Introduction to Level II quotes
Most stock brokers offer a number of different information and software plans for online stock trading. While some brokers offer Level II quotes by default, many of them offer them as paid options.
Level II quotes give you access to, among other things, a list of instantaneous bid and ask prices from each market maker (MM), Electronic Communication Networks (ECN) and various other market participants. This order book gives you some insight into price action and can offer hints as to which direction the stock is headed. For example, by looking at the trades that happen between the bidding and asking prices, you can often predict when a trend is coming to an end. This is helpful to traders who would rather get out with a small profit and get out in time, than lose money by waiting to see if their trend prediction was right or wrong. Difficulty arises when a trend is in the beginning stages of growth, as will be discussed shortly.
Another insight the Level II can provide is ‘order size irregularities’. This occurs when the ‘big players’ are loading up, or unloading on a particular stock, without wanting to be spotted. For example, market makers can hide their order size by placing small sized orders and progressively changing it as they get filled. In addition, market makers can also place their orders through ECN. This makes it difficult to tell who originally placed the order, and in turn, camouflages their intentions. This is particularly important with penny stocks, as these build ups on either side can lead to monumental double digit percentage price changes within minutes.
In a given stock, the market marker that dominates the price action is called the ax. If you follow the level II price action for a particular stock over several days, you will be able to spot the market maker who consistently ranks top of the best bid and ask prices list. Many day traders try to follow in the foot steps of the ax in hopes to gain a higher probability of a successful trade. However, they have a few tricks up their sleeves to try to shake off imitators. One of their most important deceptions is called a ‘fake out’. This is when they place a larger order to buy or sell in order to get imitators to follow suit, only to suddenly remove their order once enough people have fallen for the trick and resume trading in the opposite direction of what they initially pretended to be doing. This is called a ‘fake out’ because it is the opposite of what a ‘break out’ would be. A break out is when a stock moves out of a certain range of price action and makes a new high or low price. No one wants to be late to the party and miss all the action, and as a result, when traders are not careful, they can fall for this commonly played trick by the market makers.
Many day-trading strategies require you to be able to read price actions and decipher what role everyone is playing. If you play well, you can figure out correctly which direction the stock is headed in. In my strategy, I do not get fixated on being able to correctly read the markets. It is very difficult for a rookie trader to do, and requires a considerable amount of focus. Instead, as discussed in my personal strategy details, I prefer to focus on something that is more likely to make or break a trader throughout a trading
Below is a rather informative Level II stock tutorial freely available on Youtube:
