Part 31 Technical Analysis – Order Book 2

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Part 31: Technical Analysis – Order Book 2

In today’s part of the technical analysis, we will get back the order book. After spending some time discussing this topic, today we are going to continue. We will examine whether one can absolutely rely on the order book and if so, when. You will learn the meanings of terms such as “maker”, “taker” and “hidden orders”.

First, we will start with our previous article What is order book. If you skipped the article read it first (it only takes a few minutes) and then continue here.

Maker and Taker

We will begin with the basic terminology. Those of you who have read about order book for instance at various forex discussion forums must have come across terms such as maker and taker. Knowing what these terms mean in English will help you a lot.

  • Taker is the one who takes in the market This means that he/she uses orders already existing in the market called market orders. These are executed immediately and are not recorded in theorder book.
  • Maker, as the term suggests, is the one who makes something. In our case, he/she makes the market and helps its smooth process. Maker’s orders are not executed immediately but recorded in the order book. They sit there until a taker executes them.

An order book may look like the one in the screenshot (resource: Bitfinex).

Hidden orders

Imagine this situation: You want to buy a large number of shares from a certain company. The quantity is so large that it will surely impact the market. This situation is not unreal not even among retail traders. Speaking of companies not very popular among traders, if the retail trader wishes to make a great deal he may cause a stir.

If you (as a maker) want to buy XY shares at the price of X and enter a waiting order this order will be recorded in the order book and all traders will see it. What will happen? Other traders will start to speculate. They can see that something is about to come. They take it as a signal and place their orders in better positions (to be executable sooner to become part of the big order). This is something you don’t want to happen so you place your order as a hidden one.

Hidden order will not be reflected in the order book. Used will be some additional software and broker servers, so there is no need to install anything. As you already know, the system of executing orders in the order book works on a “first-come first-save” basis.

Hidden orders are executed at the end of the queue because they are not present in the order book. In terms of prices, this is a disadvantage for the trader but it is still better than if the trader’s intention was visible to the market.

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How to reveal hidden orders

Order book will not help you in this case. Despite having your quality data perfectly centralized you won’t see the order. Then, you may fall back to our old well-known analyses, technical and fundamental. These should give you a hint of why somebody wants to sell or buy such a large quantity of shares and why for the price.

On the other hand, not all orders that are visible in the order book may be relevant. These may include various fake orders that will disappear before executed. This phenomenon can be observed in crypto-markets pretty frequently.

When and how to use order book

If you still continue reading (not discouraged by the text before) we have good news for you. An order book containing quality data is a good helper indeed. Once the market kicks off it is worth following the trend. At this point, it is the best tool as it shows you places where orders are waiting to move forward as well as places where the market is likely to slow down.

Each order book should also display important support and resistance levels. You can check whether other traders also rely on the given line or are going to use it for trading. From time to time, the order book even shows orders made by big players, who wish to slightly manipulate the market, to bring a large volume and, perhaps, also profit from their stop losses. The topic is described in this article.

The order book is certainly a good helper. With quality data under certain circumstances, it can be seen as an efficient tool to manage the opening and closing of positions. Having the above in mind, I would not use it as the only reliable resource in most cases, rather as a compliment. Hidden orders or poor-quality data may dramatically disfigure the conclusions. On the other hand, when you follow the trend nothing will help you as much as order book.

Order book and stored data

The biggest problem I see about order book is the decentralized forex. The order book is available from every broker, but the data you see only comes from this particular broker. When you realize how small market segment it represents you may be tempted to use a random number generator (hyperbolically). It’s true that the order book shows all important levels but using an order book from a forex broker as the only resource for trading is something I personally would never do. Instead, I would use it as a complementary indicator. Remember, I purposefully mentioned “order book from a forex broker”.

The order book is not for forex trading only. There are more sources where you can obtain better data quality. If you want to apply an order book to forex then another option is the futures market. The futures market is a centralized market and the data illustrate the situation better than data received from forex brokers. The data in order book well represent also the very popular cryptocurrencies. By the way, you can display crypto order book online without having to install additional software – see this link.

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Part 27: Technical Analysis – Using Order Book

an Order book is a topic frequently discussed among traders. What is an order book? Is it a vital tool to get a picture of the market or just a small help? Can an order book be a foundation for your trading strategy? Is the data gained from an order book relevant? All these questions will be answered in our article.

What is an order book?

An order book is nothing complicated. It‘s a “mere” list showing the sell or buy orders used to record the interest of buyers or sellers. One should realize that not all orders are fulfilled at the current price level called market price. The market also includes waiting for orders. These are fulfilled at the selected price level (rate) but some of them are never fulfilled. Anyway, they all end up in an order book.

The above picture illustrates a typical order book. It is a snapshot of the Bitfinex platform showing buy and sell orders in a column as well as prices, totals, amounts, and counts.

Explanation the data order book shows

The order book on Bitfinex pages is divided into two basic halves: buy orders and sell orders. Buy orders are on the left (green) half and the sell orders on the right. What do the lines and columns mean? Let’s explain them.

  • Price: Price is simply the rate at which the order is set. If someone buying bitcoin sets the price at 6 500, his order will not be fulfilled until the market reaches this level. It will stay sitting in the order book and wait until someone is willing to sell the number of bitcoins at this price.
  • Count: is a number of individual orders waiting for the given price. In our case, once the market gets to the price of USD 6 394, theoretically 17 sales will be made (if there is a willing buyer).
  • Amount: is a total of all orders for a given price. So, 17 orders, whose total value is BTC 12.4, are waiting on the price of USD6 394. For the price to go up traders at the exchange must buy all the bitcoins.
  • Total: is the total of all orders ranging from the current price to the price determined for a given line. You can read from the picture that should the price climb up to USD 6 400 the total of all purchases would have to amount to BTC 63.9.

In our example, we used bitcoin. However, the order book is used not only for cryptocurrencies. It is a thing that is being used by all marketplaces incl. stock exchanges.

Types of orders

Let’s have an example: The current exchange rate of your favorite asset is 1.1. You wish to sell at 1.2 (e.g. the 1,18 level shows a strong resistance level and you expect that after being broken the price will grow). Because the current rate is 1.1 and you are not going to stay online nonstop you will enter buy stop. Once the rate reaches your desired level (i.e. 1.2) the buy order will be fulfilled.

Otherwise (rate remaining at 1.1 but you want to buy at 1.0), you will enter buy limit.

Naturally, it works vice versa, too. You can enter sell stop and sell limit orders. These orders are above or below the current price. The following picture will help you in orientation.

There are 4 types of trading orders you can use:

How to use order book

An order book should be offered by every broker. A simple table or chart shows where waiting orders are entered and whether the sentiment is bullish or bearish, in other words, whether the trend in the market is upward or downward. Logically, the dominance of sell signals indicates decline and vice versa. However, be cautious, an order book doesn’t show future market orders (fulfilled at the market price). All you see is data of a given broker.

An order book is visible to all traders including big institutional players which may result in many false signals. It is wise to have all orders from your order book confirmed by using technical or fundamental tools. In the past, a lot of orders in the order books was nearing a level monitored by a central bank. As an example you can use CHF/EUR at 1.2 or CZK /EUR at 27. These rates were attentively watched and one could see huge amounts of orders waiting at level of 1.18 and 26.8 respectively. Once the interventions were lifted, the market kicked off.

Data relevance

And now the key question: Is it enough to watch the order book, derive the key levels and confirm them by using a simple technical analysis and start trading? The answer is: Yes and no. The data (acquired either from your broker or exchange) represent a small fragment of the market.

The data does not give you the full picture of the market. It might be misleading. The bigger the broker, the more accurate the data. What matters is not quantity but quality, in other words the representativeness of your data sample. A lot of brokers do offer fairly representative samples.

It’s up to you to decide which way to go. The fact is that the data taken from an order book reflect a small fragment of all market players. On the other hand, the data should cover the basic types of trading habits of the majority of retail traders, which may give you an interesting picture. If you combine the order book with the technical or fundamental analysis you may get a trading strategy that works, which is the fundament of trading.

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Top 7 Books to Learn Technical Analysis

There is a wide range of books available for learning technical analysis, covering topics like chart patterns, crowd psychology, and even trading system development. While many of these books provide outdated or irrelevant information, there are several books that have become timeless masterpieces when it comes to mastering the art of trading.

In this article, we will look at seven books on technical analysis to help traders and investors better understand the subject and employ the strategy in their own trading.

Key Takeaways

  • Many books in the technical trading space are outdated.
  • There are, however, a handful (seven to be exact) that stand the test of time.
  • Among the top books for learning technical analysis is Jack Schwager’s “Getting Started in Technical Analysis” and “How to Make Money in Stocks” by William O’Neil.

1. “Getting Started in Technical Analysis” by Jack Schwager

This book is an excellent starting point for novice traders that covers every major topic in technical analysis. In addition to covering chart patterns and technical indicators, the book takes a look at how to choose entry and exit points, developing trading systems, and developing a plan for successful trading. These are all key elements to becoming a successful trader and there aren’t many books that combine all of this advice into a single book.

2. “Technical Analysis Explained” by Martin Pring

This book is considered by many to be the “Bible” of technical analysis since it contains an exhaustive amount of information covering the core concepts. The book also covers ancillary topics like trading psychology and market mechanics that help traders understand “the why” rather than just “the how” of technical analysis. Despite the wide breadth of knowledge, the book is very approachable and easy to understand for novice traders.

3. “Technical Analysis of the Financial Markets” by John Murphy

This book is an approachable introduction to technical analysis that still provides a high level of detail and actionable insights. As a former technical analyst for CNBC with over 40 years of experience in the market, Mr. Murphy has become a leading voice for technical analysis and is highly skilled at conveying complex topics in an easy to understand manner. Novice traders may want to check out this book before diving into more complex topics.

4. “How to Make Money in Stocks” by William O’Neil

This book is considered a classic work on technical analysis and was written by the founder of Investor’s Business Daily, one of the most popular investment publications in the world. O’Neil was a strong advocate for technical analysis, having studied over 100 years of stock price movements in researching the book. In the book, he presents a wide range of technical strategies and tips for minimizing risk and finding entry and exit points.

5. “Japanese Candlestick Charting Techniques” by Steve Nison

This book is the definitive volume on candlestick charting, which is one of the most commonly used technical analysis tools. Prior to Nison’s work, candlestick charting was relatively unknown in the West. He helped publicize the technique and train institutional traders and analysts at top investment banking firms. The book offers a thorough explanation of the subject, including explanations of virtually all candlestick patterns that are used by traders today.

6. “Encyclopedia of Chart Patterns” by Thomas Bulkowski

This book is truly an encyclopedia that contains an exhaustive list of chart patterns a statistical overview of how they have performed in predicting future price movements. Mr. Bulkowski is a well-known chartist and technical analyst and his statistical analysis set the book apart from others that simply show chart patterns and how to spot them. The updated version of the book includes a section on event trading and patterns that occur with news releases.

7. “Technical Analysis Using Multiple Timeframes” by Brian Shannon

This book has a wide appeal for technical traders because it can be helpful to traders regardless of the strategy that they use. The book highlights the value of applying technical analysis across multiple timeframes to identify trades with the highest probability of success. It also goes well beyond what its title implies and covers subjects including short selling, stop-loss order placement, price target identification, and related topics.

There are more than 10,000 books on technical analysis available to traders, but these seven stand out.

The Bottom Line

There have been many books written on technical analysis, but some of them have become timeless classics that are invaluable to traders. Those new to technical analysis may want to check out these books to fine-tune their strategies and maximize their odds of success.

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