Introduction: Why be interested in the order book (DOM)?
Most traders scrutinize price charts, moving averages, and even a few classic technical indicators⊠But how many actually take the time to analyze the order book (Depth of Market, or DOM)?
Yet this is where it all begins: every price movement results from an imbalance between supply and demand in this order book. If an aggressive buyer decides to take all the sell orders at a given level, the price goes up. If, on the contrary, massive selling pressure absorbs the buyers, the price falls.
So the real question is:
Can we anticipate these movements by directly analyzing market depth? đ§
This is what we will explore here, moving from theoretical concepts to empirical analyses.
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The DOM Ratio and Essential Metrics
Before going any further, letâs define some key elements of reading an order book:
1ïžâŁ Bid & Ask đïž
Bid: Price and volume at which buyers are willing to buy.
Ask: Price and volume at which sellers are willing to sell.
2ïžâŁ Spread âïž
The gap between the lowest Ask price and the highest Bid price.
A narrow spread indicates a liquid market with little friction.
A wide spread signals a lack of liquidity or increased volatility.
3ïžâŁ Order book imbalance (DOM imbalance) đ
Difference between Bid and Ask order volumes.
If Bids are significantly higher than Asks, this may indicate buying pressure⊠but is this always the case?
4ïžâŁ Price variation vs DOM đ
We seek to establish a relationship between the imbalance in the order book and the evolution of the price.
Ideally, an effective DOM imbalance indicator should make it possible to anticipate these movements.
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Empirical analysis: What does the data say?
We studied a snippet of BTC/USDC market depth on OKX in real-time, looking at:
â The evolution of Bid and Ask prices over time
This chart shows the dynamics of bid and ask prices and gives a first view of the market structure.
â Volumes available for purchase and sale
This graph highlights the distribution of volumes and allows us to observe where the liquidity imbalances are located.
â The spread between these two values
This chart illustrates how the spread fluctuates and helps identify trading opportunities.
â The evolution of the DOM imbalance
This chart clearly shows how the imbalance evolves over time and gives clues about market pressure.
1ïžâŁ Price and spread evolution
Our charts show that the spread (the difference between Bid and Ask) fluctuates depending on market liquidity. When it widens, it can signal a lack of available counterparties, making price movements more erratic.
đ Observation: In certain periods, a strong contraction of the spread precedes an acceleration of the price, which can be exploited as a trading signal.
2ïžâŁ Imbalance between Bids and Asks
The order book is rarely balanced: either buyers dominate or sellers take the upper hand. We have visualized this dynamic in the form of an imbalance graph (Bid Volume - Ask Volume).
đ Observation: Contrary to classical intuition, an excess of buyers does not necessarily mean that the price will rise! Sometimes, an overload of Bid orders attracts opportunistic sellers who liquidate their positions by selling aggressively, causing the price to fall.
3ïžâŁ Correlation between DOM and price movements
By analyzing the data, we calculated the correlation between order book imbalance and BTC price variation.
This scatter chart visually shows the relationship between book imbalance and price change. It helps to better understand why an excess Bid can be followed by a decline.
đ Result: Correlation = -0.43 đ
đ Interpretation:
A negative correlation means that the more the order book is loaded with Bids, the more the price tends to fall, and vice versa.
Why? This can be explained by the fact that "passive" buyers who fill the book are not necessarily the most aggressive, while sellers who liquidate their positions can create sudden movements.
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Anomaly detection and trading opportunities
Now that we know that the DOM imbalance has an influence on prices, how can we take advantage of it?
â Scenario 1: âExcess buyers, but price fallsâ
A book saturated with Bids is not necessarily a bullish signal.
An explosion of sell orders just after a strong Bid imbalance can signal a bearish breakout.
â Scenario 2: âAsks that disappear before a pumpâ
If Asks suddenly empty at multiple levels, it often means that sellers are pulling out.
The result? A sudden spike in price when an aggressive buyer decides to absorb all the remaining liquidity.
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Mathematical approach: Towards a predictive DOM indicator?
Now that we have an empirical basis, we can go further by modeling an indicator based on the DOM.
đĄ Idea: Build a buying/selling pressure indicator
A combination of spread, DOM imbalance, and price variation.
Objective: To detect signals of structural breakdown in the liquidity of the book.
đŹ Next step: Test this approach on multiple assets and time periods
Is this relationship true in other markets?
Can we optimize the positioning based on the DOM?
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Conclusion and perspectives
đšâđ« What we learned:
â The order book contains a wealth of information that many traders ignore.
â The imbalance between buyers and sellers can influence prices, but not always in an intuitive way.
â A systematic approach based on these signals could help improve decision-making.
đ€ What if we automated this analysis?
A DOM-aware trading algorithm could scan in real time:
DOM Imbalance Variations
Spread anomalies
Liquidity Breakdown Signals
đ Final goal: Develop an indicator based on market depth to anticipate movements before they are reflected in the price.
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đŹ And you, do you use order book reading to trade?
If you have any thoughts or observations on this topic, share them in the comments! đ©
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Did you like this article? Stay tuned for the rest: we will explore how to translate this analysis into an indicator that can be used in trading. đ
