Here's my 2 cents...use a trading strategy that does not involve using level 2 when first trading, however, watch level 2 on each of your trades and watch how the Market Makers (MM's) react to your order, if at all... The best teacher is going to be your own eyes...here's the thing, level 2 shows the bid and the ask of all of the MM's who are making a market in the stock. They are buying and selling stock for me and you, in addition to chunks of stock that they may be unloading for a capital firm who lent money to a company as well as many other sources. As far as I understand it, MMs are not required to maintain a position in all OTC stocks. This means that for some stocks the Market Makers may be trying to make you think they have stock that they don't, and on the other hand you have MMs of other stocks that are trying to make you think that they are not dumping blocks of shares.
Its a game. A mindgame that you have to always, always assume that you don't have the upperhand in because the MMs will always have a big advantage. That advantage is that they are the only ones who know for sure if a dip is for real or just a headfake to scare more sellers out of shares. Sometimes they will take a stock down on buys. Also, when you have a sell order in at the ask, sometimes the market makers will fill it partially to look like a buy to drum up more buyers, when really its a sell.
It all comes down to MM's being the master of the Two Emotions which rule mankind, FEAR and GREED.
Fear and Greed are the two enemies of man in his quest for riches.
Fear keeps people working minimum wage jobs and greed has the average joe buying liabilities instead of assets. (PS if you've never read Rich Dad, Poor Dad, I would highly recommend it. It may cause you to think diffently about money and finances.)
But not to get sidetracked, my whole point is that Level 2 is used to further the game of MM's and specialist, which is to exploit the emotions of fear and greed. Therefore, unless you can learn to interpret what the MM's are actually telling you instead of what they are trying to say, then you will be doing yourself more harm than good. But if you can learn to pick up clues from them, then Level 2 can indeed be helpful for you.
Saying all of that, I would even go as far to say that each stock has a little bit different L2 pattern, its "personality" if you will. I'm speaking of how the MM's react to buying and selling pressure. Normally, the stock's behavior relies heavily on how much inventory of stock the MM's have. You have to watch Level 2 for awhile for each stock in my opinion to see what is going on. I typically use L2 for my exit on stocks more than my entry (which is pure charting for the most part).
That is just a few tidbits...experience is the best teacher;)
AI
