How to Read an Order Book & Why Does It Matter?

By Samuel Becker · March 03, 2022 · 5 minute read

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How to Read an Order Book & Why Does It Matter?

The term “order book” has to do with buying and selling securities, including stocks and cryptocurrencies. Essentially, they track the buy and sell orders of a given security.

Knowing what an order book is can help you develop an understanding of how cryptocurrency works — or at least the crypto markets. In this article, we’ll answer many common questions about order books, including: What is an order book? How do you read an order book? What does it have to do with buying and selling stocks or crypto?

What is an Order Book?

An order book is a list of buy and sell orders for a specific financial asset, organized by price level. It’s a constantly updating (real-time) tool that allows you to see the existing orders for a particular security, like a cryptocurrency.

An order book allows traders and investors to get a live look at the supply and demand of the asset in question. As such, an order book is a tool that brings a new degree of transparency to the financial markets.

How Does an Order Book Work?

An order book is sort of like a ledger — it keeps track of securities (or cryptocurrency) being bought or sold at given prices. In that respect, it may not be too difficult to envision how a major stock exchange, like the New York Stock Exchange or Nasdaq, might use one.

The order book functions as a dynamic queue with a focus on a single security, be it a stock, cryptocurrency, or commodity. Orders to buy come in and are subsequently displayed, along with orders to sell, and the trading data is arranged by price point.

For traders and investors, the order book is basically just a list of those orders from which they may be able to dig up some market insights. Even on a decentralized exchange, where investors can trade different types of crypto, order books can help provide more detail into real-time buying and selling.

Example of an Order Book

An order book is a visual medium for displaying information, so you may need to use your imagination a bit as we run through the following example.

Let’s say we’re looking at the order book for Ripple (XRP). During the trading day, orders to buy and sell XRP are being executed constantly — several per minute. An order book helps display all of the information in a way to make it easy to digest.

The order book for XRP would show all of the orders to buy and sell, at given prices and times, in a chart-like display. With that visual, you could potentially see any imbalances — perhaps there are many more sell orders than there are buy orders — that could provide a little insight into the future price movement of XRP.

Components of an Order Book

An order book comprises several components, or pieces of information. Generally, an order book will display buy and sell orders, along with order history. But they can include more extensive data, too, such as the bid and ask prices. Here are some common components of an order book:

Buyer’s Side

As we’ve discussed, an order book displays information about buy and sell orders for a given asset. A part of that is the buyer’s side of the equation — or, who (or what) is buying the asset in question. The buyers are very important in this respect, since they represent the current or real-time demand for an asset.

If there aren’t many buyers for the asset (and there are a lot of sellers), for instance, you might ascertain that demand for the asset is down, and decide how to adjust your own strategy accordingly.

Seller’s Side

The yin to the buyer’s side’s yang is the seller’s side — the inverse to who’s buying an asset is who’s selling it. That information is likewise displayed in an order book, along with when their sell orders were passed along. This can be critical information for investors, as they can see the investors that are selling, and how many of them are deciding to do so at any given time.

Ask and Bid

The ask and bid components offer up a little more detail into the buying and selling that’s going on with a given asset. The “ask,” in this situation, refers to the share price that an order was put in at, while the “bid” has to do with the number of shares in question. Some order books may use the “bid” and “ask” categories in lieu of a “buyer’s side” and “seller’s side.”

But essentially, what you’ll see is buyers who are bidding for a number of shares at a certain price, and sellers who are asking for a price for a certain number of shares.

Prices

Perhaps the most important element to the order book, prices for the asset are also listed along with the buyers, sellers, and share quantities. This coincides and overlaps with the bid and ask data, as an order book will show the amounts that buyers and sellers are looking to move, and at what price.

Total

The total is perhaps the most intuitive component of an order book. It simply adds up or otherwise shows a cumulative amount of the given variable for the asset in question.

Order Books and Cryptocurrency

The worlds of order books and cryptocurrency intersect in a big way — cryptocurrencies trade on exchanges much like stocks, ETFs, and commodities do, so order books are also a fixture of the crypto markets.

The visual display and details of crypto order books will vary depending on the platform or exchange an investor is using. For instance, if you look at an an order book on Kraken , it may look a little different from an order book displayed on, say, Binance .

But typically they all contain the same basic pieces of information, which would include the things we’ve covered, like buy and sell orders, pricing data, etc. This information can give traders a better indication of current market dynamics and volatility.

Benefits of Order Books

The benefits or advantages of order books are pretty straightforward. They give investors or other market participants an x-ray of the market for a given asset at any given time. You can see a real-time cross-section of orders, which can help predict market trends in the short term.

Not only that, but you can see who is placing orders, and in what order those orders were placed (if that’s not confusing!). What it boils down to is this: Order books allow you to see the supply and demand dynamics of a particular asset, and that can go a long way toward informing your next market moves.

The Takeaway

As an investor, learning what an order book is can help shed more light on the markets. With a list of buy and sell orders, an order book can help provide more detail into real-time buying and selling. If you’re a crypto trader, that can be very helpful — just like learning what sharding is, or what cryptocurrency wallets are.

Ready to start trading crypto? With SoFi Invest®, you can trade more than two dozen cryptocurrencies including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

FAQ

Does Bitcoin have an order book?

Yes, there are order books for Bitcoin. Pretty much all securities (cryptocurrency, or not) have order books. Depending on the exchange or platform you use to trade crypto, you can likely track one down.

What is an exchange order book?

An exchange order book refers to the order books offered or displayed by a given exchange or platform, and its trading pairs. For instance, you may look at Binance’s order book to check out the transactions between Bitcoin and U.S. dollars currently happening on that specific platform.

Who can see what is in an order book?

Order books can usually be viewed by anyone, whether they’re a user of a particular exchange, or not.


Photo credit: iStock/svetikd

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