As more technology people, rather than traditional traders entering cryptocurrencies, more concepts on trading requires a revisit and explained in man terminology to get familiar. Though charts are not fresh in our day to day life, few of them are specifically helpful while trading.
If you have opted to enter the world of cryptocurrency, these are some well-explained step by step guides on how best to buy Bitcoin, Ethereum and Litecoin from for example Coinbase. When you purchase a few of these and want to jump into trading, you move onto a platform like GDAX (Exchange of Coinbase). GDAX is a well-designed platform that shows the order book, history of orders and charts varying from candlestick, bar charts along with a Depth Chart. Within this article, we’ll focus on understanding a Depth Chart.
Depth charts are one of those which can let you know about Demand and Supply. Today, we will try to understand why these depth charts are required and how to read them.
You probably already understand the relationship between supply and demand.
A depth chart for a bid/ask market includes two lines, one for BIDs (BUY orders) and one for ASKs (SELL orders). GDAX live chart has a Green lineup for BIDs (BUY orders), a Redline for ASKs (SELL orders).
Again, a line on a chart is simply made up by plotting dots. Each dot on a depth chart line represents how much can be traded at that point.
I would enter that I want to buy 2.0 BTC at $3300 each, but really that is a total bid dimensions of $6600 USD for trade at $3300 or lower.
I’d enter that I want to sell 3.0 BTC at $3500 or higher.
I’ve changed numbers compared to Image attached above to make calculations and understanding that a bit easier.
The charts are cumulative. If Alice bids 2.0 at $3300 and Bob bids 3.0 at $3400, the cumulative number of bids at $3300 is $16800 cumulative (both Bob’s $10200 plus Alice’s $6600 are for sale at that price point.) .
So to plot the BIDs (Green line), at every increment along the horizontal axis (at the bottom of the chart) representing each price point, e.g., $3200, $3300, $3400, etc.) add up all the bids at that price point or below and plot that total along the vertical axis (along the left of the chart) representing total dollars of orders in the level.
The ASKs (the Red line) have the same concept but the total accumulated value shows up on the right hand side, in terms of BTCs but stretched out so that those values correspond to the USD levels on the left vertical axis (e.g., if the spot price of $3500, then the mark for 100 BTC of cumulative asks will line up vertically using the $350k USD mark on the left side vertical axis)
So at any point on the Bids (Green) line you can put your cursor there and know exactly how much you could sell (from where it sits on the left / vertical axis) at that price (from where that point sits on the bottom / horizontal axis)
And similarly at any given stage on the Asks (Red) line you can put your cursor there and know exactly how many BTCs you can purchase (from where it sits on the right / vertical axis) at that price (from where that point sits on the bottom / horizontal axis.)
So that’s the basics on what a depth chart shows.
If you are asking how do you trade off of that, well, that’s leaves the realm of economic charting along with basic math and extends instead into psychology. When there is a demand curve that looks abnormal in some certain way, a few traders could think that means now is the time to buy. Or if the line grows or shrinks, some interpret that as a being a trading sign and trade off that.