How to Read Level 2 Market Data & Time and Sales
TL;DR:
Level 2 market data and time and sales (tape) provide valuable insights into market depth and real-time transactions. They’re helpful tools but not the core of trading strategies. Beginners should focus on mastering chart reading before delving into advanced data.
Main Points:
Level 2 shows pending orders; time and sales show completed trades.
Practice reading these for better market understanding.
DAS Trader is recommended for accurate Level 2 data.
Don’t solely rely on Level 2 and tape data — use it to support your strategy.
Today, we’re talking about level 2 trading data and the time and sales window, also known as the tape. These can be very valuable concepts for advanced traders — and often overwhelming for very new traders.
Our advice is to build your foundational trading knowledge first before worrying about how to read time and sales data and level 2 data. Our free video lessons and trading community will help with the basics and with more advanced trading concepts!
Of course, learning about the concepts themselves won’t hurt. Just remember to not overwhelm yourself.
Start with the basics of trading. Once you’re comfortable using them in your own trades, start looking into more advanced topics like level 2 and time and sales.
So, is reading the tape for Level 2 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.
How to Read Level 2 Market Data and Time and Sales Data: Foundations
For some context, here’s a quick review of exactly what level 2 and time and sales are.
Level 2 is also known as an order book. Level 2 trading data shows pending orders from traders around the world. Level 2 tape reading is the process of reviewing that data to learn more about price and market depth.
Time and sales data shows real-time transactions on an exchange. This information includes volume, price, direction, the date and time of the transaction, and more, as Investopedia explains.
There are traders who swear by these sources of data religiously and cannot trade without them. And, there are other traders who think the level 2 market data 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. What I will do today is break down what level 2 and time and sales are, how to read them, 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 market data and time and sales data 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
What do you need to know about level 2 before you start reading the data? Here’s a brief overview.
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.
That means these orders 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 (which is 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. I have them placed right beside each other my chart. It's only when you see the orders from these exchanges going through on the tape that those orders are actually filled in real time.
That's why you hear many traders say that they don't like using Level 2. The orders sitting there could be real or 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. You’ll see those orders disappear on bid or ask or hide their size. These are 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 and understanding time and sales date. Those people are staring at all these numbers, thinking “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 and 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.
One important note here: Velocity and color are very important when reading this data. These two elements are the closest thing to a shortcut for understanding how to read level 2 trading data and the tape.
Just as an example, a lot of red color and fast movement indicates a weak stock. Green color shows the opposite — a strong stock. Consistency of color and velocity is also key.
Our Trader’s Academy, specifically Unit 7 (the introduction to these concepts) and Units 12-16 cover this in much more detail.
What to look for on the L2 and tape
Stacked order
The color blocks we mentioned earlier in this blog come in handy here. They allow 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 because they’re pending but not completed. 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, use DAS trader everyone! I have a link for you to try for free for 2 weeks.
I have multiple brokers connected to DAS and I use it daily. This is the way to go if you want to take day trading seriously. Hands down, DAS Trader is 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 as the only 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.
Wrapping Up with Level 2 Market Data and Time and Sales Data, for Now
Reading level 2 market data and time and sales data 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 are 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 only 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. Think of level 2 and time and sales data as a complement to your trading strategy and approach to decision-making, not the foundation of it.
Which Platform Offers the Best Level 2 and Time and Sales Data?
I’ve already mentioned it once, but DAS Trader is the very best platform for level 2 and time and sales market data. In fact, it’s the best execution platform for trading. Hands down, DAS Trader offers the best and fastest data, including Level 2 and time and sales. Start a two-week free trial with DAS Trader and see it for yourself!
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 a lot of fluff in 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.
