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How Advanced Traders Use the Level 2 Quotes

Updated on 2012-09-14 by Guest

Level 2 quotes happen to be one of the niftiest tools you can use in stocks trading. In a world where every second counts, it always helps to have a direct access to observe how a specific stock is traded in real time. Level 2 quotes give raw trading information; but how this information is utilized is what separates the advanced trader from someone barely breaking even.

Basic Level 2 Information

Level 2 quotes reflect the order for Nasdaq stocks. Using this tool, you get to see the player of the market, the price of the bids and offers as well as the number of shares. Other information such as time may also be reflected on this tool. See the example given below:

A trader will automatically know that ARCA, one of the ECN has a bid on CISCO (CSCO) at 26.30 for 4200 shares. On the seller’s side, you can see major market makers such as UBS Securities (UBSW) and Credit Suisse First Boston (FBCO).

Aside from giving basic, real time information on specific trades, advanced traders uses level 2 quotes in a whole new level. They learned and mastered the skill of tape reading to tell the overall strength and condition of the stocks they’re trading. While some of these traders make their trading decisions using some other indicators, there are traders who’ve really mastered the science and art of tape reading that they execute trades based only on the information they see on level 2 quotes.

Here are a couple of ways, level 2 information can be interpreted and utilized:

Let us know strong support or resistance levels

Say for example, you see resistance price of CSCO in the chart at 26.31 – 26.33. You can look at level 2 quotes for real time information if this is truly resistance area. If you see 26.31 thinning out but constantly reappearing, you know for sure that the market is decisively selling the stocks at this price level.

But say for example, it easily broke 26.31 and 26.32; 26.33 is thinning out and there’s not much offers on prices beyond these levels, you know that the stock could be on a breakout and quite possibly, trending up.

Let us know when a trend is likely over

Say for example, you are a momentum trader. You’re always looking for a trending stock so you can get into position to favor its trend for a profit. You see CSCO at the beginning of its trend with many buyers decisively placing their bids driving the price up. However, every trend has its end. If for example, you go long on CSCO at 26.30 and you’re letting it fly for maximum profits, you need to keep your eyes glued on your level 2. Be prepared for the instance when bids starts to thin out and offers are starting to pile up. It’s most likely the best time cash in on your profit or at least, set a trailing stop.

Play tricks on other traders

Being a skilled tape-reader gives you the opportunity to play some tricks for profit. For example, there may not be much trading volume on CSCO beyond 26.31. You are in a long position at 26.30. So what you will do is place a large offer at 26.31 to make it look like a strong resistance. This will get many short sellers on board at this price. With precise timing, you pull out the large offer on 26.31 and place large bid. This will force the new shorts to cover in panic when they see the last resistance broke. You make hefty profit on your long position as long as you timed it perfectly. The danger with this tactics is that an even bigger trader would call your bluff. In which case, this could all backfire against you.

Additionally, you need to know that it is possible for market makers to hide the sizes of their orders or hide under the guise of an ECN, rather than a major institution, making that order.

Level 2 quotes is just one of the most powerful tools you can have in day trading. It allows you to be constantly on your toes for real time market activity. It also trains you to see through the bluffs of other traders and use it to your own advantage. But, however handy this tool may be, it is still your experience, skills and understanding of market psychology that takes you further. After all, any trading tool is only as good as the trader behind it.

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