Familiarize Yourself With the Level II Screen
See the three separate boxes within the one Level II screen. These vary according to your service provider and are distinguished by color. The details are the same.
Notice the current bid/ask price with total daily volume.
Watch the time/price/number of transacted shares for each trade. This is the time stamp box.
Look at the list containing number of shares, bid prices from highest to lowest with corresponding ask prices from lowest to highest. This box contains the market makers, brokerage companies and ECN's lined up for trades.
Observe the Upper Box With General Information
Track the big picture in this box. Each stock has an average daily trading volume so compare that number with the current amount in this box to determine any increase or decrease in the volume. A lot of volume might mean news is out. Better check for news.
Observe the total shares traded and current bid/ask prices that lets you know real time status of the equity.
Use your favorite website to see the average trading volume. This information is found on many sites, such as yahoo.com. Compare average with current total amounts.
Keep an Eye on the Time Stamp Box
Watch each trade noting time, price and number of shares for each transaction. Every trade for an individual stock is published in Level II stock quotes.
Apply this information to see which way the price is moving and the share size of each trade. If the trades are large in size and the price is moving up then there is greater demand than supply.
Notice closely this momentum of price and share amount. Day trading skills involve quick execution. The market turns when price levels stall out. The time stamp is a good indicator for direction of price. If the price rises to $10 but is unable to move higher then watch for lower price sales signaling a possible downtown.
See the Market Movers in the Main Box
Study all the bids, asking prices and number of shares listed for each participant. One column contains bidding share price and size. The other column has asking price quotes and size.
Track the market makers, brokers and ECN's next to these orders. The advantage is that the day trader sees if the sellers are lining up or the buyers are lining up moving the stock up or down. Remember the side that has the most shares is a good indicator of which way the price will move.
Know the market makers and brokerage firms that are active. It's good to realize who is moving the market. They are listed by letters and not full names. For example: Lehman Brothers (LEHM). All brokerage companies trading on the exchange have symbols. Observe over time to pick out the market maker wanting to unload a large amount of stock. This usually means a downward price movement. Remember the reverse is also true! Download the list at allstocks.com.
Know the ECN's. Many times individual trading activity is routed by a broker or service provider to these automated trading systems. A quick glance indicates who is buying or selling in real time with the direction of price based on volume. See your list to get a feel of which market is active.
Make the trade or decide the risk is too high based on the activity.