Janet & John Question About Level 2

[treefrogfarm]

I originally posted this on the wrong section, so apologies to the admin:


I've just subscribed to level 2 data and despite reading all other posts/faqs I'm not really any the wiser.

I understand the screen layout but my very simple question (hence the reference to "Janet & John") is, as a rough rule of thumb and no commitments etc, how is the short term price movement "guessed" at given the level 2 data.

In the very simple world I live in, does it mean that if Sell Depth > Buy Depth, then short time price tends to go down?

Or, being simplistic again, is it the 'V' shaped graph that says if blue line is lower than red line, then short term price tends to go down?

I know that the ultimate answer is "it depends", but a rough rule of thumb would be really appreciated.

Thanks

 

[Xeno]

I originally posted this on the wrong section, so apologies to the admin:


I've just subscribed to level 2 data and despite reading all other posts/faqs I'm not really any the wiser.

I understand the screen layout but my very simple question (hence the reference to "Janet & John") is, as a rough rule of thumb and no commitments etc, how is the short term price movement "guessed" at given the level 2 data.

In the very simple world I live in, does it mean that if Sell Depth > Buy Depth, then short time price tends to go down?

Or, being simplistic again, is it the 'V' shaped graph that says if blue line is lower than red line, then short term price tends to go down?

I know that the ultimate answer is "it depends", but a rough rule of thumb would be really appreciated.

Thanks

Ha, if only it were that easy. In an ideal world, you are correct that sell depth greater would tend to push down prices. However the depth of the market you see at each price are only unfilled pending trades. They can be cancelled or amended at any time very quickly. So, you have no easy way of knowing what trades/volumes will actually be executed. Also, if the depth displaying was only 10-20 on each side, and someone comes along to buy a few hundred over a few minutes, the price will probably go up in a way that was impossible to predict from the initial level 2.

It's a tool that can be useful, especially for picking your own price point, or going in between the bid/offer. It can give you hints in various ways, but if it was highly reliable trading would be too easy (and someone would come in with misleading orders)

Hope this helps.

 

[Stylo]

I am in the same boat. I am not really sure how to use Level 2 to improve my trading. If anyone can provide me with some pointers (or links) it would be appreciated.

 

[BigDeal]

I believe level 2 provides a better indication of the potential movement of a stock based on volumes showing on the buy and sell sides compared to just knowing the current bid and offer. Xeno is right in saying this position can change rapidly though so it's not the holy grail. However I feel knowledge is power in trading, and think an analogy would be like, say, looking under the bonnet at how the engine works rather than just listening to the engine. Of course if used in combination with DMA, then you can also trade inside the spread. This is useful if these are a lot of buys or sells waiting to be filled at the current price and you can get inside it.