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How Level II Quotes Can Transform Your Trading

Posted on Monday, December 2nd, 2019 by Sean Sechler

How Level II Quotes Can Transform Your Trading

Have you ever heard a trader talking about “reading the tape”? This is a term that advanced traders use to describe looking at Level II quotes. Level II quotes are great for traders because they allow us to get a little more information about the magnitude of the buying and selling of a particular security. They can help us to better understand the price action of a security and assist us in making smarter trades.

If you are trying to take your trading further, you owe it to yourself to explore all of the tools and resources that are available to you. Learning about Level II quotes has a lot to offer, even at a basic level. Below, we are going to help you understand a little more about what Level II quotes are exactly and how they can transform your trading.

Level II Quotes Defined

What is one of the first things we do when we want to learn about a security? We pull up the quote! Quotes tell us things like the real-time bid-ask price, last traded price, and volume. This is information that is always provided in a Level 1 quote. Pretty much every trading platform offers access to real-time level 1 quotes. Level 1 quotes certainly provide us with powerful information, but what if we want to go further? That’s when Level II quotes come into play.

A Level II quote is a way to view the raw trading information for NASDAQ-listed stocks. With Level II quotes, you get an inside look at a list of bid-ask prices from market participants. You can obtain valuable information like the number of shares for each order in the market. It is essentially direct access to see how a specific stock is traded in real-time, which is extremely valuable for active traders.

The Benefits of Level II Quotes in Trading

There are a ton of different benefits traders can expect from learning to read Level II Quotes. Let’s take a look at some of them.

Benefit #1 – Determine Who is Buying

One of the best reasons to use Level II quotes is that they can tell you who exactly is buying. Retail traders and institutional buyers use different market makers to buy and sell securities. If you are looking at Level II quotes and have a basic understanding of how to interpret them, you can recognize which market participants are influencing the price action of a stock. This is extremely useful because institutional buyers have the resources to really influence the intraday price of a security.

Benefit #2 – Confirm Strong Support and Resistance Levels

Technical analysis can help us identify key support and resistance levels, and when we combine that analysis with Level II quotes, we can confirm the strength of those levels. By looking at real-time information in Level II quotes, you can see just how many buyers or sellers are stepping in at key levels. This type of information is extremely useful for active traders and is another example of how Level II quotes can transform your trading for the better.

Benefit #3 – Confirm Changes in a Trend

Every trader has their own unique style and strategy, but the best traders are those that are experts at recognizing trends. It really pays to know when a trend is beginning to gather momentum and when that trend seems to be dying down. This is another huge benefit of incorporating Level II quotes in your trading. You can use Level II quotes to confirm changes in a trend and avoiding getting caught in a trade when a trend reverses. Since you are able to see the bids that are driving prices up, you have an inside look at where things are going. If you are in a long position and notice that the bids are starting to thin out while the offers are stacking up in the Level II quotes, it might be time to take profit or adjust your stop.

The Bottom Line

Level II quotes provide us with a ton of different benefits in our trading. However, remember that you can’t simply rely on Level II quotes alone to make trading decisions. Market makers have clever ways of hiding their order sizes and deceiving retail traders. That doesn’t mean you should ignore Level II quotes entirely. If you combine them with other trading tools and technical analysis, Level II quotes can be a powerful tool that transforms the way you trade for the better.

 

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