Order Book: An Essential Tool for Analyzing Market Supply and Demand

Understand the Essence

The order book is a real-time data display that aggregates the buy and sell orders of buyers and sellers for a specific trading pair. Understanding this mechanism can dramatically change trading decisions across various markets, including stocks, commodities, and cryptocurrencies.

The order book displays both the maximum price that buyers are willing to pay (BID price) and the minimum price that sellers wish to receive (ASK price). By observing these two price ranges, the supply and demand balance in the market at that moment becomes clear.

Feel the Pulse of the Market: Dynamics of the Order Book

In a market filled with liquidity, the order book fluctuates as if it is alive, changing moment by moment. New buy and sell orders are added, and when trades are executed, they disappear—this cycle tells the whole story of market activity.

By using the order book app, you can track this dynamic change on your smartphone. Major trading platforms allow you to place and monitor orders on the order book app linked with charts, so you won't miss instantaneous market changes.

Every time a transaction is executed, the corresponding order disappears from the order book, and new orders fill that spot. By observing this flow, the dynamics between buyers and sellers become clear.

Components of the Order Book: How They Function

The main elements that make up the order book are as follows:

Placement of Buy Orders and Sell Orders The BID prices are listed in descending order, with the highest buy price displayed at the top. On the other hand, the ASK prices are organized in ascending order, with the lowest sell price at the top. This arrangement allows market participants to instantly recognize the most easily tradable price ranges.

Spread: The Breath of the Market The difference between the highest BID price and the lowest ASK price is called the spread. Markets with a narrow spread tend to have high liquidity, while those with a wide spread tend to have low liquidity. It is an important indicator for traders as it directly relates to trading costs.

Display of Quantity The trading volume waiting at each price level is indicated by quantity. This quantifies the level of market interest at a certain price.

Role of the Matching Engine The moment the conditions for buy orders and sell orders match, the system's matching engine automatically executes the transaction. If the buyer agrees to pay at the seller's selling price (or vice versa), the transaction is immediately concluded.

Depth Chart: Visualization of the Order Book

Many traders prefer graphical representations over a series of numbers. That is the depth chart.

In the depth chart, the X-axis represents price points and the Y-axis represents the order quantity at each price. The green curve indicates buy orders (BID price), while the red curve indicates sell orders (ASK price). The shape of these two curves can provide insights into market depth and the potential for price reversals.

Areas where the curve is steep indicate the presence of large buy and sell walls in that price range. These are regions where it may become difficult for the price to move further.

Three Perspectives for Traders

Detection of Support and Resistance Levels The price range where large buy orders are concentrated may become a strong support level. Similarly, the accumulation of sell orders suggests a resistance level. However, this judgment is only one piece of reference information.

Evaluation of Liquidity An order book with a rich number of orders indicates that the market is active and deep. When liquidity is high, large orders are less likely to cause significant price movements, resulting in less slippage.

Market Trend Forecast By observing the situation where orders are “pending” at a specific price range, it provides material to infer potential market trends. For example, if there are a large number of buy orders at a certain level, the probability of that level becoming the next support level increases.

Types of Orders and Execution Mechanisms

Market Order: Immediate Execution If you want to execute a trade immediately at the best price, you use a market order. The buyer's market order is matched with the lowest ASK price on the order book and is executed instantly.

Limit Order: Protecting Price This is a method for traders to specify their desired buy and sell prices. The execution price is reliably controlled as it is only when the market price reaches the specified price that the order is executed. However, if the price does not reach the limit order, it will not be executed.

Stop-Loss Order: The Key to Risk Management A conditional order known as a stop order is triggered automatically as a market order or limit order when a specific price is reached. It is particularly used for stop-loss settings to limit losses and is a powerful tool for risk management.

Pitfalls of Market Analysis: Points to Watch Out For

The order book is a useful tool, but it is not infallible. It is true that orders can be easily created and deleted, which allows for the manipulation of a false supply and demand image.

Whether the “buy wall” and “sell wall” truly reflect the market's intent needs to be verified separately. Relying solely on order book analysis increases the risk of falling prey to intentional market manipulation.

Towards a Comprehensive Approach

The order book is a useful window for understanding the supply and demand structure of the market. Whether you are trading stocks, commodities, or cryptocurrencies, understanding this mechanism will enable you to make more informed decisions.

However, to conduct a reliable analysis, it is important to combine multiple perspectives, not just the order book alone, but also technical indicators, fundamental analysis, and market sentiment. It is through multifaceted verification that the true market trends become visible.