Introduction
Trading Bitcoin and other crypto currencies is one of the most lucrative investment options there are. But as always, if something is very lucrative, it is also very risky. The potential to lose everything is high. Risk mitigation strategies are needed, which again are based on your knowledge of things.
Therefore, when wanting to trade crypto currencies you are going to need to know at least all the basics.
In this series I am going to explain many basics of trading cryptocurrencies as well as other useful information around trading in general, market psychology and terminology.
[What are] Buy and sell walls in crypto? How to identify them?
Both, at the stock and crypto market, there are people or institution called “Whales”. Whales move and act within the market with lots of capital, and have the power to manipulate buy and sell orders. This is because they can deploy excessive capital into the market.
In cryptocurrency trading, a buy wall is a massive buy order, or multiple buy orders, around a particular price level. In turn, a sell wall is a huge accumulation of sell orders at a given price level.
Before understanding how buy and sell walls work, it is important to know what an order book and its market depth are.
[What is] An order book in crypto trading?
An order book is an index listing buy and sell orders for a specific cryptocurrency based on price levels. A trade is executed when the orders on either side meet at a certain price level, establishing the cryptocurrency’s price as supply meets demand.
Bitcoin orderbook
Of course, those orders wouldn’t get executed randomly — instead, the market fulfills them in the order of their sequence.
An example
Two open orders are created when Trader A attempts to sell 1 Bitcoin for $47,000 and Trader B places an order to buy 1 BTC at $46,000. Now Trader C joins in and tries to sell 1 BTC for $48,000. As a result, there are three unfulfilled, open orders.
But when a new buyer, Trader D, enters the market and tries to buy 1 BTC for $48,000, he does not get Trader C’s coin. Instead, he receives Trader A’s BTC for $47,000, and the Bitcoin spot price becomes $47,000.
Meanwhile, Trader B’s and Trader C’s orders will remain open.
[What is] Market depth?
The open orders are packed together as buy and sell orders and pitted against one another on a market depth chart.
Bitcoin buy wall
The X-axis on the graph represents the bid (buy orders in green) and the ask (sell orders in red) price, while the Y-axis represents the cumulative market volume.
Identifying buy and sell walls
A large spike sloping upward on the market depth chart’s either side is called a wall. These walls show as deeper vertical lines resembling the side angle of a staircase. Seen in the example above.
A buy wall is formed when the number of buy orders exceeds the sell orders at a given price. These are constituting greater demand for the currency against its supply.
In result, traders see the levels where buy walls appear as areas of support for a potential bounce.
A sell wall is built when the number of sell orders surpasses the buy orders, showing weaker demand versus supply at a certain price level.
A buy wall against a significantly smaller sell wall on the market depth chart suggests strong demand. The path of least resistance is currently to the upside, and the other way around.
Ultimately, viewing the order book as walls makes it easier for traders to spot potential areas for price rebounds and rejections.
As a note of caution, buy and sell walls should not be solely relied on to predict price direction. Orders can be pulled or introduced anytime, with market dynamics always in flux.
Moreover, whale traders can use their large capital to create or remove large walls of orders as a way to manipulate the market to their advantage.