This article provides a concise explanation on what a depth chart is, how to read one, and the primary risk that comes from any malicious intentions when using these charts.
Charts are a recurring aspect in association with currencies. Regardless if that currency is physical or digital, charts are a useful commodity when it comes to analyzing them. How exactly one applies charts to currency varies, but that only emphasizes their versatility.
That being said, very few are applicable in the areas of trading.
If you decide to go forth into the world of cryptocurrency, the first thing you’ll likely do is purchase a specific currency. The options you can choose from are certainly plentiful, but in this particular case, you may want to buy them from Coinbase. With that in mind, the currencies available for purchase are Litecoin, Ethereum, and Bitcoin.
Once these are in your possession, you can jump to trading on a platform like Coinbase Pro (the Coinbase exchange). This is a platform of great design that displays an array of records. These include the order book, the order and chart history, and bar charts. Moreover, they show the main topic of this article, which is a ‘depth chart.’
What is it?
‘Depth chart’ is a frequently changing display presenting the number of orders to buy and sell an asset. These assets include cryptocurrencies, stocks, and other variants.
This chart splits in the middle, which indicates the asset’s price during the previous trade. Across the bottom, it organizes the results by price. On the left side of the chart, you have the lowest buy order (price) that buyers want the asset to become. This way, they will be able to purchase it at an affordable rate. On the right side, there is the highest sell order (price) that sellers want the asset to become. At this price, they can easily sell it for a substantial profit.
Demystifying buy and sell orders
There is great complexity behind the display of a large number of buy orders and sell orders. For the sake of simplicity, all orders sharing the same price are put on display only once. In essence, depth charts pile all of the orders with the same price together. In order to see those details, you hover your cursor over the price. A pop-up will then present the overall quantity and value of the orders.
Outside of finances, depth charts are also a useful tool in sports. They show the placement of both the starting players and the secondary players. A starting player will mostly be first or on top, whereas a back-up will be below. Furthermore, these charts are prone to resembling the exact location of positions of certain players.
Nowadays, depth charts are applicable to the context of management theory. Specifically, to address the procedure of key positioning leaders within an organization. This is primarily considering the vigorous life cycle perspective, which consists of development tasks from books and articles about the leadership pipeline subject. A chart analysis for this should affect the development of leadership training. Moreover, high-performance enhancement initiatives in contemporary enterprises and corporations.
Reading the lines
Generally speaking, depth charts allow you to know about the demand and the supply. It gives a straightforward visualization of both of those factors in relation to a specific stock, cryptocurrency, or commodity. These particular charts present the supply and demand at dissimilar prices.
There are two lines on a depth chart that are designated for a bid/ask market. One line is for bids (the BUY orders) and the other is for asks (the SELL orders). On the CoinbasePro live chart, there’s a green line that is representative of the bids. For the asks, there is a red line.
It’s important to note that a line on a chart – any chart – consists of various plotting dots. Each of the dots on a depth chart is indicative of how much is tradeable at that point.
The bids (i.e. the BUY orders) are put into place by way of dollars. Hypothetically, you may enter your desire to purchase 2.0 BTC at $3,300 each. However, the actual bid size is $6,600 in US dollars for trading at $3,300 or lower. The asks (i.e. the SELL orders) are out in place by way of bitcoins. You will enter in that you wish to sell 3.0 BTC at about $3,500 or even higher.
At this point, the charts are beginning to increase. Let’s use two people to demonstrate this next scenario: Person A and Person B. Person A bids 2.0 at $3,300 and Person B bids 3.0 at $3,400. With this, the accruing bid number at $3,300 is $16,800 accumulative. Note that Person B’s $10,200 and Person A’s $6,600 are officially for sale at the price point.
Plotting out bids and asks
Now we will start to plot out the bids, which – if you remember – is the green line. To elaborate, we plot at each increase along the horizontal axis indicating each price point. Examples of this would be every $100 ($3,100, $3,200, $3,300, etc.). To plot, we add up the bids at the price point, then plot the outcome along the vertical axis. This axis is representative of the total dollars of orders at the level.
The concept behind the asks (the red line) is fairly similar, but there are notable differences. The total value presents itself on the right side of the chart. It is stretched out so that those values coincide with US dollars amount residing on the left side vertical axis.
You can, at any point, put your cursor on the bids line and know how much you can potentially sell at that price. Likewise, you can put your cursor on the asks line and know how many BTCs you can purchase at that price.
Spoofing with Depth Charts
When you look at a CoinbasePro chart, something you’ll notice is that it is chock full of information. Not only that, but it’s put together in a compact format. Automatically, you may be thinking that because more people want to purchase and the currency is going up, you should buy. However, there is a very real possibility that some of the orders are not authentic. Someone places big buy walls, but there’s a withdraw of orders once the price gets close to them.
This liability is ‘spoofing.’ It is when you place orders that you have no intention of going through with. This effectively manipulates the perception of the other traders, and thus it manipulates the market.
Spoofing is illegal in the US and has been since 2010. This is thanks to the Dodd-Frank Act, wherein the precise description of spoofing is the following:
“…bidding or offering with the intent to cancel the bid or offer before execution.”
The Dodd-Frank Act is a law overhauling financial regulation in the aftermath of the 2007-2008 financial crisis. It made changes affecting basically all financial regulatory agencies. On top of that, it affected practically every faction of the country’s financial services industry.
It’s not exactly common to prosecute a case of spoofing. This is because doing so requires proving the initial intent. There’s already a high number of people – and trading algorithms – that put in orders only to withdraw them later. Naturally, like other manipulations in markets, it’s quite frequent in crypto because this is what “unregulated” means in practice.