When you are trading and looking at a bid/ask quote, you are looking at the Level 1. To go a step further, you can subscribe for Level 2 quotes where you will gain access to the NASDAQ order book that contains price quotes for each price level and the size on each order along with which market maker is holding that order.
The window above is a Level 2 of the SPY with the bid prices on the left and the ask prices on the right. You will notice that each size has the market maker, bid price, size and the time of the order.
One important note that new traders have a hard time understanding is that not all orders you see on the Level 2 are executed when they disappear. The Level 2 is an order book and simply displays the orders that are live in the market. Buyers and sellers can pull orders at any time, which results in orders disappearing from the book.
This is important data to have, especially if you are an active trader that needs to know where buyers and sellers are showing up. In the below example, there are a lot of buyers on the bid at the $224.68 price level. The ask side is thin at $224.69 with just one order showing.
Though this may not have any significant meaning right now, if you’re watching shares trade down and then see the bids stacking up at an important support level, chances are that shares could get a bounce or a complete reversal. This is just one example of why the Level 2 is a great tool to know how to read so that you can put the odds in your favor.
Warrior Trading Pro Tip
Level 2 can be a very valuable tool to have as a day trader. When you are looking at breakout setups like a Gap-and-Go, and you see a lot of sellers on the ask, then you can reasonably assume that if those sellers get bought up, prices will likely pop higher.
We will know if the sellers are getting bought up by watching the Time and Sales window where the actual orders will go off.
If we see prices hitting the ask on Time and Sales, then we know the buyers are being aggressive. Therefore we will want to look at getting long when prices break above.
Always watch price levels when you see lots of bidders or sellers stepping in on the Level 2, since this could signify an important level throughout the day.