Understanding Order Books
The list of what people are willing to buy and sell at. Reading one takes five minutes and tells you more than any chart.
What this covers
An order book is the list of outstanding buy and sell orders for a pair. It looks intimidating and it is the most informative display on any exchange.
What you see
Bids, usually below and in one colour. Orders to buy, at prices below the current market, listed from highest to lowest.
Asks, usually above and in another colour. Orders to sell, at prices above the current market, listed from lowest to highest.
The spread. The gap between the highest bid and the lowest ask. That is the cost of an immediate round trip.
Depth. The amount available at each price level, usually shown as a number next to each price and sometimes as a chart.
What it tells you
What your order will actually cost. If you want to buy more than is available at the best ask, you take the next level too, at a worse price. Adding up the levels tells you your average price before you trade.
Whether the market is thin. A narrow spread with tiny amounts behind it means a small order moves the price substantially.
Where the interest is. Large orders sitting at particular prices indicate where participants are willing to transact.
Why it matters more than the chart
A chart shows where the price has been. The order book shows what is available now, which is the only thing that determines what you pay.
For any order beyond a small amount, that difference is the largest cost in the trade and it is invisible on a chart.
How to use it as a beginner
Check the spread before buying. A wide spread means an immediate round trip is expensive.
Check the depth against the size you want. If your order is large relative to what is displayed, you will move the price.
Place a limit order at or near the best bid rather than a market order. You pay a lower fee and you control the price.
The comparison worth making
Open the simplified buy interface and note the quoted price. Then open the order book and note the mid price, halfway between the best bid and ask.
The difference is the margin you pay for using the simple interface, and on the platforms we have compared it is frequently several times the trading fee.
Venues that offer both, such as a regulated exchange such as Collect & Exchange, let you make that comparison in thirty seconds and decide which to use.
The one caution
The order book shows resting orders. It does not show what participants would do if the price moved, and it changes continuously.
Large orders sometimes appear and disappear without executing. Treating the display as a prediction rather than as a snapshot is a mistake, and it is the basis of a great deal of unreliable chart commentary.