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Level I

To make smart decisions, traders need data to understand what's happening in the market, and that's where Level 1 data comes in.

What is Level 1 Market Data?

Level 1 market data gives you the essential information about a stock in real-time. Think of it as the “front door” of a stock's data. For each stock, Level 1 data provides the following:

In simpler terms, Level 1 data is like a snapshot that shows what buyers and sellers are currently doing with a stock. It provides basic information that any trader can use to make quick buying or selling decisions.

Why Do Beginner Traders Use Level 1 Data?

Most beginner traders start with Level 1 data because it gives a straightforward view of what's going on in the market. It's easy to understand and gives just enough information to make trading decisions. For example, if a trader sees that the bid price is increasing, they might interpret it as a sign that demand for the stock is going up, so they may choose to buy the stock before the price rises further.

Does Level 2 Data Exist?

As you get more familiar with trading, you'll notice that the bid and ask prices are important for understanding “market depth.” However, Level 1 data only shows the best bid and ask price – that is, the highest bid and the lowest ask. It doesn't show any additional layers of buyers or sellers waiting behind those top bids and asks. That's what Level 2 data is for.

The Role of Market Makers in Level 1 Data

Market makers play a huge role in providing the bid and ask prices seen in Level 1 data. A market maker is a person or institution that ensures there are always both buyers and sellers for a stock. They constantly update the bid and ask prices so that there's enough liquidity – which is the ability to buy or sell a stock quickly without affecting its price too much.

Advanced Concepts Related to Level 1 Data

For more experienced traders, Level 1 data is just one piece of the puzzle. Here are some additional concepts that work alongside Level 1 data:

  1. Price Action: This is the movement of a stock's price, and traders use it to make predictions. By observing the last price and bid/ask changes, they can spot trends and patterns in price action.
  2. Technical Indicators: Traders use indicators like moving averages or the relative strength index (RSI) to analyze Level 1 data trends. These indicators help traders see if a stock is overbought or oversold.
  3. Spread: The difference between the bid and ask price. A smaller spread often indicates a more liquid stock, making it easier to trade quickly. For high-volume stocks, spreads tend to be tighter.
  4. Slippage: This happens when the actual trade price differs from the expected trade price. Slippage is common in fast-moving markets and can be more predictable if you're aware of the bid-ask spread.

Why Level 1 Data Isn't Always Enough for Expert Traders

For expert traders, Level 1 data can feel limiting because it only shows the “surface” of market activity. To understand the depth of the market, expert traders often rely on Level 2 data, which displays a “book” of multiple bid and ask prices. This allows them to see more about the market's demand and supply for a stock and gauge the momentum and potential future price direction with more accuracy.

In high-frequency trading and day trading, which involve making rapid trades within seconds or minutes, Level 1 data can be useful for quick snapshots but isn't enough for precise decisions. These traders may also look at “order flow,” which gives insights into the number of orders being placed and canceled. This helps them analyze how the stock's price might move in the next few seconds or minutes.

Conclusion

In the world of stock trading, Level 1 data is a critical foundation. It's essential for beginners learning about the market, as it gives a basic view of price, bid, and ask information. As traders advance, they may look beyond Level 1 data to include Level 2, technical indicators, and other data to make more sophisticated trading decisions. But every trader starts with Level 1, as it's the first step toward understanding and engaging in stock market trading.