In the world of cryptocurrency trading, there exists a concept known as a “buy wall” and a “sell wall.” A buy wall refers to a significant accumulation of buy orders, or multiple buy orders, at a specific price level. On the other hand, a sell wall represents a large number of sell orders gathered at a particular price level.
Before delving into the workings of buy and sell walls, it is necessary to understand the concept of an order book and market depth in crypto trading.
An order book serves as an index that displays buy and sell orders for a specific cryptocurrency based on different price levels. When the orders on both sides match at a particular price level, a trade is executed, thereby establishing the price of the cryptocurrency based on the interaction between supply and demand.
However, it is important to note that these orders are not executed randomly. Instead, the market fulfills them in the sequence in which they were placed.
For instance, imagine that Peter Griffin creates an open order to sell 1 Bitcoin (BTC) for $25,000, while Cleveland Brown places an order to buy 1 BTC at $24,000. At the same time, Glenn Quagmire tries to sell 1 BTC for $26,000. As a result, there are three unfulfilled, open orders.
Now, let’s say a new buyer named Joe Swanson enters the market and attempts to purchase 1 BTC for $26,000. Instead of acquiring Quagmire’s coin, Swanson receives Griffin’s BTC for $25,000. Consequently, the spot price of Bitcoin becomes $25,000.
Meanwhile, Brown’s and Quagmire’s orders remain open.
Market depth refers to the consolidation of open orders, both buy and sell, which are then presented on a market depth chart. The X-axis of the chart represents the bid (buy orders in green) and ask (sell orders in red) prices, while the Y-axis represents the cumulative market volume.
To identify buy and sell walls, one must look for large spikes on either side of the market depth chart. These spikes, known as walls, appear as deep, vertical lines resembling the side angle of a staircase.
A buy wall is formed when the number of buy orders greatly exceeds the number of sell orders at a specific price level, indicating a higher demand for the cryptocurrency compared to its supply. Traders perceive these levels, where buy walls appear, as areas of support where a potential price bounce may occur.
Conversely, a sell wall is created when the number of sell orders surpasses the number of buy orders, indicating weaker demand compared to the supply at a particular price level.
When analyzing the market depth chart, a significant buy wall against a considerably smaller sell wall suggests strong demand and indicates that the path of least resistance is currently upward. Conversely, if the sell wall outweighs the buy wall, it suggests weaker demand and implies that the path of least resistance may be downward.
Viewing the order book as “walls” assists traders in identifying potential areas for price rebounds and rejections. However, it is important to exercise caution and not rely solely on buy and sell walls to predict price direction. Orders can be withdrawn or introduced at any time, and market dynamics are constantly changing.
Furthermore, it is worth noting that “whale” traders, who possess significant capital, can manipulate the market by creating or removing large walls of orders to their advantage.
Traders seeking more information on spotting and avoiding potential market manipulation can refer to Cointelegraph’s previous coverage.
Please be aware that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.