Reading the Ticker -- Level II

[alphabeta123]

Guys,

I have been trading stocks and commodities for a while and I am still confused with Level II. Its really good at telling you market liquidity but not so much for market direction. I have actually been noticing the opposite of conventional wisdom -- Level II seems to be a contrarian indicator. Every time I notice more bids (buyers) than asks(sellers), the market seems to head lower and I noticed when the market has less bids(buyers) than ask(sellers) the market rallies. Has anyone picked up on this. I actually haven't seen too many postings on the internet about this behavior.

 

[new_trader]

Do you honestly think trading is as simple as looking at the number of Bids Vs Asks for a clue to market direction?

 

[alphabeta123]

No... but just forgot other things for now and lets concentrate on the ticker: the level II. Has anyone noticed this contrarian behavior?

 

[wallstreetwarrior87]

No... but just forgot other things for now and lets concentrate on the ticker: the level II. Has anyone noticed this contrarian behavior?

Level 2 will tell you nothing if you do not understand the underlying scenario of the instrument.

You need to know what you are looking for, before you can try to see it on level 2

But when you do know what your looking for, you dont need level 2. :-0

Strange.

 

[Shakone]

No... but just forgot other things for now and lets concentrate on the ticker: the level II. Has anyone noticed this contrarian behavior?

Yes, it is quite common behaviour. I wouldn't call it contrarian.

 

[robster970]

If you find out when participants use limit orders, vs market orders then this will help you understand what is going on.

Think of it this way - if you can see that the market is heading up, why would you put a buy limit order in if you wanted to trade immediately and run the risk of not being filled if all the sell market orders have buggered off?

 

[alphabeta123]

Shakone and Robster970 are pointing two major points for this behaivor. When the market, on an aggregate is long, ie were trending higher because of the buying, market participants will naturally place limit orders to exit at a certain price. Hence causing more ask orders than bid orders.

Another reason that could explain the behaivor is its quite common for large institutional traders to place large ask orders to make it seem as if there are lots of short sellers at a certain price, causing other participants to short as well, driving the price lower, only for those large institutional traders to buy.

My third theory, is that since most traders are unprofitable, many of them are therefore always on the losing side of the trade. This causes this contrarian behavior. Hence while the market is rallying you see more asks than bid orders, as most traders are attempting to short the market thinking direction is going to change their direction.