How to Read Level 2 & Time Sales
Level 2 and time and sales, also known as the tape. Fluff or real? Well if you are a brand new trader to the market and wondering about that exact question, this blog is going to help you out.
Level 2 and tape reading
There are traders who swear by this religiously, and cannot trade without them, and there are those who think the Level 2 is full of lies, and therefore, never use it.
I'm not here to tell you whether you should use it or not as part of your trading, but what I will do today is break down what level 2 and time and sales are, how to read it, and what exactly you should be looking for there.
After reading this blog, you’ll be able to decide for yourself whether you should incorporate reading level 2 and time and sales into your own trading style.
Alright so let's start with the basics first. On this platform I use the DAS trader platform. This is the chart for UAVS intraday. There is also a box called the Montage window which is also known as Level 2. On the right is the time and sales, also known as tape.
Level 2
Bids- people placing orders to buy or cover at the price
Offers or the ask- people placing orders to sell, or short sell
Color- The color blocks on level 2 don't have a meaning, but they are extremely useful, and important when reading L2. Because the colors group the bids with the same price, or the asks with the same price together.
That's how we know when they are stacked. We’ll talk more about the details later on. So don't worry.
Exchange- These letters represent different route exchanges.
The price number represents the size in hundredths, that's being bid up at a particular exchange.
Example. 1000 shares on Arca.
Once I place those orders in, my bids go on to the exchange and I need to wait to get filled. Keep in mind, all these orders on the left side, the bids, and then asks on the right, are just pending orders. Meaning they are sitting there on the exchange and not filled yet. You’ll only know an order is filled, if you see the transaction gets printed on the time and sales, also known as the tape.
T&S also known as the tape:
I personally care more about the tape than L2 when I'm trading and I have them placed right beside my chart. It's only when you see the orders from these exchanges going through on the tape then those are actually filled in real time.
That's why you hear many traders say that they don't like using Level 2, because the orders sitting there could be real or it could be fake or fluff. You can see a lot of algos or high frequency trading especially if you’re trading large cap stocks.
Anyone can cancel their order that's sitting on the exchange and you’ll see those orders disappear on bid or ask or hide their size, hidden orders, basically showing a fake number on L2. We’ll talk more about that.
Adding liquidity, taking liquidity to the market:
If I were to sit on the bid waiting to get filled. and adding to liquidity I'm adding to the amount of shares bidding.
Removing liquidity - Basically get filled right away. Hitting the bid or ask will incur more fees. Unless its flat rate.
How to read L2 and tape:
So a lot of people always ask me, what is the secret to tape reading, understanding time and sales. Like I'm staring at all these numbers like I'm in the matrix and I have no clue. The secret to mastering reading level 2 and the tape is just to keep reading it. That's it, end of story. It's true, the only way to get good at reading L2, the tape and piecing information together really fast when you’re trading is to actually practice reading them.
There is no short cut here. Again it's all about screen time put into observing the market, not clicking buy or sell buttons all the time, it's the observation that counts.
What to look for on the L2 and tape
Stacked order
Color blocks we mentioned early come in handy. It allows me to quickly see where we could potentially be meeting res or supp. Because it groups the same pricing orders together. Buyers stacked. Sellers are stacked.
Again, that's only if those are real orders, like we said earlier, the orders can be fluff. But it is worth making a mental note. Especially at support and resistance levels. That's why I really hate using the L2 and tape on Thinkorswim. No color blocks, and it's laggy. If you want the best and fastest data, L2 and tape, DAS trader everyone. I have a link for you to try for free for 2 weeks here: https://bit.ly/2Z4CdW0
I have multiple brokers connected to DAS and I use it daily. This seriously is the way to go if you want to take day trading seriously. Hands down the best execution platform.
Hidden big orders
You see a mask sitting on the top showing a couple hundred small sizes, but you keep on seeing thousands of shares being sold at that price on the tape.
That doesn't necessarily mean the stock is going to tank, or the support is going to hold. That's just another piece of information for you. I never use what I see on the L2 or tape to be the reason I go long or short.
Rather, I place more emphasis on what I see on the chart. If the chart looks like it's breaking down, and we’re at a prior support or resistance, so I'm looking to short, then I would look for big sellers on L2 and for momentum to turn on the tape.
Reading level 2 and time and sales is a skill that needs time to mature and you’ll learn it by reading it daily. It’s not like reading L2 and tape is the holy grail to trading. They’re just a useful piece to the puzzle.
Honestly I really recommend new traders to focus on learning to read the chart first and foremost. That's the most accurate price action analysis, that reflects all the real time transactions that's going through on the tape. Because there is so much fluff on L2, you could easily read it wrong and make the wrong buying or selling decisions if you are using what you see on L2 and tape as the reason to enter. I personally put more emphasis on reading price action on the chart. Yes I do read the tape and L2, but I only use that information in addition to price action, especially at support and resistance levels.
They are the best execution platform for trading. Hands down the best and fastest data, Level 2 and time and sales right here guys. But if I'm looking to short a stock, and if I see a hidden seller sitting on an ask with small size but prints going through a lot bigger on tape.
Reading level 2 and time and sales or the tape is a skill that needs a lot of time and repetition in order to understand all of that information, but it’s not that the level 2 in the tape is the holy grail to day trading, they are just for you to know the useful pieces of the puzzle. There’s much fluff of L2 and you can easily read the level 2 and the tape wrong so that shouldn’t be the only thing driving your buying or selling decision.
