To Level2 or NOT to Level2?


First, let’s get a definition out the way: Whenever, I use the term “Level2”, I’m INCLUDING time and sales. It’s just easier to say and type “Level2” than it is “Level2 and time and sales”. And I always capitalize it as I think that’s the kind of respect it deserves. Also, this is a blog about DAY TRADING, not holding longer term(s) and/or investing.

About once a month I get into what I refer to as “the Level2 debate” with someone.

Sometimes it’s with a Level2 skeptic.

Sometimes it’s with a newbie who has legitimate and great questions about the tool.

Sometimes it’s with a Know-It-All. And you all know how I feel about them.

Once it was with an E*Trade Platinum guy who was “shocked anyone actually uses that.”

Most of the time, it’s with a struggling trader who just doesn’t understand how to use the tool properly.

I’m writing this blog to help me save some time and energy in the future. Anytime, “the Level2 debate” comes up again, I can simply give traders the link to this and then follow up with them later to see if they have any questions.

Let’s dig in!

Here are some of the most recent questions I’ve received:

Wayne, do you really use Level2?

Absolutely. I couldn’t and wouldn’t trade without it. Here's what mine frequently looks like when I'm ready to push that buy button:

Really Wayne? I thought tape reading stopped working once HFTs and ALGOs got involved in the markets?

Yes REALLY. Of course, HFTs and Algos are involved in the market. There’s nothing we can do about it. As Day Traders we must learn how spot them and adjust our trading accordingly. For me, the easiest and most accurate way to spot them is on the tape.

But isn’t Level2 manipulated?

Absolutely. There are many ways it can seem and feel that way. However, if you learn how to properly read it, you can actually learn how to “see” this manipulation more often than not. Hidden sellers? I see you. Algos? I see you too. Once you learn how to spot it, you simply adjust your trading.

Wayne, Level2 doesn’t show you everything so what good is it?

You’re 100% correct, Level2 doesn’t show you everything. But what tool does? Your chart doesn’t show you everything, but you’re still using those. There is no perfect tool. For me, trading without Level2 would be like driving a car blindfolded. Sure, I might still get to my desired destination OK, but I’m much more likely to hit something or someone on my way there. More on this driving analogy in a bit…

Wayne, what’s your edge in trading?

Using Level2 and reading the tape to confirm what I’m seeing on the chart.

Wayne, what’s more important, the chart or Level2?

Personally, I ALWAYS START with the chart, but I actually put MORE (way more) emphasis on Level2. However, if you told me I could only trade with one tool, the charts OR Level2, I would actually choose Level2.

Why do I think this way? Why do I put so much emphasis on Level2, especially compared to so many other traders out there?

My answer here is simple. But first, you must understand how I fundamentally view the stock market and day trading. For me, it’s about supply and demand. Econ101. As a Day Trader, I set aside 99% of the fundamentals and rely solely on the technical. I simply look for intraday supply and demand imbalances. We call those potential Inflection Points. Since I’m severely long biased, I get involved in a trade whenever I see demand just about to take out the supply. My favorite situation is a severe imbalance with large sellers on the tape. Think Walmart only having 50 of those Black Friday Special TVs but there are 500 people in queue outside for them. That’s when I step on the gas.

The charts can point me in the right direction, but I can only “see” those imbalances setting up by using Level2 and reading the tape. In a sense, I use the charts to get me to the right stocks, but from there it’s all about Level2. If I only used the chart to find these imbalances, I would almost always be late on my entries. We firmly believe that nailing the entry is key.

For those who only use charts, let me try to convince you another way that maybe the Level2 tool should be in your arsenal. Your charts are populated with the data from Level2, specifically the prints in time and sales. Your chart will not move until there’s a print. Now, you can guess using the chart where the next move will be. You can also use chart studies, indicators, trend lines, etc… Even VWAP! Those that truly know how to use these types of tools can make very good educated guesses too.

However, what your chart will not show you is some BIG seller(s) trying to unload shares above your entry. Sure, at times, you may get lucky and those sellers will accidentally line up with some random line, level, price, and/or indicator on your chart. But that’s just luck when it happens. Your chart resistance isn’t really what showed you that. Nor will your chart show you some large buyers trying to scoop up shares (thus adding SUPPORT) below where the stock is trading now. Sure, once in a while those buyers will line up with one of those lines on your chart.

Back to the driving analogy and we’ll even leave the blindfold out of it:

Imagine this: You’re driving a car on a dark, winding and dangerous road that you’ve never been on before. You have 2 options:

1: You can use only a map and the road signs to navigate it.

2: You can use a tool that will look down the road and show you things you can’t see on your own. This tool can spot and bring to your attention a deer, a tree, a person or countless other roadblocks long before your eyes can. It can see way down the road even around the curves and detect things you can’t. Plus, you still get to use your map and all the road signs!

Which option are you going with?

I’m going with option #2.

Wouldn’t you use this tool? I certainly would and I think most rational people would too.

Now keep in mind this tool isn’t perfect. Nothing is. It can see further than you can, but it can’t spot the deer that leaps out the woods the very second you’re driving by. Nor can it detect the bubble in the sidewall of your tire that suddenly bursts. Nor can it know that deer may move out of you way long before you get there. The tool is extremely beneficial to your driving but it isn’t perfect.

Well, when it comes to trading, that tool is Level2. That map and road signs, that’s your chart and all your fancy indicators. That deer that jumps out of the woods is a seller that shows up out of nowhere. The tire that blows out, hidden sellers. The deer that moved, that’s your spoofing. All that said, wouldn’t you rather SEE it than not? I would and that’s why I use Level2.

I hope this analogy helps.

Keep this in mind: Level2, if read properly, can actually show you those hidden sellers. Not to mention that proper risk management combined with reading the tape will make sure you’re not harmed when that undetected deer jumps out either. Proper risk management is like your seat belt, air bags and every other safety feature of your vehicle.

My larger point is why wouldn’t you use ANY tool that can help you?

When it comes to trading, Level2 is really where everything is happening. Your charts are just graphical representations of what already happened. Level2 can show you what’s on the road right in front of you and way more accurately than any chart can. Using only the chart is like driving using only the map. Sure, if you know how to read it properly it can show you where to go. Hell, those road signs may even help too. But it’s not going to show you the deer standing in the road around the bend. Level2 shows you exactly that. Maybe I’m crazy but I want to see that info before I put my hard-earned money at risk in ANY trade.

Tell me again, why wouldn’t you? It doesn’t really cost you anything either. Sure, it will cost you time to learn but I would suggest that’s time well spent. Honestly, I think that’s the biggest problem, especially with the Level2 skeptics. They never truly learned how to use the tool. Reading the tape and using the tool properly is harder than using most other tools. It’s way easier to draw lines on a chart or better yet have some technical indicator drawn for them. They used the tool the wrong way a few times, it cost them some $$$ so they threw it out the window and went back to drawing random lines on charts. Or they think because it doesn’t show them everything, that’s it’s not worth using. Remember, no tool, including your chart shows you everything.

So, if this doesn’t convince you that Level2 is a must-use tool in your Day Trading arsenal, let me try one other thing. If you care at all about risk management (and you should since it’s your #1 priority as a Day Trader) you MUST use it. Why? The ONLY way to calculate your real risk in any trade is to understand the liquidity of the stock. And the only place to see present and future liquidity? Level2. Sure, your chart shows volume and if you’re good and reading candles you can even see liquidity issues in the past. But what about the liquidity RIGHT NOW? The charts don’t show you the spreads either. And without seeing the spreads there is absolutely no way to calculate your risk properly on ANY day trade. Not to mention once you learn how to use Level2 properly those spreads can actually HELP YOU and give you an edge.

I hear something like this all the time: I’m not trading $XYZ those spreads are crazy!

Usually when someone says that, I say I’m absolutely trading $ZYX because I’m seeing an edge in those spreads. Again, traders just haven’t been taught how to properly read and interpret the information. Spreads aren’t scary. Rather, they’re edge if you understand the liquidity and can read the prints.

One other problem that comes up is traders will use Level2 without really understanding the data they are looking at. Their broker tells them it’s “full book” but most people don’t realize there’s more than one book the way most brokers define it. Even some brokers “montage” still doesn’t show every full book out there in all tiers. So, they use their Level2 which isn’t showing them everything they could be seeing. As you can imagine, they get frustrated very quickly and blame Level2 rather than the crappy data from their broker.

One must understand the data they are getting from their broker. Is your current broker showing you full book? Are you sure? Which ones? All of them? Any of them top of book only?

Let’s put this into a picture to clarify. If, in order for you to see all the books, your Level2 looks like this, I get why you don’t like the tool:

There you have it. My take on why every trader should use and prioritize the data in Level2. Even if I only convince one skeptic out there to go out and learn how to use the tool properly, the time I spent putting this together was well worth it. If you’re convince, then go out there and learn how to read that tape! If not, have fun with all those random lines and indicators on your charts! Hope that VWAP thingy works out for you in the long run.

Thanks for reading! Questions? Comments? Drop either below or reach out.