Formulating a Strategy Using the Crypto Exchange Order Book | by Lera | Coinmonks | Dec, 2022


Tips & Tricks

Trading order book is one of the most basic strategies in crypto trading. Similar to technical research, it involves getting information from the trading view. But, instead of utilizing technical metrics plotted on the candlestick chart, investors use the information from the record of orders.

Since almost all exchanges display the outstanding offers and sale price available in the brokerage system, players use the information to guide their decisions, especially when trying to forecast whether the value of the crypto will increase or decrease. Furthermore, the record is a goldmine of information, and those who can decipher the “code” will surely win the game.

With this, it’s important for newbies to understand what’s going on underneath the crypto exchange’s log of orders.

An order book in trading is an automated list of requests to purchase or liquidate a specific asset, like cryptocurrencies, organized by points of value.

The log is a measure of the market’s depth, which is shown by the number of assets being sold and bid on at various prices. By showing the supply and demand from investors, the record of requests provides a great insight into the mood of the players. Through the information listed in an order log, there’s better transparency in the crypto trading process.

Order logs can vary slightly depending on the brokerage service, but their function remains the same.

NOTE: In a centralized crypto exchange, transactions occur when purchasers and sellers agree on a price listed in the log. On the other hand, decentralized exchanges use a smart contract called the automated market maker (AMM) to execute each request.

The volume of limit orders placed at the present moment indicates market depth, which basically measures market liquidity and reflects the trading platform’s capacity to support relatively large market orders without affecting the crypto’s value.

Note that large market orders have less of an influence on volatility when there’s more liquidity in the market. With better market depth on the exchange, a trader can enjoy a lower trading cost (more crypto purchased for the same value) and exert less influence on other investors.

The limit order book keeps tabs on all the open requests to liquidate or purchase crypto at varying price ranges. On the other hand, an exchange using a matching engine will constantly pair up the requests. A more liquid asset is one that has several limit orders in a narrow price range.

Investors don’t place orders at the current market price. Instead, they set a limit for the price at which they want to buy or sell at a certain price or when they think a trend is about to start.

Crypto brokerages use limit orders to allow investors to place their sell requests, hoping that they can be filled when a willing buyer arrives. In contrast, market orders are filled instantly at the prevailing market value or the next optimum value.

Reading a crypto trading order book is quite simple. Essentially, there are four basic concepts you need to understand. There are four data points displayed on the order book:

A “bid price” is the value at which someone is willing to purchase the asset. It is common for bids to be lower than the given value, often known as the “ask” price. Note that if the bid price is higher than the ask price, the system automatically executes the buy request based on the matching ask price.

The “ask price” is the least price being offered at which the crypto owner is valuing the assets for sale. A bid-ask ratio is the difference between what’s being offered and the valuation from the seller.

Some traders place their ask price higher than the prevailing asset price to anticipate an impending price increase. When a bid price matches the lowest ask price, the market order is automatically filled.

Quantity (or size) and amount are relevant to each other. The quantity and amount per request simply show the X units at the values listed on the log.

For example, a trader wants to buy a quantity of only 0.0001 BTC at a bid price of 2.13 USDT. Since cryptocurrencies are fungible, they can be bought in portions. In this case, the trader wants to buy only 0.01% of 1 BTC for an amount of 2.13 USDT.

Records of requests are constantly changing; they are updated continuously throughout the day.

Virtually every cryptocurrency exchange uses order logs to track buyer and seller requests. An order book on crypto trading is done electronically. Their presentation may vary slightly depending on the exchange. The screen’s top and bottom, sometimes the left or right portion, display the buy and sell data. In many brokerages, the logs also contain the “total,” which simply refers to the outstanding total that encompasses all.

Order book analysis in trading can reveal if an incline or decline is in favor of the bulls or the bears. If the number of purchase requests is much more than the amount of sale requests, particularly at the ideal level of the bid/ask price spread, this suggests greater momentum coming from the bulls and a possible rise in value will soon come. On the other hand, a higher number of selling suggests that bears have a stronger grip on the situation. Because the order log is ever-changing and might experience rapid spikes in activity, continual attention is necessary in order to notice even the tiniest changes. This is because the order log could experience sudden spikes in activity.

A candlestick chart has the potential to provide beneficial information on the current behavior of the market in addition to past tendencies. Investors are provided with essential information that enables them to make informed transactions via the use of the order log. Traders are able to determine which brokerages are active and whether or not the situation is being driven by normal investors or institutions by monitoring the book. This information may be used to make trading decisions. A further benefit of keeping a record of all orders is that it discloses order imbalances, which in turn indicate short-term price fluctuations. This is particularly useful for high frequency trading in a limit order book.

For instance, if there is a significant disparity in the number of buy and sell orders, the asset price may rise due to a surge in buying pressure. Price barriers at the tops and bottom are also identified using the record of orders. Many big buy orders placed at the same value may point to strong support levels, while many sell requests placed around the same value may point to an area of resistance.

A “buy wall” occurs when there is a concentration of buy orders at a certain price level that don’t meet the asking price of sellers. If there’s a huge volume of buy requests that cannot be completed, then neither can the buy orders at a smaller bid. Because of this, the buy wall provides a temporary lowest price barrier.

When there is an abundance of sell requests (supply) at a certain price level, the resulting pattern is called a “sell wall.” The price level of the wall becomes temporary resistance if there is a significant volume of sell requests that don’t meet the bid price of buyers.

The big issue today is whether it’s enough to just keep an eye on the order book, extrapolate the important support and high barrier levels, and check them with some basic technical analysis before you start trading. You may think of the information obtained from the logs of orders as a small portion of the entire scenario. The truth is that the data in this log only represents a tiny subset of the total number of market participants. However, if the data is comprehensive enough, you may be able to piece together a compelling picture of how the vast majority of retail traders really operate. The order book, when combined with technical and fundamental research, might provide a profitable trading approach.

When used fraudulently, buy and sell barriers may create false volatility and artificially distort trading volumes, particularly for investors who are prone to making rash decisions based on their emotions. Due to the unregulated nature of the cryptocurrency industry, exploiting order logs is a significant threat. It is possible for those with access to large quantities of money, known as “whales,” to manipulate the market by restricting buying and selling. This might be done to cover a short position or to increase a long one.

Investors pump significant amounts of liquidity into the walled price to coerce investors into buying and selling at the manipulated spot rate. After a successful deal occurs at the requested price, pending orders are automatically canceled and trading begins as usual. When there is less influence for individual investors, it is particularly important to be wary of the whales in the cryptocurrency space. On the weekend, for instance, individual investors throughout the globe tend to be less active, making it an ideal time for whales to strike.

You may learn more about the value of a cryptocurrency by looking at its market depth or second-level information. In addition to the highest and lowest offer and sale prices, more detailed information also provide the total number of units transacted at each price point. By anticipating and preparing for bullish or negative market swings, this helps investors improve their approach.

The problem is that second level information from order books trading may be manipulated as well to simulate a condition when, in fact, it does not. Both market makers and investment firms are experts at doing this. Some traders employ electronic communication networks (ECN), which are automated investing engines that automatically match and execute requests at the optimal bid and ask values, while others just spread their investments over many price levels.

Another caution when looking at order logs is wash trading. In order to conceal the gap between the growing bid-ask ratio and the quantity of tokens in the exchange, several exchanges have been accused of engaging in wash trading and showing exaggerated transaction volume data. One strategy for combating this illusion is to compare the volumes with real on-chain volumes. Large discrepancies between the two should raise red flags and indicate that wash trading is occurring.

An automated trading journal mainly acts as a platform to log the specifics and conditions of an investor’s trades. As such, recording your trading history helps you efficiently examine your transactions to gain a better understanding of your approach and patterns.

At the very least, newbie crypto traders should be reviewing their trades, especially the reasons for entering or exiting a position. Journaling trades means tracking one’s performance through historical data, taking into account the emotional and logical factors that lead to those actions.

The most efficient strategy to learn crypto trading for beginners is to have a complete awareness of what works and what doesn’t. Therefore, examining your own experiences is a terrific learning tool since it focuses on first-hand experiences and helps you better understand triumphs and errors.

Therefore, an automated trading journal like Trader Make Money is an essential tool for novices because it gives them a fantastic opportunity to learn and progress. Trading cryptocurrencies can quickly become stressful, especially if you have a lot of open positions on different exchanges and have to keep track of important dates on the calendar. Keeping an automated trading diary is a great way to avoid this because it keeps all the information about your transactions in one place.

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