Learning to read order books and market depth charts is a critical step in understanding markets. This article will walk you through everything you need to know about these powerful tools.
The order book (right) and market depth chart (left) on Cryptowatch.
Trading terminals are absolutely packed with information — so much so that sometimes very useful data gets lost in the noise. Order books and market depth charts, despite their value, can sometimes confuse beginners into ignoring them altogether.
Learning to read these tools is a simple way to improve your trading. Order books and market depth charts are there to help you do technical analysis, determine liquidity, and choose prices for your orders.
Jump straight to the analysis section of this guide if you already know the basics:
An order book is a record of active buy and sell orders in a single market. Every market on every exchange has its own order book composed of unique buy and sell orders. Many of the orders you can see in the order book reflect that trader’s honest intentions. However, complete order book transparency has its pitfalls — large-sum orders, merely by existing in the order book, tend to repel traders and negatively affect the market.
This is an order book for the Kraken BTC/USD market, as it appears on Cryptowatch.
Bid vs Ask
Orders in an order book are separated into two “sides”: bids and asks (buy orders and sell orders, respectively). Bids are the price a trader is willing to pay and Asks (a.k.a. “Offers”) are the price a trader is willing to sell at.
Appear as (by default)
Bid (buy orders)
Prices with green numbers
Demand for an asset
Ask (sell orders)
Prices with red numbers
Supply for an asset
Asks/Offers are above, Bids are below.
Every order in the order book contains a price and a quantity (or volume). The order book sorts open orders by price — each unique order price gets a row, and the quantity (amount to buy or sell) of every order at that price is combined in its row. By listing open orders by price and indicating their combined quantities, the order book gives traders a look into the supply and demand forces of the market.
Only limit orders are recorded in the order book (limit orders allow you to specify the price they fill at). Market orders with trigger prices (eg. stop losses, take profits) do not sit in the order book. Limit orders (generally) incur the lower “maker” fee on exchanges because they add volume to the order book (a.k.a. “liquidity”). Market orders always match with existing orders, removing them from the order book. Market orders incur the higher “taker” fee on most exchanges. It’s also possible that the maker and taker fees are equal, depending on the market and exchange. Always check your exchange’s fee structure.
Parts of the order book
The order book is usually divided into three columns representing price, quantity, and total quantity. Here’s what it looks like on Cryptowatch:
Price point of pending orders in the order book.
Pending sell orders are in red. Pending buy orders are in green.
Quantity of all open orders at that specific price level.
Bid side: Combined quantity of orders from the highest bid to the observed price level.
Sell side: Combined quantity of orders from the lowest ask to the observed price level.
The large, white number between the bid and ask sides is the last traded price. Though often given screen-space within the order book, it does not represent a pending order and is not actually part of the book.
You can use the Grouping button to view orders by unique price, or grouped into regular intervals. Read the article linked here to learn more about grouping:
The market depth chart is a visualization of the order book. Because the depth chart’s data is derived from the order book, it indicates the same information. Traders may favor the depth chart over the order book when looking for the bid-ask spread or support and resistance levels.
Traders use the depth chart to study the order book quickly while they trade.
A market depth chart is a typical graph with an X (horizontal) and Y (vertical) axis:
Quantity of orders at corresponding price, measured right-to-left
On Cryptowatch, the colors of the depth chart correspond to the bid and ask colors in the order book. Most platforms use green to represent bids (limit buys) and red to represent asks (limit sells).
On Cryptowatch, you can overlay a depth chart over the price chart’s y-axis. Check out the link below to find out how:
In any market, there are two extremes in price that traders call the “top of the order book”: the highest bid and the lowest ask.
The highest bid (buy) is the highest price buyers are willing to pay for the asset.
The lowest ask (sell) is the lowest price sellers are willing to accept for the asset.
Top of the order book for Kraken: BTC/USD
Notice in the image above how the highest bid and lowest ask are actually lower than the last traded price?
It’s always important to check the order book before submitting a trade, since you are not guaranteed the last traded price. If we were to submit a market buy order to this market, we would pay $11,355.60, not $11,359.90 (per 1 BTC).
On the market depth chart, the top of the order book is always toward the center of the chart. The actual center of the depth chart indicates the midpoint between the highest bid and lowest ask.
Market depth chart for Kraken: LINK/USD
What is the bid-ask spread?
The gap in price between the highest bid and lowest ask is called the bid-ask spread. Looking at the top of the order book again, you may notice that the highest bid and lowest ask are not neighbors: there is a difference of $2.10 between $11355.60 and $11353.50:
The gap between these two prices is called the bid-ask spread. A trader looking to sell at market would receive the bid price (11353.5) and a trader looking to buy at market would receive the ask price (11355.6). If a new sell order came in at a price of 11355.5, it would become the new top of the ask side of the order book. The bid-ask spread would decrease by $0.10 as well, to a total of $2.00.
The presence of the bid-ask spread is easy to find on the depth chart, provided it’s wide enough. Look for the gap between the highest bid and lowest ask:
You can check the order book panel to see the difference between the highest bid and lowest ask. Subtract the highest bid from the lowest ask to calculate the bid-ask spread. We can calculate the bid-ask spread from the top of the order book in the image above:
$392.00 - $391.68 = $0.32
Cryptowatch Desktop has a “Tick Chart” module that lets you see a dynamic spread chart for any market there. This shows the spread over time, plus any trades occurring (the white dots indicate trades).
Liquidity refers to the ease of buying and selling an asset without affecting its market price. Highly liquid markets have a high number of buyers and sellers with a high volume of the asset committed to the order book.
In highly liquid markets, large orders are less likely to change the price. Markets with more liquidity generally have smaller bid-ask spreads. Popular cryptocurrencies like Bitcoin and Ethereum (among others) often enjoy high liquidity, for example.
In low-liquidity markets, large orders are more likely to change the asset’s price. Markets with low liquidity may have very wide bid-ask spreads.
Remember — the order book is constantly changing. What you observe one minute may not be there the next.
You can check the Total Quantity (rightmost) column of the order book on Cryptowatch to see how much buying and selling interest there is near the top of the order book.
The market depth chart will have wider, horizontal “walls” at price levels with more liquidity and appear thin in low-liquidity areas. A slope, rather than a sheer cliff, on the depth chart shows liquidity across a range of prices.
Support and resistance
“Support” and “resistance” refer to price levels with a significant amount of buying or selling interest, respectively. One method of determining support and resistance is to draw lines to historically significant levels on the price chart (check out our Drawing on Charts guide to learn how to do it).
We can see actual support and resistance levels in real time using the order book and market depth chart. The depth chart excels over the order book here, though practiced traders can spot these levels in both. Use the same method for spotting liquidity to find support and resistance levels in the depth chart — look for areas with horizontal “walls”:
Significant price levels on the depth chart are indicated by a line and price on the left side of the panel. In the order book panel, significant price levels are highlighted. Remember that orders can be canceled at any time (usually without cost to the trader), so support and resistance can disappear as fast as they appear.
Order books and market depth charts: further reading