It does not matter if you trade currency pairs, Forex or stocks. Having an order book is a vital thing you need to keep all the transactions under control. While modern technologies evolve, we do not actually mean a paper notebook where traders write down their entire buy and sell info (this method can also be very useful). We mean a digital source of data properly arranged and structured to track orders and analyze the trading strategy.
An order book is not just another wiring on the wall. It is a dynamic source of information. It is able to change and update the information in real-time. What's more, an order book can be of different types depending on the source of data either you use an opening, closing, or continuous order book. Traders are supposed to manage each of these types separately.
What is an order book?
To find the answer to the question "what is an order book?" let us try to imagine a list of trades displayed with a digital or manual interface created with handwriting. Besides, there you have all the trading instruments like stocks, currencies, and shares filtered by the price level and trading volume.
The order book itself can show how deep the market is. In other words, we get another indicator that updates in real-time providing detailed information about trades over a specific period. For this reason, order books are also known as continuous books.
As a rule, buyers and sellers use the tool without hiding behind each individual exchange. A book helps other traders to identify buyers and sellers on the market. Those who do not want to be recognized, opt for so-called "dark pools" that mainly contain hidden trades that are not indicated in the order book. In other words, other traders are not able to see them. It results in several obstacles for a trader who fails to identify if the asset belongs to an organization or an individual.
Some traders prefer off-book trading instead of using an exchange order book. The key benefit here is that the price is negotiated directly between the two parties without intermediaries. The main drawback of the strategy includes fewer time constraints.
Why traders use the order book
The main idea of an exchange order book results in better decision making. It helps professional and beginner traders to calculate market sentiments despite the timeframe. Unfortunately, the order books make no sense to hold and buy investors. This is due to a small impact that an intraday movement makes on those strategies.
On the other hand, short-term riders will find the tool pretty useful when not only measuring market sentiments but also when making the financial market more transparent. What's more, traders get a chance to identify other buyers and sellers along with key trends, imbalance, etc. Having an order book by your side will let you always know who is ruling the market at the moment: bulls or bears.
For example: if there is a growing number of sell orders, the market is being under sellers' pressure, which means a further decline.
How to use the order book
As mentioned earlier, an order book is a dynamic tool that updates the order information instantly in real-time. A trader can set preferences to enable an automated order match. For instance, the order can be fulfilled in accordance with the asset demand and supply.
Traders may buy or sell assets depending on the current price level. It is possible to set a certain price to identify the level for security purchasing or selling. Once the price has approached that level, the system will automatically complete the order.
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