The order flow as support and resistance levels

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The aim of this article is to empower you with a new instrument, known as Heatmap. The primary purpose of this instrument is to point out current and historic support and resistance levels on a chart. As of today, there are still some technical analysis instruments not being presented at Bitsgap and Heatmap among those.

We think that knowledge is key to successful trading, especially when it comes to launching efficient automated bots, and that is why our aim is to provide traders and investors with useful instruments.

Bitsgap team

A Heatmap can be a powerful tool for technical analysis when used with other indicators, as well as support and resistance lines. A heatmap is nothing more than just a visualisation of an order flow from the exchange’s order book. An ordinary “Order book” table is endlessly changing and it is hard to keep up with its dynamic. With such an instrument as heatmap, you are now able to grasp all of the orders plotted on a chart. The biggest drawback of the order book of any cryptocurrency exchange is that the historical data is never shown on a chart. In other words, you won’t find what was the supply and demand of bitcoins 3 days ago, a week ago and so on. Heatmap can be a better alternative.

A Heatmap is a two-dimensional graphic visualisation, using colors to demonstrate the density of  limit orders volume on a chart. Here is an example from one of those rare platforms, Tradinglite, that offer a heatmap:

The idea is simple: As you zoom in the chart, you can see the exact amount of Bitcoins currently pending in limit orders for the price level of $11,000. In total, 322 BTC should be sold before the price hits $11,000. Order flow below the current price represents only buy orders. Whereas, order flow above the current price represents sell orders.

As you scroll the line over the Order Book you get an order flow visualisation on a chart as well. Check out the video below:

Below is an illustration of a large volume being concentrated on a chart. The density control (“Density” on a chart)  represents a color range. As an example,pink color stands for the highest volume. In the example below a 260 BTC is being selected with a filter as the largest volume and as you can clearly spot at the price of $12500 is where the maximum is.

If you select 210 BTC volume maximum, then the picture will change and new order flow levels expose:

The way you can use these levels is by marking them as support/resistance.

Most importantly, we are looking for those order flow levels that overlap with graphical support and resistance lines as follows:

This is a double-confirmation. When the order flow level perfectly matches with a graphical support/resistance level, this is perceived as a validation of the price importance. By that you empower yourself with an alarm/alert on these levels, the price can swing like crazy. From a support line expect at least a short-term pullback. Conversely, from a resistance level expect at least short-term reversion to lower prices.


Conclusion

Using Heatmap together with other instruments like support and resistance lines creates a powerful combination. A combination that enables traders to find key price levels from which they can go long or short. A historical order flow overview on a chart can show you exact prices at which market participants highly anticipated a pullback. Most importantly, when launching Bitsgap bots you can choose Upper and Lower limit prices of a trading range based on the Heatmap’s support and resistance levels:

According to the BTC/USDT heatmap, $11000 and $9800 have historically proven to be strong psychological levels. Plotting Upper limit price to $11000 and Lower limit price to $9800 is a possible configuration for the bot.


Written by Dmitry Perepelkin