Level 2 quotes show the order book, a real-time display of all pending buy and sell orders at different price levels. For day traders, Level 2 is like seeing behind the curtain, it reveals where traders are placing orders and can help you make better entry and exit decisions.
What is Level 2?
Level 2 (also called Level II or the order book) displays the current bid and ask prices along with the size of orders at each price level. Unlike Level 1, which only shows the best bid and ask, Level 2 shows multiple price levels of depth.
Level 1 vs Level 2: Level 1 shows the best bid ($50.00 x 100) and best ask ($50.05 x 200). Level 2 shows you that there are also orders at $49.95 x 500, $49.90 x 1000, and so on. This depth is critical for understanding supply and demand.
Understanding Level 2 Components
The Bid Side (Buyers)
The left side of Level 2 shows buyers waiting to purchase shares:
- Prices are listed from highest to lowest (best bid on top)
- Shows size (number of shares) at each price level
- Represents demand, traders willing to buy
- Strong bid side can act as support
The Ask Side (Sellers)
The right side shows sellers waiting to sell shares:
- Prices are listed from lowest to highest (best ask on top)
- Shows size at each price level
- Represents supply, traders willing to sell
- Strong ask side can act as resistance
Market Makers and ECNs
Level 2 shows which market participant has the order:
- Market makers: Firms obligated to provide liquidity (codes like NSDQ, EDGX)
- ECNs: Electronic communication networks matching orders
- ARCA, BATS, EDGX: Common ECN venues you will see
- Understanding who is providing liquidity can give clues about intentions
Level 2 Display Example
Stock XYZ Level 2 snapshot:
Bids (Buyers):
- $50.00 x 5,000 (ARCA)
- $49.98 x 2,000 (NSDQ)
- $49.95 x 10,000 (EDGX)
Asks (Sellers):
- $50.02 x 1,000 (BATS)
- $50.05 x 500 (ARCA)
- $50.10 x 8,000 (NSDQ)
This shows strong buying interest at $50 and below, weaker selling pressure above.
Using Level 2 for Trading Decisions
1. Identifying Support and Resistance
Large orders on Level 2 often act as support or resistance:
- Large bid wall: Big order on bid side can support price
- Large ask wall: Big order on ask side can cap price
- Watch if these orders get filled or pulled
- If a wall gets absorbed by selling, it shows bearish pressure
2. Gauging Order Flow
Watch how orders interact with Level 2:
- Are market orders hitting the bid or ask?
- Is size being added or removed at key levels?
- Are large orders getting filled quickly?
- This reveals the aggression of buyers vs sellers
3. Improving Entry Execution
Use Level 2 to get better prices:
- Place limit orders at levels with thin supply
- Avoid chasing into thick resistance
- Wait for large orders to clear before entering
- Use hidden orders to avoid showing your hand
4. Spotting Spoofing and Games
Not all orders on Level 2 are real:
- Spoofing: Large fake orders meant to mislead, then pulled before execution
- Layering: Multiple fake orders at different levels
- Watch if large orders disappear as price approaches
- Real orders get filled, fake orders vanish
Level 2 Trading Strategies
Strategy 1: Bid Wall Bounce
Trade bounces off large bid support:
- Identify a large bid order (significantly larger than surrounding bids)
- Watch if the bid holds as price drops toward it
- If the bid absorbs selling and holds, buy near that level
- Stop loss below the bid wall level
- Target prior resistance or 2:1 reward
Strategy 2: Ask Wall Break
Trade breakouts through large ask resistance:
- Identify a large ask order acting as resistance
- Watch for that order to start getting filled
- When the wall breaks, enter long immediately
- Stop loss below the broken level
- Target next resistance or measured move
Ask Wall Break Example
Stock ABC has a 20,000 share wall at $25.00:
- Price consolidates below $25 for 10 minutes
- You watch the wall start getting chipped away
- 20,000 becomes 15,000, then 10,000, then 5,000
- When it clears, price jumps to $25.10
- Entry: Buy at $25.05 on the break
- Stop: $24.85 below the broken wall
- Target: $25.50+ as shorts cover and buyers chase
Strategy 3: Reading Absorption
Absorption occurs when a large order absorbs significant selling or buying:
- Large bid holds steady despite heavy selling into it
- This shows a strong buyer accumulating shares
- When selling exhausts, price often reverses up
- Enter long after absorption with stop below the bid level
Level 2 and Time and Sales
Level 2 is most powerful when combined with Time and Sales (the tape):
- Level 2: Shows pending orders (intentions)
- Time and Sales: Shows actual executed trades
- Together they show both what traders plan to do and what they are doing
- Large prints on T&S combined with Level 2 changes tell the real story
Limitations of Level 2
Understand what Level 2 cannot show you:
- Hidden orders: Iceberg orders only show a small portion of true size
- Dark pools: Large institutional orders execute off-exchange
- Spoofing: Fake orders designed to mislead
- Speed: Level 2 changes rapidly, hard to process in real-time
- Different for each exchange: Fragmented markets mean incomplete picture
Best Practices for Level 2 Trading
- Focus on liquid stocks: Level 2 is most useful in high-volume stocks
- Combine with charts: Use Level 2 to confirm chart-based signals
- Watch key levels: Pay most attention to Level 2 at technical support/resistance
- Be skeptical of large orders: They may be fake until proven real
- Practice reading flow: Takes time to develop pattern recognition
- Use appropriate timeframes: Level 2 is for short-term trading, not swing trades
Common Level 2 Mistakes
- Blindly following big orders: Assuming all large orders are real
- Overcomplicating: Getting paralyzed watching Level 2 instead of trading
- Ignoring the chart: Level 2 should supplement, not replace, chart analysis
- Trading illiquid stocks: Level 2 is thin and unreliable in low-volume names
- Front-running walls: Buying before a wall breaks, then it gets pulled
Track Your Trading Performance
Pro Trader Dashboard helps you analyze your trading results regardless of your strategy. See which setups work best and improve your execution over time.
Getting Access to Level 2
Most brokers offer Level 2 quotes:
- Basic Level 2: Often free with active trading accounts
- Premium Level 2: More depth and features for monthly fee
- TotalView: NASDAQ's most comprehensive Level 2 product
- Check with your broker for available options and pricing
Level 2 Trading Checklist
- Is there a significant order size imbalance on bid or ask?
- Are large orders holding or getting filled/pulled?
- What does Time and Sales show about actual transactions?
- Does Level 2 support or conflict with my chart analysis?
- Am I trading a liquid enough stock for Level 2 to be meaningful?
- Have I confirmed this is not spoofing or fake orders?
Summary
Level 2 quotes provide valuable insight into supply and demand at different price levels. Use it to identify support and resistance, gauge order flow aggression, and improve your trade execution. Remember that Level 2 has limitations including hidden orders, dark pools, and spoofing. The best approach is to combine Level 2 analysis with chart patterns, Time and Sales, and other technical indicators for a complete picture of market dynamics.
Complete your order flow education with our guide on tape reading or learn about VWAP trading strategies.