Level 2 Trading

Level 2 Trading Data Explained

Level 2 trading shows the numbers of buyers and sellers waiting on the bid and ask, and time and sales show the actual orders that have been placed. It gives a good idea of support and resistance levels. When you see large buyers and sellers sitting at the bid and ask levels, this is important to pay attention to because it shows a reversal or breakout might be getting ready to take place. Big buy and sell orders create movement within the stock

Level 2 is the order book of Nasdaq stocks. Trading orders are placed through lots of different market makers. It shows you the many market makers’ best bid/ask prices. Level 2 trading is a tool traders use to see bid-ask spreads and where the buyers and the sellers are. This is a handy indicator to help gauge taking a possible trade. 

The market is a battle between the bulls and bears. This war affects price movement. Using L2, you can see the price bids and the price ask.

Traders can and will affect the price when you’re trying to place an order. 

There are many things to consider when trading in the stock market. As a result, you’ll want to use the tools at your disposal. Which means you must spend the time to study and practice. 

Level 2 Trading ThinkorSwim
Here is a level 2 using Thinkorswim. On the left, you see the bids and all the exchanges that the bids are coming through, and on the right, you see the ask or the “sellers.”

Level 2 Trading Real Time

What is level 2 trading? It’s a service that gives you real-time access to orders. In other words, it shows real-time bid-ask spreads. Orders are placed by all kinds of people. They can be market makers or electronic communication networks (ECN).

These orders are put into an order book. This can be added to your trading platform. It gives you the depth of price information. In other words, you’re getting all the available prices that market makers post.

Level 1 shows the best bid-ask spreads, whereas level 2 includes supply and demand. Traders know that emotion can affect supply and demand.

Greed and fear move markets along with news.

Level 2 Das Trader

This is an example of level 2 using the Das Trader platform. It has a nice user interface and intertwines with several top name brokers such as SpeedTrader

Level 2 AX Data

There’s something known as The Ax. This is the most important market maker. This market maker controls the price action on stocks. To find out who The Ax is, look at a few days of L2. The market maker that’s consistently dominating price action is The Ax. 

You need to know the players that make up level 2 trading. These are the people and algos that we go up against. There are market makers, electronic communication networks, and wholesalers.

Market makers give the market its liquidity. We need liquidity to trade. However, they can mess with traders’ stop losses and options contracts. Market makers must buy and sell when no one else is doing so. Hence, they make the market.

Electronic communication networks are the algos that trade. They’re the computerized orders. Anyone can trade using ECN. Sometimes, even the big-time traders do because it’s all done by a computer.

Wholesalers are just like it sounds. Many times, brokers sell their order flow to wholesalers. The wholesalers then execute orders on behalf of online brokers. Usually, retail traders use wholesalers.

TradeStation Interactive Brokers Logo LightSpeed Trader
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Should You Use Level 2 Trading?

You need to know how to trade level 2. It can be a helpful tool because it tells you much about a stock. L2 trading tells you what kind of buying is happening. Is it retail or institutional?

You can find out by looking at the type of participants. The market makers used for retail trading and institutional trading are different. It’s popular with trading penny stocks.

You can find irregularities. Usually, irregularities are institutional traders trying to keep the buying of a stock quiet.

Another way to trade level 2 is to look at The Ax. Day traders who follow The Ax have a higher probability of success. To succeed, they’re following the market maker providing the liquidity.

L2 is showing you the available price and liquidity. With that in mind, I don’t think L2 truly reflects what’s happening in the market. Some programs can adjust level 2.

As a result, bid and ask spreads are manipulated. This, in turn, causes traders to panic sell. All that happens without the bid and ask ever actually changing.

Final Thoughts

Manipulation happens a lot in level 2 trading. That’s why when trading Level 2, you want to pair it with other tools like Level 1. Knowing how to trade L2 means that you know there’s manipulation happening.

Market makers can hide their order sizes. They place small orders and then update them when they are filled. They can pick up shares or unload them without making other traders aware.

Smaller barriers look easier to push through than larger ones. That’s where they can get you. Market makers can use their order size to trick other traders.

They can get shorts to come on board and then change their order. Which in turn has traders, especially new ones, scrambling. However, you can get your own AI trading software that has you running with the algorithm traders.

Frequently Asked Questions

  • Green: signals price going up or "buy orders"
  • Red: signals price going down or "sell orders"
  • White: signals no change in price
  • Multi colors: separate data points
  • Names: show the different market makers
  • Bid: shows the different prices people are willing to pay
  • Ask: shows the different prices people are looking to sell at
  • Size: shows the order share size

Level 2 is worth using if you are a day trader and want to see the big block orders near support and resistance levels. It's not worth it for swing trading or long term trading.


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