Observing and making use of 2nd Level Data

[michael3301 3]

These questions are for Andrew or any gurus out there.

 

Question 1:

When looking at the market depth data (2nd level), Andrew said that if you see a large bid, it may be a sign of bearish coming and if you see a large ask, it may be a sign of bullish coming. From an observation point of view, I get it but what is the thoughts and reason behind this?

 

Question 2:

We know that if there is large order going through it creates a support/resistance level at that price right. And if it can break though that price level, it's a strength indication and it will go even faster in that direction. If I am not mistaken in that thinking, would it make sense to set a buy stop or a buy stop limit a few pennies from the large order's price. For example, say that I see a very large order on the ask at $5 which creates a resistance at $5 level, so is it a good idea to place a buy stop/stop limit at $5.01? You know the resistance is valid and exists because you have access to 2nd level data. The idea is to buy when the resistance is broken. What is your thoughts on this?

 

Michael

[Robert H 455]

Question 1: Take a look at class 3, starting from slide 11 (about 23:30 minutes into the video). Basically, the fact that there are big buyers doesn't necessarily mean there is buying pressure. These big bids are at a price lower than the current price (low-balling). So some big player(s) knows the price is weak and wait for it to come to them. If you haven't already, check out the

.

 

Another way to think of it is if you were trying to sell some product wholesale for $1 each. A big buyer offers $0.75 for 500 pieces. Does that give you the impression that there is high demand for your product? If that were the case, big buyers would be taking your $1 offer or even offering more than that.

 

Question 2: Other members have asked this question as well (BUY STOP order above HOD or resistance). Andrew and myself haven't tried it. Normally I watch L2 indicators once I'm already in a trade. If I see a big ASK, then I factor in that piece of information while managing the position. Since I'm already long, the big ASKS indicates that we may be headed toward my initial price target. However, I wouldn't add to my position or consider entering a new trade based on L2 alone. Remember, L2 is only one indicator and can easily turn out to be wrong.

 

There are many problems with trading solely on that one indicator:

1. Where is your stop?

2. Where is your price target? I've seen a stock pop 0.10-0.20 above a big ASK and then quickly come back down.

3. Prices can momentarily break through resistance/support during a live candle and just as quickly come right back

 

Those are my thoughts. I invite you to test in simulator and see if there is an objective strategy that can be defined. Cheers.

[michael3301 3]

As always thank you Robert.  Cheers!