What is a depth chart?
Sounds like something a scuba diver uses.
But nope. That’s not it.
On most trading platforms provided by centralized crypto exchanges (CEX), aside from a price chart, a “depth chart” is also displayed.
A depth chart is a tool for understanding the supply and demand of cryptocurrency at a given moment for a range of prices.
It is a visual representation of an order book, which is an organized list of pending buy or sell orders of a specific cryptocurrency at different price levels.
As a crypto trader, it’s important to understand what a depth chart is and how to read it.
How to Read a Depth Chart
A depth chart is a visual representation of the buy orders (“bids”) and sell orders (“asks”) of the order book.
It’s a neat way to display the volume (or order size) of pending buy and sell orders relative to each price level.
Here’s an example of how a depth chart looks:
While depth charts can differ across crypto exchanges, they usually consist of the following components:
- Bid line
- Ask line
- Horizontal “X” axis
- Vertical “Y” axis
What is the bid line?
The bid line displays the cumulative value of the buy orders (“bids’) at each price point. It is represented by a green line on the left side of the depth chart.
What is the ask line?
The ask line displays the cumulative value of the sell orders (“asks”), at each price point. It is shown by a red line on the right side of the depth chart.
What is the horizontal “X” axis?
The horizontal axis shows the different prices at which buy and sell orders are being placed.
On the left side (in green ), you can see all the buy limit orders (“bids”) that people have placed. This represents the order book’s bid side.
On the right side (in red), you can see all the sell limit orders (“asks”) that people have placed. This represents the order book’s ask side.
Here’s a simple memory took:
- Left side (green ) = Bid side (buy orders)
- Right side (red) = Ask side (sell orders)
What is the vertical “Y” axis?
The vertical axis represents the quantity of orders being placed at each price level for a cryptocurrency.
Most crypto exchanges provide depth charts where you can hover over with your mouse at any point on the bid or ask line and see how many buy or sell orders are placed at that price.
How does a depth chart work?
A depth chart illustrates supply (selling interest) and demand (buying interest).
The “depth” in a depth chart refers to the ability of a market for a specific cryptocurrency to sustain large orders (buy or sell) without its price moving significantly.
The more pending orders there are on both sides of an order book the more “depth” that order book has.
The more pending orders present, the greater the “depth”.
If the green side is higher than the red side, this indicates there is a lot more buying interest (below the current price) than selling interest (above the current price). And vice versa.
Buy and Sell Walls
What are buy and sell walls?
Buy and sell walls indicate a large volume ofbuy orders or sell orders at a given price.
Visually, the volume of orders forms a colored “wall” when displayed against the price levels.
The buy and sell walls listed in a depth chart can give you insights into how the other traders in the market are predicting price direction.
What is a Buy Wall?
A “buy wall” forms when there are a large number of buy orders (“bids”) at a particular price level.
The more pending buy orders exist at a given price, the higher the buy wall.
In the example below, there is a buy wall for BTC/USD at 29,000.
Buy walls can be created by multiple orders at the same price or a single massive buy order placed by a “whale“.
A large buy wall can indicate that traders believe the price will not fall below this price level due to the number of pending buy orders.
The volume of these buy orders is large enough to potentially drive the price up if the trades are executed.
The presence of the buy wall may even cause the price to rise even before the buy wall orders are executed. This is because the supply will start to decrease as the price nears the buy wall.
Buy walls can also be artificially created. Since buy orders are dynamic and can be added or removed continuously, buy walls can be used as a form of market manipulation and may not represent true interest to buy the cryptocurrency at that price.
What is a Sell Wall?
A sell wall is the opposite of a buy wall.
A “sell wall” forms when there are a large number of sell orders (“asks”) at a particular price level.
The more pending sell orders exist at a given price, the higher the sell wall.
In the example below, there is a sell wall for BTC/USD at 30,001.
Sell walls can be created by multiple orders at the same price or a single massive buy order placed by a “whale”.
A large sell wall prevents prices from rising rapidly because it creates a large amount of sell orders at a certain price.
The volume of these sell orders is large enough to potentially drive the price down if the trades are executed.
The presence of the sell wall may even cause the price to fall even before the sell wall orders are executed. This is because as the price nears the sell wall, traders believe supply will soon overwhelm demand and drive prices down.
Rather than risk having to sell at a lower price, they will sell now.
A large sell wall can indicate that many traders do not believe that the price will rise above a certain price level.
Just like buy walls, sell walls can also be manipulated
