Now when you enter the trading world, understanding level 2 can be very important to seeing how the stock is currently acting. What we mean by acting, is understanding how the stock is trading.
What is Level 2? There are many different sources out there that give the trader the ability to view level 2. Level 2 basically lets you see the buying and selling pressure of the stock. There are usually many different market makers on a stock. These market makers are either trying to buy (bid) or trying to sell (ask). Below we will show you a picture of what level 2 data looks like....
Now here is what a typical level 2 figure will look like. Like we just mentioned, there are many different sources out there that offer level 2. Platforms like Think or Swim have the feature built in which is great.
You can see that there are 2 sections, the bid side (left) and ask side (right). If you remember from last lesson, the bid is what the market maker is willing to pay for the stock and the ask is what the sellers are willing to sell for. In this scenario above the spread is not that wide at all. What we mean by this is that the difference between the ask and bid is not that big at all. If you were interested in placing a market order to buy this stock, chances are you would buy it for the current ask which is $43.40 on the right. If those all go bought up, chances are you would be buying for the next prices below at $43.41 or $43.42.
Using Level 2 to strategize Now a really cool thing about level 2 is that sometimes you don't even need to look at the charts to understand what's going on price wise. Below is another level 2 on FACEBOOK
Even though the picture is different, the approach is the same. On the left you have the bid and on the right you have the ask. Now if you look closely on the right, you will see there are a lot of people trying to sell for $65.30. In this case you can say that there is a lot of supply at $65.30. You can further anticipate that there is a lot of supply at $65.30. What traders would be looking for is people to begin buying at $65.30. We call $65.30 a resistance level. Since there are so many sellers at $65.30, we think that if a majority of those can get bought up, theres a change the stock can continue to run up. Now in order for there to be buying at $65.30, you will have to see people beginning to raise their bid on the left!
If people begin to raise that bid on the left, now you know that there is buying at this resistance level. Once there is buying and raising bid prices on the left, there will be raising ask prices on the right. Level 2 is all about supply and demand.
In this example above there was solid demand on the bid for $65.29. This means there was a good amount of people wanting to buy the stock for $65.29. You can know this buy simply counting up how many market makers were willing to buy at that price which was 5 from the figure above.
On the other hand, there was even more supply on the ask on the right at $65.30. There was about 10 market makers willing to sell at that price. In this example there seems to be more supply than demand. Whenever there is more supply than demand what usually happens? Well if you have a lot of a product but no one wants to buy it, you will most likely lower prices right?
What's a market maker? In the figure above, you see MMID. This explains the market maker. The market maker is basically a bank or brokerage company. Below you will see some market makers and their affiliations
*Now market makers can go much more in depth, but for starters here are some of the most popular ones you will see.
*We don't utilize level 2 data as much as most traders, but it could be a great tool for you to use or at least become familiar with!
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