Cryptocurrency exchanges keep a frequently updated record of sell and buy orders known as an order book. The representation of the volume of limit orders in real-time is known as order book depth. However, the order book depth doesn’t provide the whole picture paving the way for order book heatmaps.

What is order book depth?

Also known as market depth or depth of market (DOM), order book depth indicates the volume of limit buy and sell orders of a particular asset. This metric helps to show how many market orders a crypto trading platform can accommodate before its effects are seen on an asset’s price.

DOM is viewed as a snapshot of an asset’s trading interest. It’s the order book represented graphically. The depth of an order book is measured by the amount of orders at different price levels leading to descriptions like deep and shallow order books.

A deep order book has a higher depth meaning that it can handle huge trades while a shallow order book has fewer order volumes making it unable to accommodate large orders without impacting the price.

What are order book heatmaps?

Order book heat maps indicate how liquidity is spread on an order book. It displays the information graphically, allowing traders to refine their trading decisions. An order book heatmap can also be called a liquidity heatmap because it shows traders’ activities across different price points of a particular asset.

Information from an order book heatmap can show things like the time of increased trading activity, which may help evaluate an asset’s support and resistance points. 

A liquidity heatmap (not to confuse with Liquidation heatmaps) comprises a grid of blocks with each block having a distinctive color. The colors represent the volume with bright colors showing more traded volume than dark colors. A heatmap also has an intensity slider to help users select the type of volumes they want to be displayed.

How order book depth and order book heatmaps can work together

An order book is made up of multiple components like price levels and order quantities and shows therefore the market depth. With the volatile nature of cryptocurrencies, deciphering these components can take valuable time that a trader needs to make a decision.

Although order book depth shows the concentration of trade volumes at different price points, it doesn’t paint a clear picture of the true state of the market. 

Order book heatmaps clunch together information provided by the order book and visualise it into a heatmap. This gives traders all the information about an asset’s liquidity and real-time traders’ interest in a single view. It just shows where traders are planning to buy and sell and with which quantities. 

Order book depth coupled with a order book heatmaps can help a trader make more profitable trades by knowing how to price their orders and also use the information to discern whether an asset’s price is bound to increase, drop, or enter a range.

The two can be combined with indicators like the Volume Profile Visible Range (VPVR) and Taker buy/sell ratio to fuel trading strategies like grid trading.

Final words

Order book depth and order book heatmaps can work hand in hand to provide a graphical representation of the state of the market at any given time. This helps crypto traders make critical decisions much faster than when relying on information from one of the sources. If you like visual representations of exchange data make sure to have a look at the sentiment heat maps and buying and selling pressure heat maps.