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 the order 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.
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.
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.