Level 2 Quotes in ThinkorSwim – How to read the Level II Screen

 

What is a level 2 screen? How to read the level 2 quotes? In stock and option trading, the level 2 quotes are nothing else than a tool helping traders in understanding the true picture of strength and weakness in a market.

By simple watching the screen, traders may be able to understand if sellers and buyers outnumber each other or if there is a substantial equilibrium between them. In other words, traders may be able to spot the next market trend.

 

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The Level II Quote Display


Level II is essentially an order book for stocks showing a list of the best bid and ask prices from many different market makers and other participants in the stock market. Studying the level 2 quotes can provide you with an insight of the main actors having interest in a stock and a clue of its direction in the short term.

The level II quote screen shows you two pieces of information:

  1. Insight quote, made up of the two closest bid/ask prices on the screen for that market (the order with the highest bidding price and order with the lowest asking price);

  2. Other bid/ask prices that are usually underneath on a level I screen. It displays the prices and the number of shares that all participating market makers and ECNs (Electronic Communication Networks – They stands as computerized order placement system) are willing to ask or bid.

 

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ThinkorSwim by TD Ameritrade is amongst the few brokerage firms offering to its customers easy and free of charge access to the deeper level of information provided by the level II quotes. In ThinkorSwim, you can find the information provided by the Level II screen in a tool called “Trade Grid” .

 

Trade Grid with Level 2 Quotes in ThinkorSwim

You will notice that the Trade Grid is displayed as a color-coded box in which prices are differentiated by colors. This is because each color represent a different price level. By watching carefully the Trade Grid you can track all the movements on the bid/ask sides of the underlying stock of either market makers, specialists and the public.

The general public in the level II screen is usually represented by the symbol ISLD. For the master trader is essential to look at the ISLD because is one of the guide through which he can get the fear and the greed of the public.

On a level II screen you should be able to determine the true picture of strength or weakness in a stock by watching the following information:

  • buyers who outnumber sellers;

  • sellers who outnumber buyers;

  • equilibrium between buyers and sellers.

Buyers Outnumber Sellers – Rise in the Stock Price

When on the level II screen is displayed an increase in the number of market makers or participants willing to buy (bidding side) at progressively higher prices and a decrease in the number of market makers willing to sell (asking or offering side), the market is in presence of an upward momentum with a steady rise in price.

In other words, the price level will grow deeper on the bid size and thinner on the ask side meaning greater buying demand than selling supply. Therefore, market makers and traders will be competing on the level II screen by jumping in front of each other to gain the best position to buy. As a result of this competition, prices will move higher and higher.

 

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Level 2 Quotes on SPY in TOS - Sellers Outnumber Buyers

 

Sellers Outnumber Buyers – Decline in the Stock Price

When on the level II screen is displayed an increase in the number of market makers or participants willing to sell (asking or offering side) at progressively lower prices and a decrease in the number of market makers willing to buy (bidding side), the market experiences a downward momentum with a steady decline in price.

In other words, the price level will grow deeper on the ask side and thinner on the bid side indicating greater selling supply than buying demand. Therefore, market makers and traders will be willing to step in front of each other to exit the market on the ask/offer side. During a downward momentum, the majority of trades will be occurring at the bid price in red.

 

Level 2 Quotes on RL in TOS - Buyers Outnumber Sellers

 

Equilibrium between Buyers and Sellers - Saturation Point

A saturation point is when the number of buyers and sellers on the bid and ask sides has started to equalize and the color bands separating each price level start to be matched.

 

Understanding Strength or Weakness in a Stock

 

The kind of stocks you should trade in looking at level II quotes are the ones having a wide market maker participation at each price level and a big participation of the public. In fact, it is the public’s lack of knowledge that offers you the greatest chance to profit.

As a rule of thumb, the number of market makers queuing on either side (bid or ask) gives you a general indication of the strength or weakness in a stock.

If there are much more market makers on the bidding side than on the asking side, it should normally mean that there are more people willing to buy the stock than to sell it. Obviously, this picture shows a strong market environment.

 

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On the other hand, if there are much more market makers willing to sell (asking side) than willing to buy (bidding side), it should normally mean that there are low prices on the market. This picture shows a weak market environment.

Knowing how many actors are playing in a stock is, in any case, as important as knowing the quality of the actors involved. The master trader must understand in which direction market makers are trading and never try to go against them. This is why market makers have access to huge capitals and, consequently, potentially unlimited order flow. Going against them will help you to easily and fast fritter away your hard-earned cash.

Through the level II screen and the Trade Grid in ThinkorSwim you may understand in which side of the market the biggest players are trading in and choose to trade in the same direction.

 

Related Topics

Trade Grid in ThinkorSwim by TD Ameritrade – How To Analyze the Market Liquidity Risk

 

Flavian Barrett is a self-made stock options trader who is dedicated full time to options trading. He has spent several years mastering the art and science of advanced options strategies and concepts such as options pricing and volatility, greeks and time decay.

In his website www.FromZeroToOptions.com he shares tips, techniques, tutorials and insightful articles and resources options related.

If you want to get instructions on how to place the most rewarding options strategies from scratch! .. go to Options Strategies – The eBooks.

 

 

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4 comments

  1. karen millen says:

    I like you article,thank you very much!

  2. [...] Level 2 Quotes in ThinkorSwim – How to read the Level II Screen [...]

  3. Maria says:

    But where do we locate “trade grid”?

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