Level 2 trading.

Discussion in 'Strategy Development' started by eusdaiki, Jun 21, 2006.

  1. Do you guys think is possible to make an edge based purely on level 2 quotes? I usually use lvl 2 just for fine tunning my entry once I already made a decision, but I ´ve got some friends who claim that you can build an edge purely on lvl2...
    so I wanned to do some research about it and what better place to get started than good ole ET...

    and if anyone knows of any books refering to the subject, please let me know.

    thnx in advance.
  2. Level II is a tool, just like charts, indicators, gut feelings.

    Use it to your advantage.

    Anything is possible no matter what anyone says.

    An edge is anything that makes you money. If you are making money consistently, then you have an edge.

    So YOU CAN develop an edge using Level II, but actually doing it is a different story.

    Books on the information are hard to come by. Best bet is to study the tape like so many others do and learn.

    I do know a few traders who use mainly level 2 to determine trade entries, and is integral part of all their trading, so it is possible.
  3. im sure there are traders somewhere out there that trade purely off of level II information, and their tactics and methodology could be highly profitable, but in my experience i have found the level II to be incredibly devious and misleading. the real supply and demand is different than the perceived supply and demand (what about the traders on the sidelines waiting to enter the market). i use it on a daily basis to sometimes get a better "feel" for the market in general, to essentially fine tune my entries as you had mentioned, but i have also found that it can potentially do more damage than good. you can easily become overwhelmed with the perceived momentum of the level II and decide to liquidate your position (when a clear violation of your stop was not present), only to find out in the aftermath that your attention could have been better served elsewhere. so there are pros and cons with it, as everything else...it just depends on what type of trader you are, what type of system you are trading, and what you are trying to accomplish by implementing it.

  4. L2 became a much less valuable tool back in the mid 1990's when they gave the retail public access to it. So many professionals have automated programs to place and cancel large orders to give the appearance of strength or weakness (orders a penny or two away from the current price)...the people that "taught" this kind of trading way back when have pretty much gone away.

    MM's rely primarily on their own book and they still have an edge because of this.

    Entries and exits must be based on many indicators...premium/discuount to FV, "peer" group (RS) and Market (RS), just to name a couple.


    Don :cool:
  5. Thanks for the replies. I also find level two trading to be deceptive at the least.
    I started my trading using nothing but level two, but at one point I was unable to put in logical terms what I looked for in the screen and after that I was unable to do it anymore...
    I´m usually able to trade anything on instinct for a little time with a profit, be it credits, level 2 trading, or plain momentum; but I need to have a logical aproach to be consistent. Is like I suddenly realize I can´t explain how Im making money and I stop being able to do it...
    So I´m looking for a more rational approach to level 2 trading... :D thnx again everyone.