Using Level 2 Screens for Day Trading

Level 2 screens are designed to help traders gauge supply and demand levels so that they can make better predictions about future price movement. Level 2 screens also shine light on trading activity from retail and institutional traders.

It’s important to remember that not every buy/sell order is significant. You do not want to stare at a level 2 screen and try to make sense of every trade. You’re not trying to uncover some secret conspiracy or put together a sophisticated formula for measuring trading activity. You are simply trying to get a basic understanding of the market place so you can predict future price movement.

Supply and Demand
Start by gauging supply/demand levels. For example, if you see 5 sellers looking to unload 1,000 shares each at $5 and 1 buyer looking to buy 100 shares for $5, you can assume that the stock price is going to drop because the supply overwhelmingly exceeds the demand. If these sellers want to unload all of their shares, they’ll have to drop their ask prices to meet the bids of other buyers.

Block Trades
You’ll also want to look out for abnormal trading activity. For example, let’s assume a stock generally trades in order sizes of $2000-$5000. If you see a buy or sell order for $100,000, you can assume there is some unusual interest in a stock (i.e. institutional buying/selling or dilution) and plan accordingly. These types orders are referred to as “block orders” and they can have an impact on trading activity. For example, if a stock is trading at $4.80/share with $2,000,000 dollar volume on the day and there is a $500,000 sell order at $5, you can assume that it may be difficult for the stock to break above $5 with ease.