3 Easy Steps to Reading Level 2 Stock Quotes
Dear Penny Stock Millionaire,
I went over the bulk of Level 2 quotes with you yesterday.
Today we’ll go over the final pieces, like how to read them and how using them can benefit you.
I’ve even got a practical example to help make it clearer for you.
How to Read Level 2 Stock Quotes
If you’ve never looked at Level 2 stock quotes before, you might feel a little overwhelmed.
That’s natural. Once you understand the data flow, however, it can become second nature.
1. Number of Shares the Market Maker is Seeking to Buy or Sell
On your screen, you’ll see the number of shares a market maker wants to buy or sell. It might be listed in full or as a percentage.
In other words, if it says 100 and there’s a multiplier of 100, that means the market maker wants to buy or sell 10,000 shares (100 X 100).
You can also look at the volume bars to figure out position sizes at a glance.
When the bars are long, it means there are big positions in play and that there’s significant price action.
Shorter bars mean the opposite.
2. Market Maker’s ID
Every market maker has a specific identification, or ID. It’s similar to a ticker symbol for a stock.
For example: JPMorgan’s ID is JPHQ.
Then you have the bid and ask prices for the stock, as I’ve already discussed.
When you see a wide spread, you might want to steer clear because you’ll have difficulty trading that stock.
Even if you’re willing to buy it at or near the ask price, selling it for a profit will prove difficult.
Level 2 Screen: Live Trading Videos
Seeing trades live on your screen is fantastic.
If you’ve never seen a Level 2 screen or used Level 2 quotes, you can check out these two videos below:
Level 2 Quotes Examples
Sometimes, it’s easier to understand Level 2 quotes from an analogy.
Here’s an example:
Tom has a box of shirts that he wants to sell for $20 each. Sam wants to buy one of them for $19, Jake wants to buy 3 for $17 each, and Ron wants to buy 7 for $18.
A trade will only occur when a buyer and seller have identical pricing constraints, so the current pricing above won’t generate any trades until someone changes their order or a new person comes in.
Back to our example:
Let’s say Bob is in desperate need of cash and has an identical shirt to sell. He can look at the Level 2 quotes and know that he can sell it for $19. The Level 2 window will now look like this:
So now that Sam and Bob have matching prices for their buys and sells, the trade will take place.
Now that Steve and Amanda have a mutually agreed upon price, a transaction will occur, and the Level 2 box will reflect the instance accordingly.
Every time a transaction occurs, it is recorded in what is referred to as the “Time and Sales” box, which lists the price, quantity, time, and market of the transaction.
This part of the Level 2 window contains basic information about the stock — the SPDR S&P 500, in this case.
You can see that is includes the intraday high/low, the last trading price, the previous trading day’s closing price, today’s opening price, the current percentage change, and the total volume traded.
Now let’s look at the buy side.
This shows the total number of shares investors are willing to buy at the corresponding prices, just like in our shirt example.
The number of shares is divided by 100 for simplicity (the “6” on the top left represents 600 shares).
In this Level 2 window, “39 ARCA 114.01” signifies that within the ARCA network, the best bid from investors is currently for 3,900 shares at a price of $114.01.
ECNs are designed to facilitate trading and will automatically match buyers and sellers that have the same price criteria.
Now let’s look at the sell side.
This area shows us the total number of shares available to sell at given prices.
The structure is identical to the bid side. As an example, “388 ARCA 114.03” signifies that the ARCA network has a total of 38,800 shares to sell at $114.03.
And now the “Time and Sales” box …
You don’t have to have this box showing, but it can be helpful. Whenever a trade occurs, it will be added to this box.
Here is what the full version looks like.
This shows the price, quantity, time, and ECN used in every transaction
It’s common for multiple trades to take place at the same time since there is more than one ECN available.
So why is this helpful? Since these are real-time updates that traders can see, it can help them to better understand what price their securities are worth at that time.
It can also help them analyze in which direction the stock might move.
If there are several orders getting filled on the buy side, this can mean that the stock is heading lower since sellers are rushing to get rid of shares at lower prices.
The opposite can mean that the stock is heading higher.
Benefits of Using Level 2 Quotes
You might be wondering why you should bother with Level 2 quotes, especially if you’re just trading penny stocks based on Level I quotes right now.
The answer is simple: More information.
The more information you have as a trader, the more effective you can become.
I’m successful in roughly 74% of my trades, and not because I’m a stock market genius
It’s because I know how to do my research.
Without Level 2 quotes, I wouldn’t know what the market makers are doing or how the ECNs are manipulating stocks’ liquidity.
Here are a couple other things you can potentially discern from looking at Level 2 quotes.
Strong Support and Resistance Levels
Stocks often trade between consistent support and resistance levels.
When those levels are strong, it gives me a fairly strong indication that a stock isn’t going to break resistance or crack support any time soon.
Of course, the unexpected can happen. But when I see a pattern of strong support and resistance, and when the Level 2 quotes bear out my forecast, I feel more confident in my trading.
When Trends Are Likely Over
Paying attention to trends can potentially keep you out of hot water.
Stocks can maintain consistent trends over long periods of time, but those trends will eventually end.
If you see that market makers are exiting their positions, it’s a sign that the trend is probably over.
Similarly, you might use that information to analyze if a merger or acquisition is about to take place or that some other news has influenced market makers’ positions.
The Bottom Line
Level 2 quotes give you a look at market depth and other information you can’t find in Level I quotes.
You’re actually watching how market makers, well, make the market.
Armed with this information, you can potentially boost your trading confidence, whether you’re trading penny stocks or larger-cap securities.
Talk to you tomorrow,
Editor, Penny Stock Millionaires