As more computer guys and normal folks than traditional traders enter the cryptocurrency market, more trading principles need to be revisited and described in layman's terms. While charts are not uncommon in our everyday lives, few of them are particularly beneficial for trading.
This article will explain how to interpret a Depth Chart. Depth charts are among those that can inform you about Demand and Supply, and it visually represents the demand or supply of a specific asset, commodity, or cryptocurrency. Today we will attempt to comprehend why these depth charts are necessary and how to interpret them.
What is a depth chart?
The Depth Chart illustrates the supply and demand conditions in the cryptocurrency market. There is no difficulty in identifying the sell (red) or buy (green) orders. The green side displays the total number of coins with buy orders at the current price, while the red side displays the number of cryptocurrencies with sell orders at the same price. The center of the two lines, where they intersect, represents the current market price. Place the pointer anywhere on the red or green line to see the precise quantity you could buy or sell (vertical axis) for a particular price (horizontal axis).
Be careful that walls and slopes fluctuate rapidly, which is an indication of what will transpire during the period that buys or sell orders are placed. The Market Depth chart displays a cryptocurrency's expected price increase or decrease. The price will increase if there are more buy orders than sell orders. A depth chart is a tool that displays essential information on supply and demand and provides a graphical representation of the supply and demand for a certain digital item.
The components of a depth chart
To interpret a depth chart, it is necessary to comprehend the chart's components. Although depth charts might differ between exchanges, a common Bitcoin depth chart consists of the following elements:
Bid Line
The bid line represents the total value of the bids, or buy orders, at a specific Bitcoin price point. It is depicted by a green line sloping from left to right in a negative direction. Orders to purchase are made in dollars or other fiat money.
Ask Line
The ask line displays the total value of sell orders, or asks, at each price point. It is depicted by a red line sloping from right to left in a negative direction. Orders to sell are placed using bitcoin.
Horizontal Axis
The prices at which orders to buy and sell are being placed.
Price Range
To adjust the range of prices shown, use the plus and minus buttons at the top of the graph. To zoom in and out, you may also use the scrolling capabilities of your mouse or trackpad.
Market Depth Indicator
Order sizes, in the asset pair's base currency, executed prices, and notional amounts for buys (in green) and sells (in red) are all displayed when the mouse hovers over the appropriate side of the chart in this indicator (in red).
Vertical Axis
The vertical axes on both sides of the graph reflect the total volume of an asset pair's purchase and sale transactions.
Buy Walls
Buy walls are enormous quantities of buy orders that are often placed below the current price. A taller buy wall indicates that there are more pending buy orders at a particular price. High buy walls might also signal that traders anticipate an asset's price will not go below a particular threshold.
Sell Walls
In contrast, sell walls are composed of numerous sell orders placed above the current price. High-sell walls may signal that traders do not expect an asset's price to exceed a certain threshold, whereas low-sell walls indicate the reverse.
Market depth refers to a market's capacity to accommodate large orders on both sides. While liquidity and asset volume are utilized to measure market depth, the words are distinct, albeit interrelated.
For instance, an asset may have a small number of orders at the present price and a large number of orders at significantly higher or lower prices. Even if the asset has a large number of orders and, thus, high liquidity, it will not be regarded as having market depth because a large order might readily influence the price of the asset.
Green lines vs. red lines
Two lines are visible on a depth chart: the offer and request lines. Typically, an exchange will represent bid orders, purchase orders with a green line and ask orders or sell orders with a red line.
The lines on the graph are constructed using plotting dots. Each dot on the depth chart represents the amount that can be traded at a given time.
The dollar is used to place bid orders. For instance, you may wish to acquire two bitcoins for $9,500 each, and this indicates that your total bid is $19,000 for a transaction valued at $9,500 or less.
In contrast, your ask orders are executed using bitcoin. You specify the number of bitcoins you wish to sell at the specified price. So perhaps you are selling three Bitcoins for $9,750 or more.
To plot the green line or the bids, you insert a dot at each location on the horizontal access. For instance, you would place a point at $9000, $9100, $9200, etc. Place a dot reflecting the number of bids at each price point or lower on the vertical axis. This is the total amount of money at this level.
A growth chart is displayed on a computer screen.
The Ask, or red line, employs the same concept but uses the entire cumulative value on the chart's right side. This is displayed in bitcoin. However, the values have been shifted to correlate with the USD totals on the left.
Thus, if you are setting the price at $9,500, your mark for 100 bitcoins would align with the $950,000 mark on the USD side of the vertical axis.
Supply and demand
The supply is the quantity of tokens that can be acquired with the available demand liquidity, which is often measured in Bitcoin or US Dollars.
This Bitcoin or US Dollar is listed as 'bids' in the exchange's 'order book' in order to purchase at prices lower than what the supply is now asking on the sell-side of the order book.
A depth chart provides a potent visual depiction of the present, typically dynamic picture of supply and demand across a broad price range.
What is represented by a depth chart?
In a depth chart, the total value of sell orders is stretched to match the dollar amounts on the left axis. However, although being denominated in the same currency, the x-axis values are not always equal. The difference in x-axis values gives an investor or trader insight into the asset's liquidity and volatility.
If the asset's demand and supply are substantially equivalent, the x-axis should be closely matched in value. If the asset is very liquid, meaning that more market players want to sell than buy, the volume will be skewed to the right, creating a big sell wall. The chart will be skewed to the left, forming a buy wall, if the asset is illiquid and its demand exceeds the players' willingness to supply.
Example of a crypto depth chart
For instance, if Trader A sets a bid for one Bitcoin at $10,000 USD and Trader B places an offer for two Bitcoins at $10,000 USD, the total number of bids at $10,000 USD equals $30,000 USD may be used to purchase Bitcoin at that price.
Consequently, the green line, which represents the bids, displays a dot at each increment along the horizontal axis of the chart [the bottom], representing each price point within the price range of possible bids [for example, $10,000, $10,100, $10,200, etc.].
At each price level, you may add all the bids and plot the sum along the vertical axis [to the left of the graph], which represents the total number of bids at that price level.
When you move your mouse over the depth chart on Coinbase Pro, you can see exactly how many bids or offers have been posted at the current price.
Why is it important to understand a depth chart?
Individuals typically choose between holding bitcoin as a long-term investment or engaging in trading. A depth chart is a tool for analyzing the current supply and demand for Bitcoin across a variety of prices. It is a graphical representation of an order book consisting of outstanding purchase and sell orders for an asset at various price levels. Knowing how to read a Bitcoin depth chart is crucial to comprehend the market for anyone interested in trading.
Support and resistance
The terms "support" and "resistance" refer to price levels having considerable buying and selling demand, respectively. On the price chart, lines can be drawn to historically significant levels to determine support and resistance (check out our Drawing on Charts guide to learn how to do it).
The order book and market depth chart allow us to view genuine support and resistance levels in real-time. In this instance, the depth chart outperforms the order book, although experienced traders can identify both levels. Look for horizontal "walls" to identify support and resistance levels on the depth chart, employing the same technique as when identifying liquidity.
A line and price represent significant price levels on the left side of the depth chart's panel. The order book panel highlights notable price levels. Keep in mind that orders can be canceled at any time (often at no cost to the trader), so support and resistance levels can vanish as quickly as they arrive.
Using the Depth Chart to track Supply and Demand
As the price decreases, the buy wall increases. In other words, demand increases as prices fall. A stronger buy wall suggests that traders believe there will be sufficient demand at these lower prices to prevent the market price from falling below them.
In contrast, a sell wall rises as the price rises, indicating that supply increases as prices rise. A high sell wall suggests that traders believe there will be sufficient demand (a significant number of sell orders) at those higher prices, preventing the market price from rising above those levels.
The buy wall is higher the more unrealized buy orders present at a particular price. A strong buy wall can imply that traders believe the price will not drop below a particular level. A huge purchase wall prevents a sudden decline in bitcoin values by generating a high number of buy orders at a single price. Due to higher market liquidity, buy wall orders may be filled more quickly during bearish market cycles than during bullish market cycles. Market psychology can influence the development and expansion of a purchase wall. If traders observe a large or expanding buy wall, they may conclude that the asset's price will climb, prompting them to sell for a quick profit or purchase for higher long-term profits.
Sell Walls
The higher the sell wall, the more unfilled sell orders there are at a given price. A high sell wall may imply that many traders do not expect an asset to transcend a certain price, whilst a low sell wall may indicate that the asset's price is anticipated to climb. A huge sell wall inhibits the price of bitcoin from rising rapidly by generating a high number of sell orders at a single price. If traders observe a huge or expanding sell wall, they may conclude that the asset's price will decline, prompting them to sell to avoid incurring further losses.
The difference between the values on the x-axis in a depth chart provides investors and traders with insight into the liquidity and volatility of the asset in question. This is due to the fact that the aggregate value of sell orders is stretched to match the USD (or other fiat currency) values on the y-axis. The x-axis may not always display equal values despite being denominated in the same currency.
This indicates that the x-axis will be closely matched in value if demand and supply for the asset in question are near to equal. Nonetheless, if the asset is highly liquid, the volume will be skewed to the right, and a sell wall will be created. Likewise, if the item is illiquid, the chart will tilt to the left and form a purchase wall.
As you may expect, buy and sell walls can reflect market trends and impending volatility. Essentially, they inform traders or analysts how other market players anticipate price adjustments. In fact, a single trader can generate massive buy or sell walls by placing a very large order.
Now, a high buy wall can imply that traders do not expect the price to drop below a certain level. Similarly, a high sell wall can imply that many traders do not expect an asset to transcend a certain price, whereas a low sell wall implies that the asset's price is anticipated to climb. Obviously, the height of these barriers will influence traders' decisions to buy or sell their assets in order to generate profits or avoid losses.
In whichever platform, such as Coinbase or Ethereum, you are evaluating a crypto chart; you will have the opportunity to analyze a 15-minute chart, an hourly chart, a 4-hour chart, or a daily chart. The time frame you select will depend on your individual trading style.
For instance, intra-day traders who open and finish positions within a single trading day will favor shorter time frames such as hourly, fifteen-minute, or even five-minute charts.
The 5-minute chart is the most popular sort of chart. Long-term holders, on the other hand, may maintain their holdings for weeks, months, or even years; hence, they will benefit more from hourly, four-hour, daily, or weekly charts.
To learn how to read cryptographic charts, knowing which time range to concentrate on is crucial.
Final thoughts
If you wish to invest in bitcoin, you must be able to interpret cryptocurrency price charts. Every trader must develop the capacity to make intelligent decisions when trading cryptocurrency. If you are overwhelmed by the complexity of these graphics, you should delegate the analysis to professionals. Simply educating yourself on the fundamentals can give you an advantage over those that invest in crypto without viewing a chart.
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