Getting an edge with Forex Tools – Order Book

Order books, which are largely prevalent among exchange based trading instruments is one of the ways some traders tend to trade. An order book is nothing but a record of the buy and sell transactions, similar to what an accountant would maintain at a regular office. Trading with the order book has been around for many years as far as exchange traded assets such as stocks or ETF’s are concerned.

When it comes to the currency markets, given the fact that they are unregulated and traded over-the-counter, it can be difficult to get hold of the order book. However, there are some forex brokers that do offer these tools. While the forex order book can be viewed at in the same way, traders should first understand its limitations.

Of the many brokers, Oanda is one such broker that offers traders free access to their order books. However, the data showed in the order books of Oanda are largely limited to the positions or orders held by trading clients of Oanda. Regardless of this limitation, the order book for the currency markets does help traders to gan an understanding of how at least some of the retail market participants are positioned.

Order book – Open orders and Open positions

The order book from Oanda has two main categories:

  • Open Orders: This section shows the amount of open orders (or pending orders) placed by Oanda clients.
  • Open positions: This section shows the current active open positions from the trading clients of Oanda.

The chart below gives a brief outlook on how the positions (as well as orders) are placed with Oanda currently.

Oanda Forex Order Book
Oanda Forex Order Book

Understanding the order book graph is very simple.

Under open orders, we notice that there are a lot of sell orders sitting around 1.145, while a lot of pending buy orders are placed around 1.12 price levels for the EURUSD.

Under the open positions we notice that most of the retail traders are heavily short on EURUSD near 1.14 levels while we also notice a heavy positioning to the long side near 1.14 levels.

These graphs therefore translate to an assumption with a heavy short position near 1.14 and with a large cluster of pending buy orders at 1.120, the retail traders are looking to exit their short positions near the 1.120 levels (where in when they liquidate their short position, it automatically converts to a buy).

What to make of the Order book information?

It is a highly debatable subject as to what to make out of the information from the Order book. Sticking to the information that the order book provides, traders at best can use the above tool in order to understand how their personal trading positions are in comparison to at least a part of the retail trading crowd. Traders should not mistake the order book as a trading signal to go long or short considering that the positions and orders shown are exclusively to that of Oanda trading clients, which in fact is a very small percentage within the larger ocean that is Forex.

You can click here to access the Order book tool from Oanda which is free to use.