What is the market depth chart in Cryptocurrency?

What is the market depth chart in Cryptocurrency? Traders use various tools and parameters to have profitable transactions; One of these parameters is the “Market Depth Chart,” which helps traders and investors to reduce the risk of their transactions. In this article, we want to answer questions like; What is a market depth chart? How does it work? And how to read and use market depth data? to check

What is the market depth chart in Cryptocurrency?

The Market Depth Chart is a chart that shows supply and demand in the market at different prices. In other words, market depth is the density of buy and sell orders ( supply and demand ) registered for an asset at each price level.

Access to the Market Depth Chart in the digital currency market gives the trader a good view of the resistance and support levels (supply and demand); They can also monitor the reaction of buyers and sellers with this chart. 

The depth of market data is also known as Order Book; because it contains a list of pending orders for a digital currency; By examining these orders along with fundamental and technical analysis, we can have a more accurate prediction of the price of this digital currency.

Deep Market

According to the definition of market depth and the Market Depth chart, how can we define the deep market? We said that the depth of the market shows the supply and demand; as a result, the deep market is a market where buy and sell orders are made quickly and require little time for confirmation.

In general, it can be said that the deep market has high liquidity due to high buying and selling, and the price moves in a logical trend so that whales cannot have a great impact on the market. If the digital currency has high liquidity, there are many buyers and sellers; as a result, with a buy or sell order, significant asset price changes do not occur.

If the digital currency does not have high liquidity and is not traded continuously, its price may change significantly by registering a purchase order.

Components of the market depth chart

Before reading the market depth chart, we must know its components and understand what each of them means. The depth chart can be displayed differently on exchanges, but the standard Bitcoin depth chart consists of several parts:

1. Bid Line

The bid line shows the accumulated value of buy orders at any given price point; This line is in green on the left side of the graph. Purchase orders can be placed in USD or other fiat currencies.

1. Ask Line

The ask line is located on the right side of the chart and shows the accumulated value of sell orders at each price point in red. If we look at the Bitcoin chart, the sell orders will all be Bitcoins.

1. Horizontal X axis

The horizontal axis in the market depth chart shows the price points where buy and sell orders are entered.

On the left side of the chart (green part), you can see all the buy limit orders registered by the traders. This section shows the side of Order Book bidders.

On the right side of the chart (red section), you can see all the sell limit orders placed by traders. This section shows the side of Order Book requesters.

In simpler terms:

• Left side of chart (green) = offers (buy orders)
• The right side of the chart (red) = requests (sell orders)

1. Y vertical axis

The vertical axis on the market depth chart represents the number of orders placed at each price for a cryptocurrency.

How to use market depth data?

Now that we know the components of the market depth chart, how can we use the chart data? Using the depth chart, like other charts, does not require statistics and mathematics and has only one psychological dimension.

Using the data obtained from the market depth chart, the trader can perform his analysis and finally decide whether to enter the trade or not. For analysis, traders usually look for the Buy and Sell Wall, which helps them buy and sell.

Shopping wall

As we said, the market depth chart that shows open orders consists of two parts: 

• Left side of chart (green) = buy orders
• Right side of chart (red) = sell orders

When there are many open buy orders on the left side of the chart, it means that the orders are placed at a price lower than the current price of the coin, and sellers are not willing to sell at these prices; Therefore, the purchase orders remain open.

But when there are a lot of open sell orders on the right side of the market depth chart, that is, orders with a higher price than the current market are registered, and buyers are not willing to buy at these prices, So the orders remain open and unfulfilled.

On the market depth chart, these unclosed buy and sell orders form buy and sell walls, also known as green and red walls. Now we want to know when the buying wall and when the selling wall will be formed?

buy wall

The buy wall or the green wall on the left side of the market depth chart occurs when the volume of buy orders is greater than sell orders; The more pending buy orders there are, the higher the buy wall will be.

Finally, more buy orders indicate that demand is outstripping supply.

For example, in the image below for the Bitcoin Tether (BTC/USD) currency pair, you can see a buy wall at $16,908.

Sometimes the volume of these orders is so large that the price increases if the transaction is done.

sales wall

The sell wall or the red wall, which is on the right side of the market depth chart, is formed when the volume of sell orders exceeds the buy orders, So more sell orders indicate more supply.

For example, in the picture, you can see a sell wall at the price of $16,913.

Also, if the volume of these orders is very large, it can reduce the price.

Chart of market depth in exchanges

The market depth chart is visible in almost all digital currency market exchanges and you can easily use it; But remember that this chart alone cannot help you decide whether to buy or sell and is usually considered an auxiliary tool.

Conclusion

Since the bid and ask lines show the accumulated value of open buy and sell orders at a particular price, it can be said that the market depth chart gives you a good insight into the supply and demand of a cryptocurrency.

Since it is possible to cancel orders registered in exchanges, whales may manipulate prices by registering a large transaction and deceive small traders; This shows that this chart alone cannot help you trade.

Another point that is particularly important about these charts is that the chart of the market depth of a digital currency in each exchange is drawn based on the buy and sell orders of the same exchange, and of course, you cannot decide to buy and sell your asset based on the price of an exchange. Get.

Finally, we must say that this chart, along with things like technical and fundamental analysis, the use of indicators, and your own knowledge, can be useful for making a digital currency transaction.