What Is an Order Book? How to Read an Order Book
Trading
Reading time is 7 min

What Is an Order Book? How to Read an Order Book

Intermediate

Order Book

What is an order book? An order book is a summary of orders on an exchange. It lists financial assets for purchase and sale by price and size.

Market participants use the order book not just to trade stocks, commodities, cryptocurrencies, etc. but to gain an insight into market depth, volatility, investor behavior and an asset’s overall ‘health’. This is often referred to as order book analysis.

What is an order book?

Every exchange consists of two sides: buyers and sellers of a given asset. This is, of course, what an exchange is — two parties wishing to trade one asset for another. As they do so, they create a list of orders, and this is called the order book. Of course, the order “book” is in fact digital, not manual, and is updated automatically without human intervention. In the case of cryptocurrency exchanges, these updates occur constantly in real time.

Exchanges have to settle the trades nearest to the spot price first — so-called incremental settlement — so the order book is organized by price level by default. You’ll see trades nearest the spot price first when looking at order book data — more on that below.

Order book definition

An order book is a list of trades on an exchange which offers an overview of activity between buyers and sellers of an asset. This overview has two important functions: it helps traders understand what’s happening on a particular market and also makes markets more transparent by showing each participant’s trading to every other exchange user.

Order books can also exist outside financial exchange circles; they constitute, for example, a complete overview of the commercial activity of a business in a given sector.

Components of an order book

Buyer

On any given order book, there are two parties involved: buyers and sellers. Buyers are looking to purchase asset A with asset B (which they already own). They do so by entering into a trade; they select how much of asset A they wish to purchase and how much they are willing to pay for it in terms of asset B.

"Buyers either perform a trade live or create one in advance which will only complete under specific circumstances. A classic example could be when the price of the asset they want to purchase reaches a certain level."

Seller

Sellers complement buyers in that they take the opposite side of the trade. Sellers are looking to sell asset A for buyers’ asset B. Like buyers, they enter into trades, setting parameters for how much of asset A they wish to sell and at what price they are willing to do so.

Just as with buy trades, these can be done right away or scheduled to only execute under specific circumstances defined by the seller.

Bid

What is an order book “bid”? A buy order on an order book is also referred to as a bid. Just like an auction, buyers enter the price at which they are willing to purchase asset A. Bids on crypto exchange order books tend to be colored green, and TabTrader retains that classic color scheme in its order book data.

We take data straight from major exchanges and make every order book instantly viewable via a single app. This means that you can conduct order book analysis on multiple exchanges at once, all without leaving TabTrader.

Ask

What is an order book “ask”? The complementary term for buyers’ bid orders is sellers’ ask orders. Asks refer to how much a seller is “asking” of a buyer in order to sell them their asset A.

Asks are normally colored red on the order book, as is the case by default in TabTrader.

Price

On a TabTrader cryptocurrency exchange order book, there will be several columns — not just a list of bids and asks.

The “Price” column lists the price at which the two assets involved are changing hands. You can see at which price asset A is traded for asset B for each individual trade on the order book. On a BTC/USDT order book, for example, where BTC is asset B and USDT is asset A, the Price column shows the price at which BTC was exchanged in USDT terms. This is the case for both buy and sell transactions.

Total

The “Total” column shows how much a trade was worth in terms of asset B. On a BTC/USDT order book, for example, the Total column is in USDT. Alongside the other trading data, it is easy to verify that BTC and USDT really are being exchanged at exact amounts according to the agreed price between buyers and sellers.

Order book — Advantages

Whether it’s a stock order book or crypto order book, there are more benefits of knowing how to read an order book than just a basic overview of trades taking place.

Order book analysis is key for those who want to gain an insight into the “health” of a specific market — who (buyers or sellers) is more active, how much of an asset is being bought or sold, at what price levels is the majority of buying or selling taking place, etc.

How to read order book data is an important topic for newbie traders, because if done right, order book analysis can make or break a trade or entire trading strategy.

Order book — when to use (strategy)

Now that the “what is an order book” question is out of the way, when should you put it to the test? Let’s take a look at how to read an order book as part of overall order book analysis.

As can be seen below, the walls increase in height as the cumulative order totals are added, and ultimately cover the entire order book on the exchange.

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Visual order book data allows traders to place bids or asks with more precision, e.g. a sell order immediately below a large sell wall increase, and vice versa. This increases the chances that an order will be filled — a trader’s worst nightmare is missing a price move by a tiny amount, and successful order book analysis can stop this happening.

Example of an order book

What is an order book in the wild? Let’s take a look at one from TabTrader, in this case for the BTC/USDT pair on Binance. Open the order book on TabTrader and all the data covered in this guide is immediately visible alongside a chart BTC priced in USDT. Bids in green are flowing from buyers, while asks are coming from sellers. The amount of the trade in USDT is visible, and how much each trade is worth — how much BTC is being bought or sold and the price in USDT. Enlarging the order book data brings up the visual representation — the buy and sell walls. As trades execute and new ones are generated, the walls themselves change in real time to reflect those changing conditions.