Warrior Trading Blog

Level 2 Market Data | Quick Demonstration


Hey everyone. Ross here from Warrior Trading. So in this video I want to talk about level two market data. Now when I first started day trading, I had no idea that there was even such a thing as level two market data. I just presumed that when you looked at the price of a stock, it was the bid verses the ask. So in the case of Apple, right now, 142.69 by 142.70. One cent spread. That’s the price. Well that’s not all there is to the price. You’ve got all of this depth below the very top of the market, which is the current best buyer and the current best seller. And when you pull back the curtain and you see all of that level two market depth, you actually get a real understanding of whether you’ve got bullish or bearish sentiment in this stock.

So what I want to do is show you a bunch of examples because I think this will help you understand level two a little bit better than me just explaining it to you. All right so on this stock Apple, this is a good example here because you can see a 16,000 share buyer. It’s actually a 25,000 share buy order, right here at 142.50. So I just took a quick screen shot of that and let me just pull up the screen shot. So what we have here on the screen shot is at 142.50, there is a buy order of 28,800 shares.

Now when you’re just looking at level one market data, depending on where you’re getting your data from, you may or may not see the number of shares available. You may only see the current price. So if you only saw the current price, you wouldn’t realize that there is a 28,000 share buy order on NASDAQ at 142.50, and there’s another 16,000 shares on EDGX and another 11,000 shares on Arca. These are really big orders for a stock of this price range. I mean you’re talking about over a million dollars in buy orders at that current price. So from a market sentiment standpoint, that represents a level of buyer support, which is important to be able to see if you’re an active trader.

Now the things that I look at when I look at market depth, I look at the number of tiers that are at the current price. So the way level two is colored is all of the prices that are in the same tier are colored the same. So all of these orders that are at 142.50, these are all the same shade of green. They are the first depth of the market and the first depth of the market is always green, as you can see here. Green, green, green, green, green and green. All right, now each of these are different sizes and those sizes are based on the number of buyers or sellers in that tier. So in this case on Apple, you’ve got one, two, three, four, five, six, seven buyers all at 142.50 and you’ve got only three sellers at 142.51. So in this case it feels like there’s a lot more buying support than upside selling resistance.

And as you look down the level two, you can see how many people are buying at 142.49, how many are buying at 142. 48, and then it drops down to 142.39, 142.06, and you can see the same thing as you go up in price, and what you can even do is you can make these windows bigger to see way out where you’ve got buyers and sellers. Now different level two data subscriptions will give you different amounts of depth to the market. And I actually don’t subscribe to all of the feeds because I don’t really feel like it’s that helpful. I just kind of like to be able to see what’s within the current price and maybe a couple of tiers down. That’s more than adequate for the way that I trade. Now of course you have to pay market data fees so it saves a little money to subscribe just to the top of the book and then you see everything that’s at the current market price.

So the couple of things I look at. I look at if there are any big buy or any big sell orders because those are going to be psychologically significant. Traders see that as mental support. Right? The stock is up 15 cents off that level, traders recognize there is some support there and so the stock bounced up. Now if I saw the same type of big order on the ask side, at 142.51, I would consider that to be resistance or a bit of a wall, and I would not be as likely to be a buyer. I might be more likely to want to in fact short the stock for a move back down.

The next thing I look at is the depth of each tier and how thick or thin the market is. So in this case, this is a pretty thick market because we’ve got only a one cent spread, only a one cent difference between the best buyer and the lowest price seller, and you can see a number of orders that are on the level two. In contrast, if we pull up a stock like this Bluebird Bio, this is a very thinly traded stock and you can see it just by looking at the level two. You have more than a 20 cents spread between the best buyer and the best seller, and on either side there’s only two or maybe three orders at each tier, and as you look down the level two, you can very quickly this could drop below 99 down to 98.82. I mean this is a stock that can move very, very quickly and could be very volatile but doesn’t have a lot of volume, has larger spreads, and therefore the risk is higher and you’re able to see all of that in the level two.

You wouldn’t necessarily see it in the chart and you wouldn’t necessarily see it just looking at level one data. You would see the spread but that’s it. This is level one, right here, and then this is level two. So imagine trying to drive a car with blinders on like this. You’d be able to see a fair amount but it’s going to be a lot easier when you can see everything and there is no reason you would choose to drive half blind folded, right? And there is no reason most people would trade half blind folded if they’re active traders. So level two can give you a lot of understanding of what’s going on in the market and there are definitely times where I take trades based almost entirely on the price action that I see in the level two, whether it’s all of a sudden seeing a 100,000 share buyer pop up here at 99.50, that’s a huge level of support, if we saw that. Or maybe a 100,000 share seller pop up here. That would allow me to make a decision. I have more information, I can make a better decision in the way that I trade.

All right, so I hope this has been a good sort of intro to level two. If you want to learn more, keep watching these videos. There will be a bunch more posted and as always, if you have questions, don’t hesitate to reach out.

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