How_to_Read_L2

Presented By:
Thor Young

About me!
Thor Young – Moderator at BBT and Full Time Retail Stock Trader
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Table of Contents
Introduction – How to Read L2
1. Structure and Breakdown of the Montage
• L1 | Bars | MMID | BOOKS | Tiers | Colors
• Configure Level 2 Layout in DAS
2. Breaking Down the Bid and Ask
• Define the spread
• Select Spread on Montage
• Why is spread so important
3. How to Read the Level 2
• What are lots?
• What are stacks?
4. Good verses bad L2
• Real Estate Prospecting Analogy
• Example of good L2
• Example of bad L2
5. Time and Sales overview
• Colors | Filtering Large prints
• Configuring in DAS
6. Is that L2 Bullish or Bearish
• Example of Bullish L2
• Example of Bearish L2
7. Wall verses a run
• What are Liquidity Levels
• Spotting the run “Example of price busting a wall”
• Identifying a Wall “Example of Price hitting a wall”
8. Use the large players
• Use the L2 to know when to get in
• Using L2 to know when to get out
• How large players manipulate the L2
• What’s an NITF order?
• What is spoofing?
9. L2 scalping
10. Live Examples
• Example of a wall with L2
• Example of a run with L2
• Example of a wall and shorts taking control
• Example of a run and shorts taking control
• Example of an L2 scalp
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Breaking down the L2
layout.
• Level 1 –a type of trading display used in stock trading that
displays the best bid-offer-volume quotes in real time
• Level 2 – Level II will show you a ranked list of the best bid
and ask prices from each of many different market makers
and participants. When orders are placed, they are listed
here, giving you detailed insight into the price action.
• L2 Dynamic scale Bars – Dynamic bars that give visual
representation of the weight of the bid and ask.
• Market Maker ID – ID that let’s you know which Market
Maker and order is coming through on.
• Books – An order book is an electronic list of buy and sell
orders for a security or other instrument organized by price
level.
• Tiers – The number of buy and sell orders that can be
displayed simultaneously and grouped in order by price.
• Color Groupings – Every order from all MMID’s grouped by
price and highlighted by color to help focus on the grouping
or stack.
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Configure the L2
layout.
Tier Color – Each Price tier for up to 7 groups is
given a color to help you focus on larger groupings
of multiple lots of orders from different MMIDs.
Price Format – switching to 2 decimal can really
help clear up the display and with trading mid and
high floats you don’t need to worry about the
fractions.
Lv2 Dynamic Scale Bars – Turn the on by check
marking the setting.
Tier Settings – Set all tiers to 100. This will give you
100 tiers and fill the tiers with the top 100 quotes
from each order book sorted by price.
Lots verse quote size – Uncheck this box if you’d like
to see lots over quotes. I find lots a lot easier to see
and it cleans up the display a lot.
Keep it simple – I only have 3 columns showing
MMID, Price, and size. This information moves
quickly. No need to have to much of it. A lot of this
config is to filter down the information to only see
what we really need.
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bid
ask
What is the Bid and
Ask
• The bid price represents the
highest price an investor is willing
to pay for a share.
• The ask price represents the
lowest price at which a
shareholder is willing to part
with shares.
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What is the Spread and
why is it important?
• The Spread refers to the difference
between the ask price and the bid price.
If the ask price for a share of $ABC stock
is $25, and the bid price is $24.75, then
the spread for ABC stock is $.25.
• The Spread is an incredibly important
variable in stock trading and should not
be underestimated. In risk management
a large spread can equate to massive
slippage if not properly accounted for.
When selecting a stock you can quickly
whittle down your list by using spread as
qualifier. Most stocks in play with good
volume will have a spread that is tighter.
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Configure Montage to
show Spread
While trading you can easily configure your
montage to show the spread at all times.
Simply right click on the option drop down
on the montage and select Bid-Ask Spread.
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How to read the L2
What are Lots?
A lot is a grouping of all orders on a
particular MMID at a particular price. Rather
than see every single order that’s out on the
L2 we use lots. We also use lots to lower the
number of digits we have to read. Each lot
represents 100x that size. So for instance at
the market stack you can see the NSDQ with
a lot of 232 which equates to 23,200 shares.
This does not mean there is a very large
seller at that level waiting to exit a position.
Rather its every order from that MMID at
that price grouped together in a lot. This way
we can see the market more as a whole
rather than get bogged down with to many
individual orders.
232 lot
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How to read the L2
What are stacks?
A stack is a grouping of lots on the L2. When
a bunch of sellers or buyers start to
congregate at a particular level it will start to
stack up. We will often call this out as, “The
ask is stacking at $42.00”. What we are
saying is there are a lot of orders starting to
pile up. Remember not everyone uses the L2
or even has access to it. So this is something
that we can see that many others can not.
Giving us an edge. Notice on the example to
the right you see at 42.00 and 42.01 there
are quite a few orders starting to stack up.
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How to read the L2
Why the colors?
What we are trying to do is group similar
orders together so we can get a feel for the
over all condition of the stock. We have lots
to group similar orders at a price on a specific
MMID. We have colors to help us more easily
identify stacks of lots from multiple MMIDs.
In the example to the right you see at the bid
you have lots from EDGX, BATS, NYSE, ARCA,
and ACB. Being grouped by the color yellow
makes it much easier to identify that they are
all at the same price.
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Good or Bad L2?
Let’s put this in a way that’s maybe a little different. Whether you’ve actually flipped
houses or watched a house flipping show. You will likely be able to relate to this.
Locating a good L2 is similar to how a realtor locates good houses when prospecting for
houses to flip. When you want to buy a house for less and then sell it for more, a key
variable is the market. To judge the market realtors use listings from other houses that have
sold and/or are for sale. For us we can judge the market in a similar way. Our listings are
stocks for sale on the L2 and where stocks sold on the Time and Sales.
If the listings are high enough in real estate and the market is hot. Then the risk is a good
investment and you’ll buy knowing there is a good chance you will be able to sale the
house for more once you’ve put your time and money into it.
A good L2 will have stacks of orders spread out at regular intervals, congregating around
key areas creating liquidity zones. This shows confidence that the market is strong, and
sellers are confidently placing their shares out with little worry they won’t get filled at
some point.
However, if there are no liquidity zones then it’s like looking at a market where no houses
are up for sale. There’s no confidence in the market and it shows the value and demand is
low. Without a good supply of sellers the buyers will have no confidence in the future
value. And because of that the price will need to drop to entice buyers to the table.
To many sellers can dilute the price by creating an over abundance of inventory. Like having
to many houses on the market this will also cause buyers to lose confidence.
A good L2 has an obvious imbalance between sellers and buyers. Where the buyers are
stepping up to the ask but there are still sellers above. Giving buyers the confidence to
keep buying cause they know there is a market for them to eventually sell. This creates
solid consistent moves with consolidation periods as the next line of buyers steps in as the
old line of buyers are selling.
This works in similar fashion for the market but in reverse if the stock is weak. You will
prospect as a short seller looking for liquidity in the market below the price and aim there.
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Example of a Good L2
Here is an example of a good L2:
In a good L2 the main thing you are looking
for is overall structure.
You want stacks of orders at various levels
and obvious action on the stock.
You want an even distribution of the price
down to those orders. Notice that each tier is
incrementing down by .02 which fits since
the stock has a .02 spread. You don’t want to
see large gaps in the price cause this will
show potential inconsistency in the price
action.
We will get into reading the L2 more in a bit.
But for now we will start here.
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Example of a Bad L2
Here is an example of a bad L2:
On the left is an L2 that is bad because there
are just way too many orders. Trying to read
an L2 that is this congested is very difficult
since spotting the imbalance is very difficult.
On the one to the right you’ll notice here
there are very little asks to the top side or
bottom side. Also notice the spread is 3.87!!
As you look down the ladder of tiers you can
see massive price gaps. This stock is very
dangerous and one bad trade on it could ruin
your month.
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Time and Sales
Overview
In order to read L2 you need to at least understand the
basics of the Time and Sales. Before we get into the more
advanced topics lets make sure to understand what you are
seeing as you look at the time and sales.
Remember all transactions are a buy and a sale happening
at the same time. The only relevance is the relationship of
that transaction to the current price on the market.
Lime Green – Orders in this color are occurring above the
ask price. This shows enthusiasm as buyers are willing to pay
slightly more than what the stock is currently worth.
Green – Means normal buying is occurring and the stock is
moving.
White – Means the transaction occurred within the spread.
Most often white orders are fractional orders like $24.512. It
can also be an indication the stock you picked has a large
spread.
Red – Show sellers are giving up and are willing to sell for
less than the current ask price and are now selling on the
bid. This demonstrates a lack of demand.
Pink – Shows sellers are in a panic to sell and have started
selling below the bid. You see this a lot less often but when
it starts I wouldn’t be in a long position.
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Time and Sales
Overview
How I configure time and sales:
Filter for Large order > 2000.
I have two time and sales I run on my setup.
The first one is a normal time and sales but
the second one filters out orders under 2000.
This way I can spot the larger orders. This
helps you focus on what the big buyers are
doing and not getting overwhelmed by all
the small buyer volume.
A quick note: Don’t assume that because the
time and sales flashes green the price is
going up. In fact if a stock is gapping down
man of the transactions will happen above
the price cause a green trail as the price falls.
We need the L2 to be strong, the price
moving up, and green prints.
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What is a Bullish or
Bearish L2
Bullish (strong) L2
After reviewing the House Flipping analogy
you can apply this concept for locating a
bullish or bearish L2.
In the example to the right you will see a
Bullish L2. Like the house flipping example
you can see how the ask has stacks of orders
a variable levels creating zones. (a) Notice to
the lower price on the bids there aren’t as
many stacks or lots. (b) The large buyers are
coming in near the price which shows a lot of
enthusiasm for this stock and a bit of a rush
for the buyers to get in. (c)
c
b
a
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What is a Bullish or
Bearish L2
d
Bearish (weak) L2:
In the example to the right you will see a
Bearish L2. Unlike the prior example you can
actually see stacks (a) and large lots (b) to
the low side on the bid. Forming liquidity
zones below the current price. This
demonstrates a lack of enthusiasm and an
overall need for the price to lower to start
bringing in new buyers.
Notice this time the asks don’t have many
stacks away from the price Just some large
lots pretty far away. (c) Rather all the sellers
are rushing in to cover at the price (d). A
short seller will see this as an opportunity to
sell. Buying back into those liquidity zones
below the price and scalping some easy gains
while everyone else loses money.
a
b
c
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Wall Verses a Run
Liquidity Levels:
When reading the Level 2 one of the main
things we are looking for are Liquidity levels.
As we try and judge if the price is going to
move up or down having these levels are
critical to continued movement up. When
you play an ABCD pattern or a price breakup
what you are often doing is playing the
movement from one liquidity level to
another. As the liquidity at the lower levels
starts to run out the price will move up or
down to the next level. Many consolidations
happen at these levels where large order can
be exchanged by big players.
What exactly are Liquidity Levels?
For big institutions and traders with a need to fill large orders,
finding pockets of enough liquidity is absolutely essential unless
you have a dark pool.
A market’s liquidity has a big impact on how volatile the
market’s prices are. When these big players take positions in the
market, they obviously aim to be filed at the best possible price.
However, given the size of their positions, they need to find
enough counter-forces to fill their orders, and here is the key,
with the minimal amount of slippage. If a big player were to
enter the market at an area of low liquidity, the volatility it
would create would have a negative impact on the average price
it gets. Lower liquidity usually results in a more volatile market
and cause prices to change drastically; Alternatively, if the same
trader were to enter a trade at an area of much higher liquidity,
it usually creates a less volatile market in which prices don’t
fluctuate as drastically, therefore ensuring a better average price
for the entire position aimed to enter. These pockets of liquidity
are often seen as chop or consolidation areas.
So if you get the target of this. What we are looking for on the
L2 is locating the zones and as the price moves from one zone to
the next we will take a position as it rises or falls. We see it as a
pattern with candlesticks. What is really going on is the delicate
balance between supply and demand as large funds try and
move money around for the best price possible. As a retail
trader this is where we can capitalize.
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Wall Verses a Run
Liquidity Levels in a thermal map provided by
“Bookmap”:
The shot was taken prior to the open.
On the bottom you can see a thermal map
provided by Bookmap. This map also has L3
access but what you can see easily is the
large orange bars identifying liquidity levels.
As you look at the chart you can see the
second candle bounced from 91.50 before
moving down to 90.00 the largest zone. The
price consolidated there for about 5 minutes
before starting a lengthy upward trend.
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Wall Verses a Run
Wall:
Now that we’ve defined most of the
concepts, let’s show how to use that idea to
help us judge if the stock will move up or if
it’s going to bounce.
As the stock is moving up or down you will
start to notice a large stack of orders. The
main thing you will notice is there aren’t a lot
of orders above them. As the price
approaches the wall other sellers and shorts
will come out in front of the larger stack of
sellers. Everyone else gets filled but due to
overall market looking weak buyers will stay
out and the price will fall before the large
order can be filled.
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Wall Verses a Run
Wall:
Eventually if not enough momentum can be
gained the large order will drop and then
short sellers and longs panic covering will
further escalate the move down.
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Wall Verses a Run
RUN:
When a run occurs you still have a large stack
you’re approaching but unlike the previous
example you will notice there are other
stacks above that one. As the price
approaches the seller, the price will fall as
before. However, unlike before because the
market looks better bids will step up and
start buying. This allows the large stack to fill
and propels the stock price upward towards
the next stack. This helps create that pretty
lightning bolt pattern we like. As the stock
moves up quickly, then consolidates and then
moves up again. Each time a new set of
buyers coming in with confidence and filling
the sell orders of the prior buyers. This will
continue until the market thins and the price
has to fall back to entice new buyers.
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Wall Verses a Run
RUN:
In this chart you can
see how the L2
from the prior slide
resolved. A nice
breakup through 42
and more sellers
showing at regular
intervals to the top
side with the buyers
coming in strong at
42.
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Wall Verses a Run
RUN:
In this chart you can see a trade I took based
on the L2 information we’ve reviewed. I ended
up getting a great move up to premarket high.
You can see how I took a partial at 42.10 as the
stock surged through that large stack. On the
5min chart you can see I set a target for PMH
and thanks to the L2 I had the confidence to
hold even though the price pulled back very
close to my original entry before finally getting
the rest of the move. At the end we have a live
demo of how the L2 looked on this one.
Also notice as I took partials based on the L2 as
we moved up. Almost the top of every candle
on the 1 and 5 minute charts. This is because I
partial in front of larger orders which cause the
price to pull back before it can move back up.
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Using the Large
Players
When to get in:
You likely recognize a lot of long
signals here which made this a great
trade. Going for a HOD breakout
after testing and holding a previous
daily level. We have a very large
stack of orders at 33.50 and a solid
upward trend and a solid
consolidation as shown by the
Volume by Price. Large orders will
often fade the price but they also act
as magnets to draw the price in. If
there is enough buying enthusiasm
these sellers can cause a massive
pop.
- At the end I will show the L2 on this
trade as it happened and you’ll see
how that large stack was absorbed
by the buyers.
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Using the Large
Players
Take profit ahead of key levels, averages, and large orders. You notice these orders never got filled at $30.00.
In this instance I would’ve placed orders at 29.80 since it was just under the failure point and a lot of orders.
When I partial I like to look for empty pockets in the price. When the price get’s there since there aren’t as many
orders you will have a much fill priority.
When to get out.
When trading the level 2 you have
to remember who exactly has
access to the Level 2. Keep in mind
you pay a good amount of money
to have access to this data.
Commission free traders, Portfolio
Managers, and many Day Traders
using programs without L2 are not
paying attention to this. Giving us
an edge. They are selling at a
particular level cause that’s a
profit target but we can tell they
are there and take profit ahead of
them to get a better fill priority.
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How Large Players
Bully us around
In many channels it’s called manipulation but
for a more relaxed approach let’s call it being
bullied.
Large players know that serious traders keep an
eye on the L2. So they will use their large bank
and margin to try and push us around and stop
us out of positions. The trick is to recognize
these players and use their moves to profit.
One method involves spoofing or using NITF
orders. NITF orders are covered in Andrews
books and are defined as, “No Intention to Fill
Orders.” They are most often put really far away
from the price but in an unusually off size to
gain attention and make speculators think there
is more liquidity in the market than there really
is at that moment.
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How Large Players
Bully us around
Spoofing is an illegal form of market
manipulation in which a trader places a large
order to buy or sell a financial asset, such as
a stock, bond or futures contract, with no
intention of executing. By doing so, the
trader—or "the spoofer"—creates an
artificial impression of high demand for the
asset.
This can happen in any direction and is very
hard to prove. But there are times you can
see it happen.
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How Large Player Bully
us around
The use the reality that we take large partials in front of big orders to their advantages. The
longs will take profit at this point allowing them to push the price down.
You won’t know for sure cause it’s hard
to catch but imagine if you were in a
short position from earlier in the day.
You have some distance still but if you
lose VWAP you will need to get out and
capture whatever profit you have.
However, since you have a very large
account you go ahead and put a limit
short out at 30.00. It’s a massive order
but you have a lot of margin. You don’t
intend for it to fill you just want to
create the appearance of a lot of orders
so the price tops and falls back down.
As longs take profit ahead of the
obvious wall. You will notice the order
starts to decrement even though it’s
not be filled and will eventually drop.
The big give way is when the price gets
closer to the wall and the wall starts to
drop even though no filling is going on.
Here there was plenty of space so
nothing to worry about.
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Level 2 Scalping
Level 2 scalping is not very complicated but
does take a bit of timing. The idea behind
L2 scalping is to use the large bids and asks
as bounce points or magnets for the price.
L2 scalping is where you judge a trade and
asses risk completely off the L2. As per
usual scalping; the goal will be to get a
quick pop and then take off a large part of
the position. Then sell the rest at a key
level. The idea is to use the L2 to create an
extremely small rvr so you can get max
reward out of a small pop but minimize risk
on larger shares.
As you can see $UBER here reversed and
got above 14.80 when a large bid stepped
out at 14.80. I decided to use this bid as
support since it was isolated. The bid held
and I got a nice pop up before a stop out at
b/e on the remaining shares.
At the end I’ll show you a live take on that
and let’s see how it looks.
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Live Example of the price hitting a large stack and running.
33

Live Example of the price topping and starting to fail. L2 shows
the short rush
34

Live Example of the price hitting a large stack bouncing before
move up.
35

Live Example of the price smashing into a large stack as short sellers
take control.
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Live Example of the price smashing into a large stack as short
sellers take control.
We just witnessed that epic battle and here
you can see the result. I traded this one short
and held through the big drop. Such a large
order with so much selling pressure on the
bad catalyst just caused the stock to flush
through.
37

Live Example of the price smashing into a large stack as short sellers
take control.
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Live Example of the price smashing into a large stack as short
sellers take control.
So you saw on this one how the
large order held as it bounce
and we got a nice 2 to 1 rvr on
a quick scalp play. Long was
14.85 s/l 14.79 .06 risk. Got an
80% partial at target of 15.00
and stopped out at b/e with the
rest. Total profit on 1000 shares
taken was $120.00 even after
b/e stop. Total risk was $60.00.
You can hit daily goal targets on
these easily.
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Time for some Question and Answer!!!
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