Prop Traders Use Level II Depth For 80% Of Their Trades

Fundlord

Fundlord

In the following video a prop trader from Futex says all of the traders base 80% of their trades by just looking at level 2 market prices, he also mentioned that one trader he works with was up $13m in one day so I thought he might be on to something.

He explains it a 21-27 mins


I still don't understand it, when I look at the level 2 pricing for EUR/USD I see

No Of Lots In Red, when I hover over it says "sell limit X lots at X price", I assume this is a buyer and I can sell them X lots at the price ? Correct me if I am wrong

I have attached a screenshot below.

2gxfgwz.png


Anyways how exactly do you use this to determine where the market will go ?
 
There are pretty much always huge bids, offers, and constant executions in eur/usd, so I think the information would be less meaningful there.

Also if I’m not mistaken, because there is no centralized exchange for fx, you’re seeing the bids/offer on your particular broker/platform, but not seeing others.

Depending on what you’re trading people can hide and/or pull bids/offers, so it’s not like that information is sitting out there, reliable, and easy to read. It’s a specific skill you improve at with lots of time and experience, and combine with other skills to develop that elusive edge.
 
In the video he gives GBP/USD as an example where a trader quickly makes 2000+ trading 80lots in 5 seconds but I want to understand why he did what he did. The guy in the video doesn't go through it all he really says is "you can see at what levels there is liquidity"
 
Of course you can't determine where the market will go. But by looking at the size available at various prices you can get an idea of how hard it's going to be to get out of your trade if you're on the wrong side, or how far it can easily move if you're on the right side. This gives you a better idea what your risk/reward is like.

For example, a lot of people will send in an order to buy a stock at an even number of dollars. So if you've got a stock and it's approaching the $10 level, and you think it's likely to bounce off that price, you might put an order in just above that level. Then, if it starts printing at $10.00, you can get out of your trade by selling into one of the many old bids at $10.

But anyone would know that $10 was likely to be an important price (i.e. a price where there would likely be a lot of activity). What Level 2 does is give you an idea of what other prices are hiding a lot of bids (or offers). So it gives you another way of detecting the activity of the big guys. And front-running the big guys is how small guys survive in the market (or maybe even make money in it).
 
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