Day traders often think that there’s one tool or indicator that will generate their ‘aha’ moment and send them on the path of profitability.
But that’s not the case…
Trading is about having a full toolbox of tools you put together with your knowledge to start finding consistency.
Think about it this way…
Anyone can have a toolbox with a hammer, drill, level, and square, but they need the knowledge before they can use the tools to build a house or even a shed.
It’s the same with trading.
You can have a broker and a platform and all the indicators in the world… But without knowledge of how to use them, they’re useless.
One key tool traders like to use is Level 2.
So how do you use it? When should you use it? And what are the downfalls?
Read on to find out…
How to Use Level 2
Level 2 is a box on your platform that shows you buyers and sellers and what price they’re willing to pay…
It’s a list of orders waiting to get filled. And it can help you spot whether a stock is bullish or bearish…
If Level 2 shows a lot of orders stocked in the bid column, with prices close to the current bid, that can be a bullish sign. Buyers are lined up to buy the stock.
But if the Level 2 box shows a wall of sellers stacked on the ask column, those sellers can act as resistance and keep the stock from going higher.
Look at this Level 2 example from Melco Resorts & Entertainment Limited (NASDAQ: MLCO). It was just one of Oracle’s winning picks yesterday…
During midday trading, you can see there are an equal number of buyers willing to pay $6.93, as there are sellers willing to sell for $6.94.
But you can see the size on the ask is higher than the size of the buyers. That means sellers are selling more shares than buyers are wanting to buy.
This was taken yesterday afternoon when the stock was trying to get back to the high of day.
But you can see it on the chart it rejected and went lower…
MLCO chart: 1-day, 1-minute candle — courtesy of StocksToTrade.com
When to Use Level 2
Level 2 numbers change fast.
And when it comes to liquid Nasdaq stocks, there are so many games traders and market makers can play…
Orders can appear and disappear. Traders can hide their orders. And traders can cancel orders before they’re filled.
That’s why I mostly look at Level 2 when I’m in a trade…
Before I enter a trade, I’m focused on the pattern, key levels, VWAP, and price action.
But once a pattern has played out and I’m in the trade, then I care more about Level 2.
I care where big buyers and sellers are…
And I want to see if someone keeps dumping shares at a certain price and preventing it from climbing higher.
How to Use Level 2
If you see a big seller on the ask side of the Level 2 box, it might be time to get out.
But you also have to read the price action…
If you don’t see big sellers on Level 2 but the stock is struggling to go higher, someone could be dumping shares with a hidden order.
You can also use Level 2 to help you pick levels to set your stop.
If there’s a big bidder showing on Level 2 after you’re in a position, you can risk just below that buyer.
Because if that big order fills, that means someone is hitting the bid and selling to get out. Or if it disappears, that can mean demand for the stock is gone.
And if there aren’t many bidders below that, the stock will likely go lower.
Level 2 can seem complicated to new traders. If you want to learn more about it — check out this video.
For more in-depth explanations and examples, SteadyTrade Team members can watch all my Level 2 webinars here.
If you’re not part of the Team — join today!
Have a great day everyone. See you all back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade