Depth Chart

A depth chart is a visual representation of an exchange's order book that shows how much of an asset traders are willing to buy and sell at different prices. Buy orders, or bids, are plotted on the left side, usually in green, and sell orders, or asks, on the right side, usually in red. Each side is drawn as a cumulative curve, so the height at any price shows the total volume available between the current price and that level. Crypto exchanges in particular display depth charts alongside price charts on their trading screens.

A depth chart answers a different question from a candlestick chart. A candlestick chart shows what prices have done in the past; a depth chart shows the orders waiting to be filled right now. Traders use it to judge liquidity, estimate how far a large order would move the price and spot clusters of orders that may act as short-term floors or ceilings. It is a snapshot that changes constantly as orders are placed, filled and cancelled.

Picture a market square with buyers on one side and sellers on the other. Each buyer holds a sign saying the most they will pay and how much they want; each seller holds a sign saying the least they will accept. If someone stacked those signs into two piles, starting with the most generous offers near the middle, the piles would look like two hills sloping away from a valley. That picture is a depth chart.

The valley in the middle is the gap between the best buyer and the best seller. Tall, steep hills mean many orders close to the current price, so it is easy to trade without moving the price much. Low, flat hills mean few orders nearby, so even a modest trade can push the price a long way.

• The spread. The gap between the highest bid and the lowest ask in the centre of the chart is the bid-ask spread. A narrow gap indicates an active, liquid market.
• The bid side. The green curve rises to the left, showing the total amount buyers would absorb if the price fell to each level. These orders are resting limit orders.
• The ask side. The red curve rises to the right, showing the total amount sellers would supply if the price rose to each level.
• Walls. A sudden vertical step marks a large order at a single price, often called a buy wall or sell wall. Walls can slow price moves, but they may also be removed at any moment.
• Imbalance. If one side is much larger than the other near the current price, some traders read that as short-term pressure in that direction.

Suppose a token's best bid is $9.95 and its best ask is $10.00. On the ask side, sellers offer 400 tokens at $10.00, 600 at $10.10 and 1,000 at $10.25. The depth chart's red curve therefore reaches 400 tokens at $10.00, 1,000 tokens at $10.10 and 2,000 tokens at $10.25. A trader who sends a market order to buy 1,000 tokens would buy 400 at $10.00 and 600 at $10.10, paying $10,060 in total, an average of $10.06. The 6-cent difference from the best ask is the order's slippage. The same order in a market with 5,000 tokens offered at $10.00 would have filled entirely at that price, which is what traders mean by a deep market.

Traders use depth charts to size orders so as not to move the price against themselves, to set limit orders just in front of large walls and to compare liquidity across exchanges before choosing where to trade. A market maker watches depth to decide how much to quote on each side. Analysts use a related measure, the amount of volume within a set percentage of the mid-price, such as 2%, to compare how easily different assets or venues can absorb trades. Depth is also shown on a decentralized order book, and some interfaces draw similar charts for automated market makers, where depth is derived from the size and shape of the liquidity pool rather than from individual orders.

A depth chart shows only displayed orders on one venue. Large traders often hide their size using iceberg orders or trade off-exchange, so real liquidity may be greater or smaller than it appears. Orders can be cancelled in milliseconds, and a wall that looks solid may vanish as the price approaches. Placing large orders with no intention of letting them fill, to mislead others about supply and demand, is a form of market manipulation known as spoofing, which is illegal in regulated markets. On thinly regulated crypto venues, order books may also be inflated by wash trading or by an exchange's own accounts. For these reasons, depth charts are best treated as a rough guide to current liquidity rather than a reliable forecast of where prices will go.