Those who are closely involved in trading in the crypto world should first get a proper understanding of order book analysis before trading. But for those who don't know about order books, these things are very difficult to understand and there is a lot of loss potential in this volatile market. So in my series, I am sharing with you some simple techniques and tools so that the newbie can at least get some basic understanding of trading and order book which will help them to become pro-level traders in the future. In the previous post I discussed a few tools and analysis techniques, today I will discuss two more tools and techniques.
Liquidity is essential in any market, and the order book is where you can assess it. If there are plenty of buy and sell orders around the current price, the market is liquid, meaning it’s easy to execute trades quickly without moving the price too much. But on the other hand, thin liquidity can cause slippage. This means your trade executes at a less favorable price due to a lack of buyers or sellers at your desired level. For example, if you’re trying to buy 100 Ethereum and there are only 20 available at your target price, the remaining 80 will be bought at higher prices, which can hurt your bottom line.
Order book depth means the total volume of buy and sell orders at different price levels. A deep order book indicates strong market interest and higher stability. A shallow order book when it is fewer orders then suggests the market is thin and more volatile. So there is a possibility of moving prices dramatically with just a few trades. Many traders use this information to judge whether they should enter or exit a position. For example, if the order book is deep on the sell side, it might take longer for the price to rise, since there’s more selling pressure to overcome. A deep buy-side on the other side can be a buffer. This will prevent the price from falling too quickly. This is an indicator of the stability of the price.
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It is important to have a thorough understanding about trading and how orderbook works. This can help to plan things better and thanks to you for sharing this informative article about it.
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