Many novice investors regularly refer to the order book as “outdated” and believe that in the age of digital speeds "it has lost its former significance."
Of course, the Depth of Market has lost some of its former glory. But there is still no better instrument to evaluate a particular asset at the moment, to understand how many orders have been made to sell or buy it and its real price. All of this data influences future pricing and market behavior.
Read Also: What’s The Depth of Market?
The order book reflects up-to-date information useful for conducting situational analysis and choosing tactics within a trading day, for example, in the process of forming a portfolio.
The appearance of the order book depends on the terminal used, but the general characteristics remain unchanged. This table has two parts:
• the first contains the price to sell or buy the asset;
• the second indicates the volume of the proposed transaction.
The order book has three zones:
• red, where sell orders (Ask) are placed;
• green, this is a purchase order (Bid);
• and neutral, located between the first two. “À la guerre comme à la guerre”, is the place where the market price is formed, this is where supply and demand are opposed, it is where current transactions are made.
No trading terminal can display all active orders, therefore, the visible part contains orders that are located close to the current price, usually 20x20.
There are three types of orders on the exchange:
• Limit orders, which include the desired price and volume, they are reflected in the order book;
• Market orders, executed at the best market value in the desired volume. They are not visible to the market, since they are executed instantly at the best prices;
• Conditional (stop order), requiring compliance with the conditions set by the market participant, excluding limit ones. These orders are not displayed in the order book, since awaiting the occurrence of conditions under which they will become limit or market.
The order book reflects only limit orders, which include the offered price and the desired volume of the asset.
To understand the depth of the market and assess the strength of the impact of orders on the market, players divide them by the volume of supply into small, medium, and large. This is a very arbitrary division and depends on the trading volume for each specific instrument:
• Small - the volume of the transaction will not be able to influence the pricing of the instrument and does not deserve close attention;
• Average is a significant volume if it is present in a narrow price range among several similar orders. Such tight groups are likely to exert pressure on prices due to the cumulative increased volume;
• Large - these are the orders that set the market mood, significantly affect the fluctuations of quotations. These positions are monitored closely and their impact on the market is considered.
According to their purpose, traders divide orders into two types:
• passive - act as extras and move slowly, without leaps for a long time, they protect the asset from sharp price surges;
• active (aggressive) - this is the driving force of the market, they arise quickly and push the price in a certain direction of the trend.
Players monitor the interaction of these groups and, by the nature of their correlation, build a strategy for their actions in the market.
The order book is practically the only tool that works ahead of the curve.
The ability to analyze the order book makes it possible to see what other players are doing, understand the main factors of the current market, and find ways to influence the market, i.e. it is rational to enter or exit the position. The order book remains an auxiliary mechanism since there are many sophisticated trading strategies (hidden orders, fictitious orders, false signals) that do not allow us to consider it a 100% useful tool, so always use additional market assessment tools that will allow you to see the whole picture, for example, price charts or order tape