How to Read Level 2 & Time and Sales
- Anthony Speciale
- May 19, 2024
- 3 min read
Hey Trader,
How to Read Level 2 & Time and Sales
Level 2 and time and sales, often referred to as "the tape," can be confusing for new traders. Are they fluff or real? If you’re just starting out in the market and pondering this question, this blog will help clear things up.
Understanding Level 2 and Tape Reading
There are traders who swear by Level 2 and tape reading, claiming they can't trade without them. Conversely, others believe Level 2 is full of misinformation.
I'm not here to tell you whether you should use them in your trading, but I will explain what Level 2 and time and sales are, how to read them, and what you should be looking for. By the end of this blog, you'll be able to decide for yourself if incorporating Level 2 and tape reading into your trading strategy is right for you.
Basics of Level 2 and Time and Sales
On order flow based platforms, you'll find the chart, a Montage window (Level 2), and the time and sales window (the tape). Let’s break these down:
Level 2
Bids: Orders to buy or cover at a specific price.
Offers (Ask): Orders to sell or short sell.
Color Blocks: Colors group bids or asks at the same price, making it easier to see when they are stacked.
Exchange: Letters representing different route exchanges.
Price and Size: Shows the number of shares being bid or offered at a particular price on an exchange.
For example, if there are 1000 shares on Arca, those orders are sitting on the exchange, waiting to be filled. You’ll know an order is filled when you see the transaction printed on the time and sales window, also known as the tape.
Time and Sales (The Tape)
I personally prioritize the tape over Level 2. The tape shows real-time filled orders from the exchanges. This is why some traders distrust Level 2, as the orders there can be fake or canceled, while the tape shows actual transactions.
How to Read Level 2 and the Tape
Adding and Removing Liquidity
Adding Liquidity: Placing an order that waits to get filled, adding to the existing bids or asks.
Removing Liquidity: Executing an order immediately by hitting the bid or ask, which incurs more fees but fills instantly.
Practical Tips for Reading Level 2 and the Tape
Stack Orders
Color blocks help quickly identify potential support or resistance levels by grouping similar price orders. However, remember that these orders might be real or fluff, especially in high-frequency trading environments.
Hidden Orders
Sometimes, a small size on Level 2 may hide a larger order, evident when large volumes appear on the tape at that price. This doesn’t always indicate the stock’s future movement but adds another piece of the puzzle.
Developing the Skill
The secret to mastering Level 2 and tape reading is simple: practice. Spend time observing the market, not just clicking buy or sell. The more screen time you invest, the better you’ll become at interpreting these data points.
Practical Example
If you see a stock approaching a resistance level on the chart and spot a large seller on Level 2 with heavy volume on the tape, it might confirm your decision to short. However, always prioritize the chart’s price action over Level 2 and tape readings.
Recommendations for New Traders
Focus on learning to read charts first!
They provide the most accurate real-time transaction data reflected in price action. Level 2 and tape can be misleading if relied upon exclusively. Use them as supplementary tools, especially at key support and resistance levels.
Conclusion
Reading Level 2 and time and sales is a skill that requires time and repetition.
They are not the holy grail of trading but can be valuable pieces of the puzzle when used correctly. Avoid making trading decisions based solely on Level 2 and tape; always consider the broader context provided by price action on the chart.
By understanding and practicing these concepts, you'll be better equipped to decide if Level 2 and tape reading should be part of your trading strategy.
Happy Trading,
Anthony Speciale
Speciale Analysis
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