How to Read a Depth Chart
To read a depth chart, understand that it plots the cumulative size of resting orders on each side of the current price. The shape it produces is largely determined by the axis range you choose, and every order it draws can be cancelled without ever trading.
A depth chart plots the cumulative size of resting orders on each side of the current price, producing two curves that step outward. It is a rendering of the order book and contains nothing the book does not, which is worth knowing before reading anything into its shape.
Before you start
An understanding that it is a rendering of the order book, not new information. Same data, different presentation.
The axis scale, because the shape changes completely with how far out it plots. A wide range always produces dramatic walls; a narrow one often shows almost nothing.
An acceptance that everything it draws can be cancelled. Cumulative curves look solid and are made entirely of intentions.
The steps
1. Narrow the price axis first
Plot only as far as price might plausibly travel in your holding period. On this site’s shared series the ninetieth percentile bar range is 1.101, which is a reasonable place to start.
2. Read the curves as cumulative totals
A point on the curve is the total size resting between the current price and that level, not the size at that level. Cumulative means the curve can only rise.
3. Compare the two sides near the touch
Depth close to the current price is what your order will actually meet. Imbalance far from it is describing orders unlikely to still exist by the time price gets there.
4. Treat steep walls with suspicion
A sudden vertical section is a large order at one price. It is the most visible thing on the chart and therefore the easiest to place as a message and withdraw.
5. Check the venue coverage
On a crypto exchange the chart usually shows that exchange’s book, which may be most of the trading in that pair or a small fraction of it. In equities it is almost always a fraction.
6. Use it for execution, not for direction
How far your order would walk the book, and what that would cost. Those are answerable. Which way price goes next is not, and the chart has no history in it.
7. Take levels from the price chart
A wall on a depth chart is this moment. A level price has respected repeatedly over weeks is evidence of a different kind, and it is the kind that survives the next minute.
How to tell it worked
The axis was narrowed to a plausible range, not left at its default width.
Depth was read near the touch, within 1 average bar range of the current price.
0 entries came from a visible wall, without a structural reason behind it.
And the venue coverage was checked within the last 30 days, so you know what fraction of trading it shows.
Why the shape is mostly the axis
Cumulative curves only ever rise. Plot far enough out and both sides look like enormous walls, because you are summing every order in the range. That is arithmetic, not a market condition.
Which means two people can look at the same book and see opposite things. One with a narrow axis sees a balanced market; one with a wide axis sees a wall — and neither is misreading the chart.
The one question it answers well
What will my order cost to fill. Walk the curve from the current price to the size you intend to trade, and the price at that point is roughly your average fill.
That is a genuinely useful calculation and it is invisible on every other display. For anybody trading size relative to the book, it is the whole reason to have the chart open.
Everything else it appears to say is the axis. Imbalance, walls, support and resistance — all of those are properties of a cumulative plot at a chosen scale rather than facts about the market.
Reading it against the trade record
A wall that price approaches and passes through leaves a trace. The orders either transacted, which appears in the trade record as a burst of volume at that level, or they did not, which means they were cancelled.
Those two outcomes look identical on the depth chart afterwards. The wall is simply gone in both cases, and only the execution record distinguishes absorbed size from withdrawn size.
Which is the single most useful habit with this display. When a large block disappears, check whether the volume showed up. Absorbed size means real participants took the other side; withdrawn size means nobody was ever going to.
After a few weeks of doing that you have your own answer about how often the walls on your venue are genuine — which is a question nobody else can answer for your instrument, and one the chart itself will never volunteer.
The original data
Of the 24,971 unique videos in research/search-study-corpus.jsonl, 0 mention depth charts in the
title. The order book appears in 3 at a median of 2,367 and time and sales in 0. Crypto generally
appears in 217 instruction-shaped titles at 30,027. The counts come from site/corpus_count.py.
0 videos on a display that appears on the front page of every crypto exchange. Millions of people see one of these regularly and there is no instructional coverage of what the curves mean or how the axis changes them.
The answer to the question on that chart is that a wall is orders, and orders are free. Placing a large visible sell order costs nothing and cancelling it costs nothing — so the most prominent feature on the screen is also the one with the least commitment behind it.
When it fails
The failure is trading a wall, and it is the depth chart’s characteristic mistake. A large block appears on one side and reads as a ceiling that price cannot pass. A position goes on against it. The order is cancelled as price approaches — it was never a commitment — and price continues through a level that existed only as a rendering of somebody’s revocable intention. Nothing on the chart distinguishes a wall somebody means from a wall somebody is displaying.
The second failure is a default axis. The shape is then mostly the scale.
A third is reading distant imbalance. Those orders will not be there.
A fourth is assuming full venue coverage. It is usually one exchange.
A fifth is using it directionally. It has no history in it.
And a sixth is treating it as new information. It is the book, drawn.
Related
Depth of market covers the underlying measurement. Order book is the same data as a list. And Level 2 is the common name for the tabular display.
The first thing I do is narrow the axis. Plotted out to a wide range these charts always show dramatic walls on both sides, because cumulative totals only ever grow. Narrowed to where price might actually go in the next hour, most of that drama disappears and what is left is the part that could matter.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.