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Old 06-22-2009, 10:50 AM   #1 (permalink)
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Level 1 & Level 2

Hey traders,

For this lesson we are going to look at the level 1 and level 2 screens, discuss the differences between the two, and discuss how they can help you with your trading.

For this lesson, we will be taking a look at a live screenshot of my trading platform.

This area is the level 1 and level 2 screen. Level 1 screens provide information such as volume, high and low of the day, percent change, price change, last sale price, open/close price, current bid, current ask, and current spread. Traders can typically customize their platform to display only the information they find most useful.

A level 2 screen, on the other hand, is different than the level 1 because this screen displays inside market data that can only be accessed on a direct access platform. Level 2 screens show the bids -- the people willing to purchase this stock and the highest price they are willing to pay for this stock. Level 2 screens also show the offers, that would be the people trying to sell this stock and the lowest price they are willing to sell this stock at.

Now you might be asking yourself how can I use this for my trading? Well, the information on level 1 is helpful because it is important to know the highs, lows, and volume in a stock. However, most of this information can be provided from just looking at a chart. I personally don't use level 1 too frequently.

As for Level 2, there is much debate over how this screen should be used and if it should be used at all. It is important to realize that the information on level 2 is always changing and is not set in stone. Bids, offers, price, and size can always change without sales being executed. The level 2 screen is often referred to as a "game" because large size trades can utilize it to make a stock look stronger or weaker than it really is. Another important thing to remember about the level 2 screen is that not all bids and offers appear on level 2. If we take a look at my order entry screen and I do a limit order on the Q's for 500 shares, I can select how many shares I want visible on the level 2. This can range from my whole position to none of my position. This enables large bids and offers to be out there without traders knowing so. So we may look at level 2 and expect a stock to break through resistance or below support, but it may never so do because of these hidden bids and offers. I personally do not utilize level 2 too frequently, aside from looking at the current bid and ask price.

Trades should never be based strictly off of level 2 information. It can be used in conjunction with good trading setups, however because much of the information displayed in level 2 is games it is important to acknowledge that it is not a very reliable trading indicator.

For our next lesson, we are going to cover time and sales which unlike level 1 and level 2 is definite and set in stone because it consists of actual sales that are occurring or have occurred.

Until then and as always, good luck with your trading.

Links to Help You Learn About Level I and Level II

Introduction To Level II Quotes
How to Use Level II Stock Quotes for Day Trading | - Free Level 2 Stock Quotes
How Level 2 Quotes Work? Level 2 Quotes

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