How To Read Depth Charts
Introduction to depth charts
A steadily increasing number of people from all walks of life are getting into investing and trading cryptocurrency. While ‘how to read depth charts crypto’ is common knowledge for traders who have experience with the market, newbies will need a resource to learn this.
There are a few kinds of charts that will be useful in your crypto trading exploits, and the one we are going to focus on is the ‘depth chart.’
Buying your first crypto
If you still need training on how to buy your first cryptocurrencies, you can find many great tutorials and videos online using the Google and YouTube search engines.
Once you have acquired some bitcoin, litecoin, or ethereum from an exchange like Coinbase, you can hold it for trading on their primary site or jump over to their Coinbase PRO trading platform.
Coinbase depth chart
Coinbase Pro features more professional level charts, including the order book/history of orders, candlestick charts, and depth charts.
You also have the option to withdraw your crypto holdings from Coinbase to another exchange or secured cryptocurrency wallet address.
When you learn how to read depth charts of crypto, you can easily visualize the supply and demand. That is why this kind of chart is so useful for your crypto trading analysis.
By the time you finish this article, you will have a strong understanding of how using this kind of crypto chart can advise your trading decisions.
Depth charts are not just unique to the crypto market. This kind of chart has been available to stock and commodity traders for quite some time in this modern age of digital trading and analysis.
Today we will focus on the crypto-trading side by looking at the depth chart available on Coinbase Pro.
Since you have made it this far, you probably already understand the relationship between supply and demand. But for the readers who need a little help on this topic, I’ll give a brief and basic breakdown concerning the crypto markets.
Supply and Demand
Supply is the number of tokens available to be purchased by the available demand liquidity, usually in Bitcoin or USD.
This Bitcoin or USD is set up in ‘bids’ in the exchange ‘order book’ to purchase at prices lower than the supply is currently asking on the ‘sell-side’ of the order book.
A depth chart provides a powerful visual of the current and usually fluctuating picture of supply and demand within a wide range of different prices.
A depth chart is a visual representation of the ‘bid’ [buying] and ‘ask’ [sellng] sides of the order book.
The order book’s bid side is represented by the chart’s left side, which has a green line plotting across it. And the ‘ask’ side of the order book is represented on the right side of the chart, which has a red line.
This color coordination is very similar to a typical candlestick chart. Where green candles represent executed bid orders, and red candles represent completed ask/sell orders.
Dots form the lines on these charts plotted to show how much of the currency can be bought or sold at each available price level.
Bitcoin depth chart
For our example, we are looking at a depth chart for Bitcoin trading against the USD, otherwise known as BTC/USD. In this particular market, bids/buy orders are placed in US Dollars.
For example, you may select that you want to buy 10 BTC at $10,000 each. Even though the total size of your bid order would total $100,000, your buying price per Bitcoin is $10k.
Conversely, when you are ready to place your ask/sell orders in this market, it will be placed using Bitcoin. Essentially you are selling your Bitcoin for USD.
For example, you may set a sell order for 5 of the Bitcoins you just bought in the last example [$10,000/per BTC] for $15,000 per coin. That would net you a 50% profit from your original buying price minus trading fees.
Each side of the depth chart is a visual representation of all the kinds of bid and ask orders that people have set up in advance. And the charts are cumulative in how they display and plot the line on each side.
Example of a crypto depth chart
For example, if Trader A places a bid for one Bitcoin at $10,000 USD and then Trader B bids for two Bitcoins at $10,000 USD, the number of bids at $10,000 USD adds up to $30,000 USD available to buy Bitcoin at that price point.
So the green line, which represents the bids, plots a dot at each increment along the horizontal axis of the chart [the bottom], representing each price point through the price range of available bids [ex. $10,000, $10,100, $10,200, etc.]
At each price point, you can add up all the bids and plot the total along the vertical axis [left of the chart], representing the total number of bids at that price level.
When you roll your cursor over the depth chart on Coinbase Pro, you can see exactly how many bids or asks are placed at the exact price.
Crypto order book
When looking at the $16,200 bid price, there are currently 275 bid orders of this size stacked on top of each other. That adds up to a total of 4.455 million dollars available to buy Bitcoin at the price of $16,200 per coin.
The ask/sell-side of the depth chart is the same concept, just flipped. The vertical axis shows the total accumulated value of the number of Bitcoins being sold at each price increment along the horizontal axis.
What makes the depth chart useful is that it gives you a nice visual of the market’s support and resistance.
The depth chart makes it easy to see how the number of Bitcoins for sale ramp up at specific prices, which cause what we call ‘resistance’ for the price to go up. There is significant sell pressure at these price levels.
And of course, the depth chart also makes it easy to see how the amount of USD ramps up at certain price levels, which we would call support levels, that help keep the price from going further down. Essentially there is significant ‘buying demand’ at these levels of support.
And these are the fundamentals of how a depth chart works. If you were wondering if a depth chart is enough to base your trading decisions on, the short and straightforward answer to that is: NO.
For a successful crypto trader, the depth chart will be merely one of the multiple aspects that will be considered when looking to enter a trading position or sell in profit.
Trading off the depth chart alone would be a purely psychological play and more of a ‘guessing game’.
For example, different supply or demand curves that materialize may be interpreted differently by traders. But essentially, as the lines grow or shrink, it may help provide you with a bias as to the short term direction of the market.
That’s basic and does not provide you with an edge as much as a ‘feeling’ about things. And feelings can only take you so far in the unforgiving crypto market.
From all my years of experience, I have seen that these depth chart curves’ movements seem to take on certain characteristics when markets are trending up or down.
Or even alternatively, when trends meet points of resistance or support. But in my experience, the depth chart would always be one of the last things I would look at after gauging the chart’s candlestick patterns and my preferred technical indicators.
If you want to learn how to be successful with trading and investing in the cryptocurrency markets, you need to invest in yourself and learn how to do it right.
Once you know how to analyze this market and execute a winning trading strategy, the sky will be the limit for you. Don’t let your crypto education journey stop here with depth charts, and keep pursuing your potential.