Most of what you see on the Level II will not have an affect on the future of the stock beyond a few minutes.
Certain things may repeat over time though.
For instance a buyer may come into the market every time there is a certain amount of liquidity being offered out.
These are things that need to be watched.
But basically most of what you see on the Level II does not have a long term impact on the stock.
Strong buying and selling takes place at the offer and at the bid respectively.
Market orders are especially strong signals when they are happening in large volume and frequency.
When a stock is moving up with strength, it is because the offers are being bought out, not because there is a big bid.
Big bids may cause the stock to move up artificially for a brief time because offers might pull drawing the bids up further, but most indicators such as On Balance Volume or Cumulative Volume Delta will let you know that the stock is not moving up on strength.
Don't get suckered in to thinking that just because someone has posted a huge bid the stock is going to go higher.
Often large blocks of visible stock attract liquidity, meaning other traders will exit their positions on the large buy block.
So what does the Level II do for us then? Well, it can provide with clues as to when to enter the market, as well, possibly give us an extra few cents on our trades if we can read the very short action that is occurring in the Level II.
It can also provide some short term trading opportunities for scalpers.
First off, let's start with how the Level II can help you enter the market.
It is being assumed that you use some other indicators, this would be prudent, but even if you didn't I think you could make money simply by watching the level II for clues as to when to enter the market (but some other indicator is strongly recommended as well).
Your indicators or charts may tell you that it is a good time to go long.
The Level II can allow you to enter the market at a favorable price without ever going offside (being negative on the trade) more than a few cents.
Often when stocks are about to be pushed higher (or lower) "bluffers" will enter into the market, showing strength on the offer side with large volume offers, normally a couple of cents outside the current offer price.
Large offers that pop up outside of the current market price are normally a signal to go the other way (ie.
A large offer pops up outside the current market price should signal a time to go long).
Often these large offers are a last attempt to either get a few more shares long by causing a small panic sell off, or an effort to push the stock down so they can get out of a short.
Either way, if that level gets taken out (and normally they will pull their offer before this happens because they don't actually want to sell and if filled will cause an upward pop in the stock) the stock is more than likely going up because they will now need to buy at a higher price, or they will need to cover their short if they are holding a short position.
Watching this as well as watching your time and sales window (or ticker tape) for the larger prints going off on the offer side can give you a strong indication the stock is going up in the short term.
On the other hand if the current bid (for example, same idea for the offer) is sparse and then starts to see bigger amounts posted on it, this could be a good time to buy at the offer price.
The increasing bid volume may be actual buyers who want into the market but are trying to sneak in at the bid price instead of the offer.
They have shown there is a decent chance they are actual buyers by placing bids which could easily be filled.
And if the price goes up (which you will help do by buying at the offer price) those bidders will be forced to buy at a higher price, making your short term position, or scalp, profitable.
Certain things may repeat over time though.
For instance a buyer may come into the market every time there is a certain amount of liquidity being offered out.
These are things that need to be watched.
But basically most of what you see on the Level II does not have a long term impact on the stock.
Strong buying and selling takes place at the offer and at the bid respectively.
Market orders are especially strong signals when they are happening in large volume and frequency.
When a stock is moving up with strength, it is because the offers are being bought out, not because there is a big bid.
Big bids may cause the stock to move up artificially for a brief time because offers might pull drawing the bids up further, but most indicators such as On Balance Volume or Cumulative Volume Delta will let you know that the stock is not moving up on strength.
Don't get suckered in to thinking that just because someone has posted a huge bid the stock is going to go higher.
Often large blocks of visible stock attract liquidity, meaning other traders will exit their positions on the large buy block.
So what does the Level II do for us then? Well, it can provide with clues as to when to enter the market, as well, possibly give us an extra few cents on our trades if we can read the very short action that is occurring in the Level II.
It can also provide some short term trading opportunities for scalpers.
First off, let's start with how the Level II can help you enter the market.
It is being assumed that you use some other indicators, this would be prudent, but even if you didn't I think you could make money simply by watching the level II for clues as to when to enter the market (but some other indicator is strongly recommended as well).
Your indicators or charts may tell you that it is a good time to go long.
The Level II can allow you to enter the market at a favorable price without ever going offside (being negative on the trade) more than a few cents.
Often when stocks are about to be pushed higher (or lower) "bluffers" will enter into the market, showing strength on the offer side with large volume offers, normally a couple of cents outside the current offer price.
Large offers that pop up outside of the current market price are normally a signal to go the other way (ie.
A large offer pops up outside the current market price should signal a time to go long).
Often these large offers are a last attempt to either get a few more shares long by causing a small panic sell off, or an effort to push the stock down so they can get out of a short.
Either way, if that level gets taken out (and normally they will pull their offer before this happens because they don't actually want to sell and if filled will cause an upward pop in the stock) the stock is more than likely going up because they will now need to buy at a higher price, or they will need to cover their short if they are holding a short position.
Watching this as well as watching your time and sales window (or ticker tape) for the larger prints going off on the offer side can give you a strong indication the stock is going up in the short term.
On the other hand if the current bid (for example, same idea for the offer) is sparse and then starts to see bigger amounts posted on it, this could be a good time to buy at the offer price.
The increasing bid volume may be actual buyers who want into the market but are trying to sneak in at the bid price instead of the offer.
They have shown there is a decent chance they are actual buyers by placing bids which could easily be filled.
And if the price goes up (which you will help do by buying at the offer price) those bidders will be forced to buy at a higher price, making your short term position, or scalp, profitable.