Have you ever looked at an order book on a trading platform and felt like you were deciphering alien 👽 code?
To help you understand the mechanics of order book Let's start with the basics:
What exactly is an order book? 📖
An Order Book is a dynamic list that provides real-time updates on buy and sell orders within a specific market. It serves as a valuable tool for traders, offering insights into market depth.
An order book consists of bids and asks, arranged by price. But what exactly are they?
Bids 🛒
Bids are what people are willing to pay for an asset. They are listed in descending order with the highest price someone is willing to pay at the top. This is known as the highest bid.
Asks 🏷️
On the flip side, asks are what sellers are willing to accept for the asset. These are listed in ascending order, and the lowest price at the top is known as the lowest ask.
Top of the Book 🏆
This refers to the highest bid and the lowest ask. These are the best prices you’ll get if you’re looking to execute a trade immediately.
Mid Price 🎯
This is the average of the highest bid and the lowest ask. It provides a quick snapshot of where the market stands. If the highest bid is $100 and the lowest ask is $110, the mid price is $105.
The Spread 🕊️
This is the gap between the highest bid and the lowest ask. In our example where the highest bid is $100 and the lowest ask is $110, the spread is $10. A smaller spread often means a more liquid market.
Market Depth 🌊
Ever hear traders talk about 'depth'? This refers to the number of open buy and sell orders at various prices. More depth generally means more liquidity, making it easier to execute large orders without significantly impacting the price.
Why is this Important? 🤔
Understanding the Order Book helps traders make informed decisions. It provides insight into the supply and demand at different price levels and can signal market sentiment.
