How to Use Level 2 Quotes for Day Trading
A few weeks ago, we looked at the concept of reading the tape, which is also known as tape reading. We also looked at the concept of imbalance, which refers to the actions by buyers and sellers in the market.
In this report, we will look at the concept of level 2 in trading.
What is level 2 quote?
Level 2 is often viewed as a complex dashboard that shows the order flows in the market. It shows how buyers and sellers are placing their trades. Having a good understanding of how to read level 2 market datacan help you determine whether to buy or sell stocks.
Bid and Ask Price
The left side of Level 2 is known as the bid price. Bid refers to people who are trying to buy a stock. In most cases, it is usually red in colour, as shown in the chart below. It is usually arranged in a descending order, with the biggest bids on top.
The right side, on the other hand, is the ask price. It shows the number of people who are attempting to buy the stock and is usually arranged in an ascending order.
The level 2 dashboard is offered by several brokers and other online companies. At Day Trade the World (DTTW), we providethis dashboard in the PPro8 trading platform.
Level 2: participants
There are three key parts of level 2 dashboards.
- Market makers – A market maker is a company that operates in an exchange to provide liquidity. They provide the quotations and are required by the exchanges to buy when no one is buying and sell when no one is selling. By doing this, the market makers help to ensure that there is good order flows in the market.
- Electronic Communication Network (ECN) – ECNs are communication networks that offer order placement systems. There are many online brokers that offer the ECN model.
- Wholesalers – This is a situation where many online brokers share their order flow to wholesalers who them execute the orders.
Level 2 and Time and Sales
The concept of level 2 is usually related to that of time and sales, also known as reading the tape. As we wrote before, time and sales shows all transactions in the market, including volume and the time the transaction went through.
In most cases, the time and sales is usually shown in red and green. The figures are red when they are executed at or below the best bid on level 2. If the price is executed at or above the ask price.
For example, if there are more greens in the time and sales, it shows that there are more buyers in the market, which is likely to push the price higher. Similarly, if there are more reds in the time and sales, it shows that there are more sellers in the market, which could push the price lower.
Benefits of Level 2
There are several benefits of using these quotes when trading. These are:
- It shows you exactly what is happening in the market. For example, you can understand exactly who is buying and selling the stocks.
- It helps you gain an edge against traders using the other types of analysis.
- As shown above, you can combine level 2 with time and sales and find imbalance.
Disadvantages of Level 2
However, there are disadvantages of using Level 2. For example, it is common for market makers to hide their order sizes using an ECN. They can also pump a stock and then dump it.
Level 2 Trading Strategies
There are several trading strategies when trading the market. The most popular is to look at the charts and analyze where the price will move to. On the other hand, there are those professionaltraders who look at the level 2 charts and attempt to digest what the market participants are doing.
External Useful Resources
So you want to add some Level 2 trading skills to your toolkit. That’s great!
Level 2 data is the nerdy part of trading I usually hate on. It’s the type of stuff that makes me feel like a computer programmer from the 80s. Like I’m in some bunker trying to decode a Soviet plot. All those flashing colors and numbers and acronyms that you ‘probably should know’…
Today, I want to dispel any antipathy around trading with Level 2 AND show you how to use Level 2 for day trading. It’s not rocket science. It’s not a cheat code for trading, either.
It’s simply one more tool that you can learn.
If you’re here, I hope you’ve already picked up some trading basics — like my FREE guide to penny stocks. Be sure to check out my YouTube channel. It’s full of trading lessons and guides, like my “30 Trading Videos in 30 Days” playlist.
Maybe you’re even on your way to applying for my Trading Challenge, where many top traders have started.
Level 2 is one more piece of the puzzle. Understanding Level 2 won’t give you some brand new ‘trading system.’ You do that yourself, by continuing to learn and grow as a trader.
Table of Contents
What Is Level 2 Trading?
When someone tries to buy or sell a stock with a limit order, it gets listed with all the other orders.
This is what’s called the order book. Buyers are listed in the left column — the ‘bid.’ Sellers are in the right column — the ‘ask.’ The prices closest to the last price the stock traded are at the top, and are the first to come off.
This is the part you should pay attention to.
When bids come off the board, the price will usually go down.
When asks come off the board, the price is probably heading up.
Why is that? Offers to buy and sell at higher or lower prices than the current price can help give you an idea of the mood around the stock.
If you have a stock that’s been selling for $ per share, the only reason to take $ is so you don’t get stuck taking $ Or less.
You know that moment in school when you realized that something wasn’t cool anymore? That’s when you just knew you needed the new ‘it’ thing to impress your friends
The same principle is in play when a stock runs. It isn’t just a trading principle — it’s a LIFE principle.
Level 2 and Price Action
If you want to understand how Level 2 quotes affect price action, there’s a book I think is worth reading.
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay is one of my favorite books. It explains why prices move based on crowd sentiment. It was published in the s, but its lessons are timeless.
(As an Amazon Associate, we earn from qualifying purchases.)
Or just watch that last scene in “Trading Places” again. When the old rich guys are buying orange juice futures, everyone wants in.
But like I say, this is only one piece of the puzzle. When the news signals a drop in OJ futures in the scene, people trade on the news and not peer pressure. The price goes down. Check out my video lesson from It may be a few years old, but the lessons still apply today
Level 2 Trading Platforms
Most of the best trading platforms out there have Level 2 functionality. Fidelity, E-Trade, Interactive Brokers, and many others have Level 2 stock trading and Level 2 options trading.
Even the brokers I called out in the tweet above have caught on. Robinhood and Webull have since come out with Level 2 add-ons.
Many of these brokers will even give you Level 2 data on their trading apps.
And yeah, I know your next question … because it’s one I always get. “What about free Level 2 trading platforms, Tim?”
Well, in the days of no minimum deposits, a lot of Level 2-equipped trading softwareis free. Just watch out for fees and commissions.
The Level 2 trading platform I use is StocksToTrade. It isn’t free, but I think its robust Level 2 quotes more than make up for that.
This is especially true for OTC stocks. Some platforms have incomplete Level 2 quotes for OTC stocks. Heck, Robinhood and Webull won’t even let you trade OTCs.
But to me, OTC stocks can be great for helping to build a small account. And Level 2 is even more important for OTCs than listed stocks. More on this later.
StocksToTrade has many other features that make it my go-to:
- A killer news scanner that picks up on press releases, earnings reports, tweets, and other things that move a stock
- A flexible stock screener, built with penny stock traders in mind
- Awesome charting capabilities, which help me to identify my favorite setups
Try STT now for 14 days — its only $7.
(Quick disclaimer: I helped design and develop StocksToTrade. I’m also an investor in it.)
What Is the Difference Between Level 1 and Level 2 Trading?
Level 1 quotes are also known as real-time quotes. They show you the current bid-ask spread on a stock, as well as the volume being offered. And they also show you the last price the stock traded at and the volume. But you only see a single bid and ask — you can’t see how deep they go.
Level 2 shows you real-time quotes for each market maker. This is the order book — limit orders that are waiting for a fill. It can give you a better picture of supply and demand. Seeing Level 2 is like a glimpse into what everyone’s thinking.
How to Read Level 2 Market Data
OK, get your decoder rings on. We’re about to go under the hood.
First, let’s talk about the three- and four-letter names alongside those numbers. Those are called market maker IDs (MMIDs), and some traders use them to guide their trading.
Market makers literally ‘make the market.’ Many are large institutional brokers or exchanges. They provide liquidity by buying when no one else is buying and selling when no one else is selling.
But they’re also traders trying to make money. And they try all kinds of tactics to make that happen.
They know we’re watching.
Here’s what it looks like
On the left, you see the bidders. There are a lot of bids at $, and each market maker is displayed under the ‘MMID’ heading. Sellers are under ‘ASK’ on the right. You can see the number of shares for each bid or ask under ‘SIZE.’
How’s that useful? Imagine we’re trading a breakout. The stock’s about to break over a multi-year high of $2. We’ll take the most fundamental approach, and buy over $2. But what if theres a HUGE number of sellers? The only way to tell is with Level 2.
Level 2 data can warn you of a failed breakout. You can see if there are massive numbers of shares on the ask and follow my #1 rule: cut losses quickly.
One of the games that market makers play is flashing big orders in one of the columns and then taking it off the board. This can make traders second-guess themselves. Is it a real order or market manipulation?
Orders will show up in small volume and restock as soon as the order gets filled. Often, market makers stage their orders in this way to avoid spooking the market. This is called ‘soaking up size.’
Market makers can also disguise their orders through alternate market makers. These are known as electronic communications networks (ECNs).
A third market participant is the wholesaler. Some brokers sell their order flows to these wholesalers. They usually represent retail traders.
Some traders keep cheat sheets on market makers. They watch for the ones known for dilution — flooding the market with shares and killing the price.
They also watch for the ax, which is the most important market maker. The ax usually drives the price action in any given stock. If you become familiar with a stock’s Level 2, you can figure out who the ax is and keep an eye on its moves.
Of course, the ax knows you’re watching. They’ll dig into their bag of tricks whenever it suits them.
And those 8-bit colors? They’re just there to help you visually group the prices.
See How I Use Level 2
Level 2 can be incredibly useful for the niche I trade, penny stocks. Check out this video
OTC stocks tend to have much clearer Level 2 quotes than listed stocks. So when you see a wall of buyers like I did in the video, you can be a little more confident that you’ve found the bottom.
That’s because OTC stocks usually have lighter volume than listed stocks. When the order book isn’t as deep, it’s harder for market makers to hide orders.
It’s much harder to use this strategy on listed stocks.
On the main exchanges, market makers create noise … They try to disguise or manufacture supply and demand.
The market moves on simple supply and demand. If you see , shares on the sell side and only 5, on the buy side, the price will probably go down.
But market makers are smart. They know traders are looking. And they put on extra weight to tip the scales or prop it up so you don’t see what’s really happening.
So they sell through 5,, then another 5,, and so on. If they’re careful, they can sneak the whole , through without moving the market.
But remember — it all comes down to price. If the price doesn’t budge after a buyer or seller imbalance, that’s all you need to know.
Level 2 Trading: “Learn Level 2” DVD Webinar
If you’re looking for a Level 2 trading tutorial, check out the “Learn Level 2” DVD recorded in …
It may seem dated, but the principles are the same.
And I think this DVD is one of the best resources available for understanding Level 2. This DVD isn’t just a classic, though. It’s also one of the few resources you’ll find that spotlights OTC Level 2 quotes and shows you how to trade with them.
Apply for My Trading Challenge
If you see education as a never-ending battle, check out my Trading Challenge. But know that I only accept the most dedicated students. If you’re accepted, you get access to all my DVDs, including “Learn Level 2.”
Plus, I share all my trades and the plans behind them, every day in the Challenge chat room. I’m proud to be a transparent trader in an industry full of fakes. It gives my students more opportunity to learn from my every move, even my mistakes.
Everything I’ve learned in my 20+ trading career goes into this challenge. Come learn from me, other top traders, and a group of peers.
It’s your time to level up. Apply for the Challenge today and start your journey!
The Level 2 Trading Conclusion
Level 2 knowledge can help you in your trading. But you need to keep it in perspective.
For me, Level 2 is just another indicator for a trade.
Like my Trading Challenge students, you’ve gotta realize that your learning is never done. There’s no magic knowledge pill that makes you a successful trader.
There’s only getting a little bit better every day. So stick with it. And always remember that small gains add up and to cut losses quickly.
Have you figured out Level 2 trading? Let me know your Level 2 strategies in the comments — I love hearing from my readers!
Level II is a thinkorswim gadget that displays best ask and bid prices for each of the exchanges making markets in stocks, options, and futures. It is essentially a real-time ordered list of best bids and asks of an underlying that allows instant order placement. Like all other gadgets, Level II can be displayed as a section of the left sidebar or a separate window (see the Left Sidebar article for details).
In the gadget header you will see the following elements: the symbol selector, the 'clip' icon , the full name of the symbol, the current market price of the selected symbol, and its percentage and absolute change since midnight. The clip icon brings up a color-and-number selection menu; choosing a color in this menu will link Level II to all thinkorswim components with similar color. Consider linking Level II to a watch list so that clicking through the latter will immediately display the corresponding symbols in Level II.
For stocks and options, Level II is a color-coded display of best bid and ask prices from a given set of exchanges. Use the toggle in the upper right corner of the working area to switch between the pre-defined sets (books): Level II, NASDAQ Full Book, and BATS/EDGE Full Book. For futures, since they each trade on a single exchange, Level II displays first several layers of that exchange's book.
When you specify the symbol in the symbol selector, you will see the real-time quotes in the working area. The working area is divided into two sets of columns: bid-related (to the left) and ask-related (to the right). These columns identify the marketplace or market maker at the given bid or ask price with respective number of shares to be bought or sold (ask/bid size). In both ask and bid size columns, the numbers represent hundreds of available shares or contracts: for example, 3 in the bid size column means that there are shares or contracts ready to be bought at the respective bid price at the respective exchange.
Since the purpose of Level II is providing you with best bid ask prices, the columns are sorted accordingly. By default, the bid area of the gadget is sorted in descending order by the bid price column, so that highest prices are on top. As it might be expected, the ask side is sorted vice versa: the default sorting displays lowest prices on top. You can re-sort the columns in the reverse order by clicking on the Bid or Ask title, or sort the set by exchange name or bid/ask price by clicking the title of respective column.
Level II enables you to add orders instantly. Click on a bid price in Level II to add a sell order; clicking on an ask price will prompt you to add a buy order.
Introduction to Level II Quotes
Level II can provide enormous insight into a stock's price action. It can tell you what type of traders are buying or selling a stock, where the stock is likely to head in the near term, and much more. Below, we'll explain what Level II is, how it works, and how it can help you better understand open interest in a given stock.
- Level II shows you the order book for Nasdaq stocks, including the best bid and ask prices by various market makers and other market participants.
- Level II shows you who the market participant is that is making a trade, whether they are buying or selling, the size of the order, and the price offered.
- The three players in the marketplace are market makers, who buy and sell at all times, providing liquidity; the ECNs, the computerized order placement systems; and the wholesalers that work with online brokers.
What Is Level II?
Level II is essentially the order book for Nasdaq stocks. When orders are placed, they are placed through many different market makers and other market participants.
Level II will show you a ranked list of the best bid and ask prices from each of these participants, giving you detailed insight into the price action. Knowing exactly who has an interest in a stock can be extremely useful, especially if you are day trading.
Here is what a level II quote looks like:
This tells us that UBS Securities is buying 5, shares of stock at a price of Notably, the number of shares is in hundreds (x). Now let's take a look at the market participants.
Introduction To Level II Quotes
There are three different types of players in the marketplace: market makers, electronic communication networks, and wholesalers.
Market Makers (MM)
These are the players who provide liquidity in the marketplace. This means that they are required to buy when nobody else is buying and sell when nobody else is selling. They make the market.
Electronic Communication Networks (ECN)
Electronic communication networks are computerized order placement systems. It is important to note that anyone can trade through ECNs, even large institutional traders.
Wholesalers (Order Flow Firms)
Many online brokers sell their order flow to wholesalers. These order flow firms then execute orders on behalf of online brokers (usually retail traders).
Each market participant is recognized by the four-letter ID that appears on level II quotes. Below are some of the more well-known ones.
|GTSZ||GTS Securities, LLC|
|CDRG||Citadel Securities, LLC|
|UBSS||UBS Securities, LLC|
|DBAB||Deutsche Bank Securities, Inc.|
|JPMS||J.P. Morgan Securities LLC|
|GSCO||Goldman Sachs and Company|
|FBCO||Credit Suisse Securities (USA) LLC|
|NMRA||Nomura Securities International, Inc.|
The most important market maker to look for is called the ax. This is the market maker that controls the price action in a given stock. You can find out which market maker this is by watching the level II action for a few days. The market maker who consistently dominates the price action is the ax. Many day traders make sure to trade with the ax because it typically results in a higher probability of success.
Why Use Level II?
Level II quotes can tell you a lot about what is happening with a given stock:
- You can tell what kind of buying is taking place—retail or institutional—by looking at the type of market participants involved. Large institutions do not use the same market makers as retail traders.
- If you look at ECN order sizes for irregularities, you can tell when institutional players are trying to keep the buying quiet (which can mean a buyout or accumulation is taking place). We'll take a look at how you can detect similar irregularities below.
- By trading with the ax when the price is trending, you can greatly increase your odds of a successful trade. Remember, the ax provides liquidity, but its traders are out there to make a profit just like anyone else.
- By looking for trades that take place in between the bid and ask, you can tell when a strong trend is about to come to an end. This is because these trades are often placed by large traders who take a small loss in order to make sure that they get out of the stock in time.
While Level II can be helpful for traders looking for information about a specific stock, they need to also be aware that some market makers use tactics to hide their trades and actions, so as to throw other participants off.
Tricks and Deception
Although watching Level II can tell you a lot about what is happening, there is also a lot of deception. Here are a few of the most common tricks played by market makers.
Hiding Order Size
Market makers can hide their order sizes by placing small orders and updating them whenever they get a fill. They do this in order to unload or pick up a large order without tipping off other traders and scaring them away. After all, nobody is going to attempt to push through a , share resistance, but if a persistent 10, share resistance is there, traders may still think it is a beatable barrier.
Order Sizes and Timing
Market makers also occasionally try to deceive other traders using their order sizes and timing. For example, JPMS may place a large offer to get short sellers on board, only to pull the order and place a large bid. This will force the new shorts to cover as day traders react to the large bid.
Trading Through ECNs
Market makers can also hide their actions by trading through ECNs. Remember, ECNs can be used by anyone, so it is often difficult to tell whether large ECN orders are retail or institutional.
The Bottom Line
Level II can give you unique insight into a stock's price action, but there are also a lot of things that market makers can do to disguise their true intentions. Therefore, the average trader cannot rely on level II alone. Rather, they should use it in conjunction with other forms of analysis when determining whether to buy or sell a stock.
2 stocks level reading
.How to Read Level 2 Quotes for Day Trading
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