are trading with specific conditions. Stop limit is also known as a type of stop loss. Stop losses are used to get out of the market once price goes in the wrong direction. A stop loss is simply a signal that puts a limit order in the order book for the price defined when placing the stop loss. How does this work:
- Set a stop limit (stop loss) at a specific price
- The stop limit then acts as a signal
- Once the stop limit price is hit, a signal is sent to the broker
- This signal is telling the broker to place a limit (buy or sell) order for the price set in the first step
- The limit order will be placed in the order book
- In most cases, the order will be instantly filled although this might not also be the case. You’ll see an example in the last chapter of this guide
Do note there are also market stop loss orders. In that case the order will be filled for the current market price.
Trailing acts the same as a stop limit only the price is variable. Trailing Stop is a directive to place a buy or sell order if the last trade price on the market is a given percent above or below the smallest or largest trade price seen on the market since the order was placed. Meaning your stop loss can move based on the price.
You might also have noticed OCO and Ladder Limit. These orders are not found on all exchanges. OCO stands for “One cancels the Other”. When you use OCO you can set a stop buy and stop sell order at the same time. When one of the orders is filled, the other is canceled.
When using Ladder Limit you can place multiple limit orders. This is very useful when using the buy the dip strategy discussed in my basic guide.
8. Be careful of spread
The order books look different on every exchange or broker. You have to be extra careful for brokers that offer 0% commission rates. Almost every time these brokers will use spreads to make money. Spread is the difference between the buying and asking price. For example:
- The bid for 1 BTC = $50.000
- The ask for 1 BTC = $49.500
- The spread = bid price minus ask price = $500
- Known as the bid-ask spread
Every order book has a spread because without a spread the transaction would take place immediately. A low spread means the market has much trading volume. But in a market where the trading volume is low, the spread might be quite high. If there are not many stocks or crypto coins in circulation in the market, the BID and ASK prices can fluctuate much, creating high spreads. Regarding brokers that offer 0% commission, they will artificially create spreads. Meaning they will add a profit margin (the spread) between the BID and ASK prices regarding the trading volume. On certain brokers you can trade coins (like bitcoin) with very high trading volumes but still have high spreads. This is a way for the broker to make money instead of asking for a commission for each trade.
This is very important to know before you open an account. These brokers trick you with advertisements saying you have to pay 0% commission but not saying you have to pay 1.5% spread for each trade. You have to read the small letters to find that out. And the spread is different for each trading pair. Meaning, you might even pay more versus a broker where you have to pay a commission with each trade.
9. Using stop losses
What is a stop loss?
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- Current bitcoin price = $50.000
- Stop loss set at $49.500
- Bitcoin price drops to $49.500
- The stop loss is triggered and will send an order to the broker placing a market sell order for $49.500
- The broker will fill in the first buy order(s) in the orderbook. Important: regardless of the price!
- You prevented further losses because bitcoin dropped to $45.000 shortly after
This is the most basic explanation of a stop loss. You place a stop loss at a certain price point where you think you are wrong. For example, you are trading with a specific strategy. Your stop loss must be set at a certain price point where you are 100% confident that your strategy will not work out. Every professional trader that makes consistent money in the long term is using stop losses this way. Without a stop loss, you risk losing all your money. There is not a single person in the world that never loses a trade. That is simply not possible (unless you only make one winning trade and never trade again...). That's why every trader that wants to make consistent profits should use stop losses.
Normally, stop losses work great. Sometimes they don't. In very volatile markets (like bitcoin) things can happen that will mess up your stop loss. And although your stop loss is set, that does not mean it will always be filled for the price you want. For example:
On 21 october 2021 the price of bitcoin plummeted from $65.000 to $8000 in a few seconds on a certain exchange:
What possibly happened:
- A whale had many bitcoins in his account on this exchange
- The exchange was pretty small with lower trading volumes compared to other larger exchanges
- The whale wanted to sell some bitcoins but forgot to select "limit sell" and instead used "market sell"
Market sell means you are selling against the current market price (the buy price listed in the order book).
- Because the market on this exchange was quite small, there were not many buyers
- For example, this exchange only had 1000 bitcoins in total volume. 200 out of 1000 bitcoins were placed in a buy order ranging between $60.000 and $65.000 (fictional numbers) as this was the current market price
- The whale wanted to sell 800 bitcoin but accidentally pressed market order instead of limit order.
As a reminder, with a limited sell order, the order will be placed in the order book for the selected price and will only be sold for that price or stay in the order book forever.
- When the whale pressed "market order" he was telling the exchange that he wanted to sell his bitcoins for the current market price.
- But there are only 200 bitcoins for sale between $60.000 and $65.000
- Because he wanted to sell 800 bitcoins, the other 600 bitcoin will be sold below market price according to the buy orders in the order book
- In this case (because the order book was small) the market price plummeted all the way down to $8000
- The whale sold 800 bitcoins until all 800 bitcoins were sold disregarding the price
- To put it in other words, the whale had $52.000.000 in bitcoin (800 x $65.000) and told the broker to sell his bitcoins for whatever the price in the orderbook
- The broker just filled all buy orders until all 800 bitcoins were sold. Netting the whale not $52.000.000 but maybe $20.000.000. The whale lost $35.000.000 in this trade.
Why is this important to know? Because you are not the only one that is placing a stop loss at a certain price point. Your stop loss just sent a signal at $60.000 "all right, sell right now!" but there are also many other traders doing the same thing. Once markets are crashing, many people are trying to sell. It's impossible to fill all market sell orders for the specific price because that totally depends on the buy order in the orderbook. The difference between the price of the stop loss and the actual price it's sold for is called slippage. In practise there will always be slippage.
There are a few losers and winners here:
- The whale lost a staggering amount of money ranging in the millions.
- Many people with a stop loss did not get the amount they wanted and sold for much less.
- Some lucky people bought bitcoin below $10.000 while the current market price is $65.000.
Important rules to consider:
- Never put your entire account in one trade. Although you might have set the perfect stop loss preventing you from making big losses, your stop loss might fail and you will lose everything.
- You can have market stop losses and limit stop losses. Where limit stop losses are dangerous as well. Because when setting a limit price it does not mean the price will go back up to that price again.
- Some brokers offer insured stop losses. Meaning the stop loss will always be hit when the stoploss price is reached. In return you have to pay a very high fee.
- Always look at the order book if you are trading at low liquidity exchanges or low liquidity coins.
Now you know how to read order books. Always do your own research before you place buy or sell orders. Every market is different. Prices can go up and down. Nobody knows where the price will go tomorrow. Use the order book to your advantage.