One of the biggest things I look out for when watching Level 2 screens is large order sizes on both the bid and the ask. A large order on the bid can represent strong support, while a large order on the ask can represent strong resistance. I use large orders on the bid as a confirmation of strong support, meaning that it would be hard for the stock to drop below a certain price level because there is a buyer willing to purchase a lot of shares. This is not fool proof, as sometimes shareholders with large position sizes will use these large bid orders to unload their shares. Nonetheless, having a large order on the bid is better than not having one.

That being said, I pay much more attention to the large orders on the ask, as they can sometimes create a “wall” that is hard to get past. Often times, these orders create intraday resistance levels, which is a sign that the stock may not be able to fully breakout.

So, what exactly is a big order?

The answer to this question is relative to the stock and its volume for the day. I don’t have a golden rule that I use to guide my decisions. Instead, I watch the Level 2 screens closely and see how the market reacts to large order sizes. Sometimes, a “hero” will come in and take out the entire order, allowing the stock to run again. Sometimes, people will take small chips off the ask, without really making a dent. This usually leads to sideways price action. When buyers realize that the price won’t be moving up anytime soon, they sit back and hope others do the work. Often times, the stock will bounce off the newly created resistance level, as investors lose faith in the stock’s ability to move past that price point. Other times, the stock will move sideways for a bit, as new buyers are not as aggressive, but sellers have yet to push the price down. Sideways action accompanies by low volume is one of the biggest indicators for me. If I catch on to the trend fast enough, I will sell my shares. If I don’t sell right away   and the price drops, I will keep a note of where the large order is and sell my shares before the stock reaches that price on the way back up.

Here is a fictional example example based on patterns I have seen in the past:

A stock is trading between 30-50 million shares a day.

Small order sizes are usually 5,000-50,000 shares

Medium order sizes are usually between 50,000 and 100,000 shares

Large order sizes are usually between 100,000 and 250,000 shares.

If someone puts up 250,000 shares on the ask, this won’t be too detrimental. It can be taken out with one larger order or a combination of smaller orders.

If someone puts up 1,000,000 shares on the ask, this is a red flag for me. An order of this size may represent 2-3% of the daily trading volume. It would take so many small and medium orders to take this out, or a few large orders. At this point, I will take a step back and see how the market reacts. Maybe 4 large buyers will take out the block on the ask, but that is not always the case. The stock may rebound of the price level of the large order, as it may seem hopeless to get past it.

Here is an example that popped up on my trading screen as I was writing this:

Screen shot 2014-04-08 at 10.20.44 AM

This example is fairly similar to my fictional example above. There are some small orders between 5,000 and 50,000, medium sized orders between 50,000-100,000 and larger orders between 100,000-250,000.  Notice that there are about 1,000,000 shares available at .021/share. This makes it harder to get past that price level because the sellers over power the buyers. This leaves room for new sellers to jump in front of that order by selling cheaper shares, which can slowly drag the price down, and as of now, that is exactly what is happening. Of course, this stock is trading on exceptionally high volume of 250+ million shares, so the level may be breached, but you get the point.

The reason why this whole phenomenon plays out the way it does is fairly simple. Stock trading is based around supply and demand. When there is more demand than supply, the price goes up, and vice versa. When buyers see that there are a lot of shares available at a certain price (supply), there isn’t as much demand. After all, these shares may be available for quite some time. This means that there is no pressure to buy. Day traders want to buy stocks that will go up fast, so they don’t have to sit on the shares for too long.

It is also important to note that some people take advantage of the psychological phenomenon triggered by these large orders. If a stock price is skyrocketing, someone may place a large sell order on the ask to keep the price down (they may be short the stock). If a stock price is dropping rapidly, someone may place a large order on the bid to create an artificial support level. These buyers/sellers may have no intention to get their entire order filled, and sometimes these orders will be removed when price action changes.

You should always be paying attention to where the large orders are. Sometimes, they will only appear for a few seconds, before being hidden by a smaller order from the same market maker. Level 2 screens are very insightful, but they do not show everything at once. They just show the lowest ask price and highest bid price for each market maker. Pay attention to where the large orders are as they may indicate future support and resistance levels: levels you may want to buy or sell at.