Monday 18 January 2016

Decoding a Trade/Order Book in the Exchanges...

Hello friends,

The long weekend is over and hope you are ready for an exciting week ahead. There are lots of you who are new to the markets. Today, I am going to take you through the following:

1) Order Book in the Exchanges
2) How to use it
3) And most importantly, how NOT to use it :-)

I am hoping that most of you are trading/investing ONLINE with a broker. Now when you are buying or selling shares online, you will see an order book which provides you a good idea of the top 5 selling and buying prices.

You can find order books of your stocks in both NSE and BSE sites. Lets take an example of an order book here.

From the above example, we see that there are 4 columns. The buy quantity is the number of shares waiting to be bought. Buy price is the price which a buyer is willing to pay for the share. Sell price is the price which a seller is quoting for the share. The sell quantity is the number of shares waiting to be sold.

So we have 500 shares waiting to be bought at a rate of 5250. And we have 1650 shares waiting to be sold at 5252. Now a trade is executed when the buying and selling price match. For example. if a buyer plans to buy 1700 shares at market price, he will get 1650 shares at 5252 and 50 shares at 5252.10 and we can see that the last traded price goes to 5252.10. 

Similarly, if a seller plans to sell 700 shares at market price, he will sell 500 shares at 5252 and the remaining 200 shares at 5249.20 and the last traded price will be shown as 5249.20. 

We can see that the order book is made by the highest 5 buying prices and the lowest 5 selling prices. 

In the bottom, we see the Total buy quantity and the Total sell quantity. Now, we only see a part of the actual order book. The orderbook definitely contains more than top 5 orders. For example, in the current scenario, we cannot see how many buyers are waiting to buy at prices below 5248.70 and we also do not know how many sellers are waiting to sell at prices above 5252.45.

Due to the above reason, it would be foolish to make our buy or sell decision purely by looking at the total number of buyers or sellers. I see many a time, that many traders buy a stock when the total number of buyers are higher than total number of sellers. They try to sell when the total number of sellers outnumber the total number of buyers. It would be interesting to note that a operator/punter can easily manipulate the total number of buyers/sellers by placing a huge order at a very low buy price or a very high sell price (since he is sure that his order will not get executed)

So the bottom line is, please do not make trading decisions based on order book. Try to trade based on a news or a trend. Be intelligent.

The most intelligent thing to do would be to invest rather than trade. In that case, small price fluctuations would not matter. Only the business matters.

Do you have any questions? Any comments.. Waiting for them...

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Good luck,
Fundamental Investor


  1. Articles are very good and in detail, I really appreciate . I request you if it is possible to write in detail how to evaluate the management which is one thing very important in investing.Thanks Balchender

    1. Dear Balchender ji. Thanks for your words. It motivates me to serve.

      The management aspect is a very tricky thing. Let me try to write something on this for you and for everyone else. Can you drop me an email as well so that I would respond as well?

    2. Very nice and informative article. My experience is that if we are convinced to Buy a certain share/stock and if we see Total Sell far exceeding Total Buys in the ratio of 1:5 or 1:10 or more, then this should give us more confidence that the Operator/Punter is trying to influence the market by putting his large order at Upper or Lower Ceiling price so that at every small fluctuations in price he can keep on buying at his desired price. Correct me if I am wrong.

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  3. Hi Fundamental Investor,

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