What is Level 2 Data?
Before explaining Level 2 Data, it is important to understand that a graph of a stock represents price actions from the past. Price actions are only displayed on the chart once they have been completed. Even if you look at the 1 min chart, the new candle that is forming comes from completed trades.
Level 2 Data are orders that are still executed, they are in pending state. Level 2 data indicates two elements, the different order prices and the amount of order for each bid and ask prices. Bids are made from buyers that wish to purchase the stock and asking prices are set by sellers that wish to sell their position.
From the information given on Level 2 Data, it is possible to locate big blocks of order on either the bidding or asking side. The bigger the size of the order, the more it acts like resistance/support level. This is very useful for scalp traders to be able to move between bidding and asking prices.
Level 2 Data Example
The following example is a Level 2 Data screenshot of a stock trading between $192.20 & $192.50 at the moment that it was taken. On the left side of the table, the prices are all bids made from buyers that wish to purchase the stock. As you can notice, the bids are lower than the actual stock price since buyers are waiting to buy at a lower than asking price. On the right side of the table, we have the asks from the seller that wish to sell at a higher price than the current stock price.
The size number is set up to display units of 100 stocks. Therefore, size 1 is actually an order of 100 stocks, size 8 an order of 800 stocks and so on. This is a setting that you can change to your liking. Just know that if you put a unit of 1, there can be more than 10 000 orders exchanged every minute depending on the trading volume of the chosen stock. The Level 2 Data will move so quickly that it will be hard to analyze any level.
On the bidding side (left side), the closest order waiting to buy shares is at a price of $192.21 for a size of 100 shares. Following that order, the second price with pending order to buy shares is at $192.20 for a size of 100 shares as well. On the asking side (right side), the closest order waiting to sell shares is at a price of $192.50 for a size of 800 shares. Following that order, the second price with pending order to sell shares is at $192.98.
Now we can say that $192.50 acts as a resistance wall since it has a greater volume. In other words, the stock price will be pushed downward because in order for the stock price to rise up, it will need to satisfy all the 800 stocks that sellers want to sell at $192.50. It is a simple concept of supply and demand. If there are more buyers than sellers, then stock price rises. If there are more sellers than buyers, stock price falls.
As a day trader, knowing how to read and analyze Level 2 Data can help decide where to buy and sell. For example, if I had a long position on the given example, as a day trader I will make sure to sell before the $192.50 level. Since the price will rebound to the downside from there.
Do I need to use Level 2 data?
The answer is no, you can day trader and swing trade without Level 2 Data just by analyzing the chart. Although, learning to use Level 2 Data will help you make even more precise entry and exit points. Level 2 Data is essential for scalp traders since they take position in and out within a few seconds.
Where can I get access to Level 2 Data?
Most brokerages provide Level 2 Data once you sign up for an account with them. Some brokerage might have fees associated with Level 2 Data, others provide it for free. Simply search and verify if your brokerage provides Level 2 Data or not.