Level II
What is level II market data and how to profit from it?
Level II is what we call market depth. It offers the same type of information as level I, however for the ‘next price levels’.
This means: for the lower price levels at the bid side and for the higher price levels at the ask side.
You can see the level II data by subscribing to this data that is offered by the respective exchange.
What does level II tell us?
This data provides us with the information of where the next resistances are.
When we look at the left side and we see a bid order with a very large volume at price x, we can conclude that x will act as a support level. However we have to be very prudent, this will only serve as a support as long as the selling volume does not exceed that bid order.
The same applies to the ask side. When we see a big ask order, this will function as a resistance. Unless we have a larger buy volume, this resistance will not be broken.
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Pay attention with interpreting level II
Be aware that not all orders that disappear are executed. As you see the lines in the level II window disappear, you might think that all these orders are executed. This is not the case. Most of them will be so, but any trader can cancel his order at any time. As a consequence, some of the disappearing orders will not be executed but just canceled.
On the other hand there are hidden orders. These orders do not show up in the level 2 window, unless they're on top of the list and are being executed. This is mostly done in case of huge orders.
So we can conclude that we have to be prudent with trusting the level 2 information