I would like to discuss the intricacies and nuances of Level II data (i.e., Level II data order flow). This is a tool that, if used correctly, can empower any trader.

Video about Active Trade orders Book


There are those who prefer trading with the help of charts. In my view, that is not very effective – akin to driving a car with your eyes closed. How far do you think you’ll get that way? Not very far, I’d say. You probably want to keep your eyes open. It’s the same with using Level 2 data: it gives you a good idea of what’s in front of you.

There are a few things you need to know in order to use Level II data to your advantage. Keep in mind that it’s perfectly normal if your monthly gains are modest. The important thing is to be profitable – or at least avoid losing money by breaking even.

Here are the main ingredients that go into the successful use of Level II - "orders book" data:
1. Discipline
2. Money management
3. The use of the right system
4. The ability to find a reliable platform (and avoiding platforms such as MT4)

It looks simple, yet many still fail when it comes to execution. Why?

Well, first of all, a lot of traders don’t understand how the market works. In a nutshell, the market is determined by supply and demand. There’s little more to it than that. Don’t pay attention to chart patterns, fundamentals, and other such things. It’s all about supply and demand. If some news comes out that drives the price of a currency up, what you are really seeing is supply and demand at work.

Supply and demand, however, are driven by emotions. Greed dominates the market when prices are going up; fear takes over when prices are going down. Speaking from many years of trading experience, I have learned one important thing: the key to successful trading lies in the knowledge of other traders’ intentions and in the anticipation of their decisions. It sounds easy, but how can you divine something like that? That is where Level II comes in very handy.

Is the concept of front running familiar to you? When someone gains knowledge of a sizeable order that might have a small effect on the price of a security and puts an order ahead of the sizeable order, the trader taking advantage of this knowledge is engaging in front running. Although these kinds of price moves are inherently small, if the trader does it enough times, the gains start to add up. Yet it happens all the time. If you have ever wondered about those small 2- to 4-pip moves in either direction that precede the bigger moves that follow, you were likely looking at front running in action.

Level II gives you the ability to do the same, but without doing anything unethical or, worse, illegal. It gives you the ability to see what the order flow is like, which means you can see where other traders think the market will move. This is your opportunity to place orders intelligently, betting not on what you think may or may not happen in the future, but on how other traders – who determine supply and demand – will shape that future. You are taking advantage of the general anticipation of what others will do. You need only decide whether it makes more sense to jump ahead of them or to place orders in the opposite direction. The latter should not be underestimated. Whenever someone tells me there is a 100% chance of the market moving this way or that way, I am always happy to take the opposite side of that trade.

FIX API Traidng

I do not recommend the use of the MT4 platform. There is a reason why it has been promoted to such a great extent: the platform favours the broker much more than it does the trader. You should know that just about every decent broker has something called FIX or API. This is for serious traders who are looking for speed in order to accommodate their software and place sizeable orders. If your order routing involves high-frequency trades or large volumes, bear in mind that these kinds of trades have very low latency. There are additional factors at work here as well, but that’s what you should know at this point.

Back to MT4. It speaks volumes that Meta Quotes started to sue anyone trading directly through their servers. Now why would they do that? Why prevent traders from placing their trades without getting reroutes? Is it because of slippage? If you have ever placed 25 lots or more on MT4, you know exactly what I am talking about.

There is a reason why MT4 enjoys an 80 percent market share. MT4 is a place that is easy to use – and where it’s easy to lose. Brokers make it so easy for you to start using MT4 because your losses are their bread and butter.

There are other issues that I will touch upon later. For example, are you able to place orders with spreads? If not, why? Why can’t you have access to the broker’s book so that you can see the market depth for a given security? How and, more importantly, why does the broker conceal big orders? If you place a call to your broker and ask for access to the broker’s order book, do you think you will be given such access? In the vast majority of cases – say, 95% – the answer will be a resounding no. Even if you do get granted Level II, the data will likely be stale unless you’re an institutional trader with a reliable feed and the lowest latency possible. There may be a handful of brokers willing to give you up-to-date Level II access, but their order books will probably be small and will not reveal the real extent of the market depth – you might at best get the first 5-10 market depth levels, which means you won’t see the next 50 or so levels.

You might have a $5-million account. After some two years of trading activity and relationship building, your prime broker might give you access to Level II information. You will then need to figure out what to do with dark pools (i.e., orders that are concealed from the public), iceberg orders, hidden orders, etc.

Your broker is likely not particularly astute when it comes to knowing how the market works. This renders the use of charts almost useless. Support and resistance make for good tools only when you have the benefit of seeing the order flow.
Trading is nothing short of a blood sport; if you don’t pay attention, you will get pounced upon and end up as someone’s dinner. Your task is to find out how large banks conceal their orders. Don’t overestimate the banks; they are not that great. They merely have greater resources and, consequently, greater staying power.

While virtually everyone has heard of COT data and the power it gives to those traders who know what to do with it, even here caution is the order of the day. COT data is not in real time and is typically stale (about a week old or so). Yet even with one-week-old data, you can still make some successful trades. Imagine the gains you could capture if you had access to real-time COT data, with updates every couple of seconds. Of course, differences exist between these two, and I will be sure to talk about them later.

FIX API Trader

You can receive access to forex volume (market depth)  - level 2 quotes and send orders directly to broker via fix api using FIX API Trader.

Fix api trader allows you to use your own mt4 expert advisors and feed them from fix api market data and send orders to fix api broker.

fix api trader software

You can access market depth (level 2)

You can trade not only with your EAs but and manually

you can use limit orders: FOK and IOC

 Video about FIX API Trader

You now have to deal with a bigger problem – that of education. You need to have a good understanding of how Level II works. The problem is that information about Level II is scant. The literature on the subject, whether in paper format or online, is very limited and is likely to be generic at best.
Let me tell you how I place orders.

I might see a large order hit the market. I don’t know whether the order is genuine or not. It might be real, but it might also be used to deceive the market – the trader actually wants to do the opposite of what the order suggests. For example, a trader might place a $400-million buy order one pip below the market to lead the market into believing that the price will go up. As other traders looking to jump on the bandwagon begin to push up the price by placing their buy orders, the trader with the large order establishes a short position to profit from everyone else’s naivety.

It is also possible that the order is real and the trader thinks the market will head north. The goal, then, is to figure out whether the order is real or not.
Most of the time, it’s not very likely that you will see an order of that size. No one wants to show his hand. While liquidity providers have their own order routing systems that conceal such orders from you, we have built a system that allows you to bypass this limitation. I will go into details later.

We offer retail traders buy limit and sell limit orders, as well as buy and sell stop orders. I refer to these orders as “whatever orders.” Let’s say that the market is at $1.35555, and I show an order to go heavy or light at 1.35700. If I place an order to go heavy, this will likely attract buy orders from traders who now expect a spike in the price. If I show a limit order at $1.35300, the price is likely to dip.

When placing orders, I use 5-to 10-pip stops and scale the order out. In other words, if the market moves five pips against me, I take out half of my losing position and let the rest go to -10 pips.

I usually specify my exact targets, which never exceed a range of 3-10 pips. My targets vary and are based on volume.
Should I hear of any rumours involving option barriers, protective stops, and other such things, I will be sure to keep you abreast of these levels.

Keep in mind that barrier options typically expire at 10:00 EST, and the price will usually gravitate towards them.
As for protective stops, they are self-explanatory. They very much depend on the number of liquidity providers or Tier 1 banks that have placed stops at these levels.

How to create your own strategy using FIX Trader

Using fix trader you can create your own trading strategy and improve your existing strategy.  You can obtain the values of volumes of Level 2 from your MT4 EA and thereby enhance any scalping strategy, arbitrage strategy, a strategy based on the channel and resistance lines. Knowing the value of the volumes  can be predicted whether the channel or s/r line will be broken or not.

Bloomberg video about Latency Arbitrage


It is easy to create your own arbitrage strategy using fix api trader or you can buy ready to use arbitrage software

Good luck!

Useful links:

Fix API Trader software

Latency Arbitrage

Hedge Arbitrage (2-legs)

*- In this article we use some materials from forexfactory.com