The Level 2 Price Action Strategy combines traditional price action analysis with real-time insights from Level 2 market data, also known as Depth of Market (DOM). This hybrid strategy gives traders the unique ability to interpret institutional order behaviour while aligning entries and exits with key technical price levels, providing a deeper edge than chart patterns alone.

Most effective in forex ECNs, futures, and equities, this strategy is suited for M1 to H1 timeframes, particularly during high-volume trading hours.

What Is Level 2 Data?

Level 2 data shows the live order book—including pending buy (bids) and sell (asks) limit orders at various price levels. Unlike the standard chart, it reveals:

• Liquidity concentration (where traders are waiting to transact)
• Order imbalances (more buyers than sellers or vice versa)
• Order flow shifts that precede price movement

When combined with price action, Level 2 can provide confirmation, trap detection, and early entries.

Strategy Objective

• Use Level 2 market data to confirm or fade traditional price action setups
• Anticipate breakout failures, reversals, or continuation moves
• Align entries with real-time liquidity behaviour rather than lagging indicators

Tools and Indicators Required

• Level 2/DOM feed from ECN broker or futures platform
• Candlestick chart (M1, M5, or M15)
• Optional: Time & Sales (tape), volume profile, VWAP for context

Step-by-Step Strategy Setup

Step 1: Identify Key Price Action Setups

On the chart, look for:

• Support/resistance zones
• Double tops/bottoms
• Breakout levels
• Pin bars, engulfing patterns, inside bars

Mark these areas as your price action bias zones.

Step 2: Check Level 2 for Confirmation

When price approaches a key level, watch for:

• Stacked orders just beyond the level = likely reversal
• Thinning liquidity = potential breakout
• Spoofing/fake orders = false breakout trap
• Rapid cancellation of resting orders = breakout readiness
• Absorption = large market orders being filled without price moving

Step 3: Entry Logic

• Reversal Setup:
  • Price hits resistance, shows pin bar
  • Level 2 shows large sell orders not getting cleared
  • Entry: Short on confirmation candle close
• Breakout Setup:
  • Price consolidates under resistance
  • DOM shows ask side thinning, bid stacking
  • Tape shows buyers lifting offers
  • Entry: Long at breakout above resistance

Step 4: Stop Loss

• Place SL just above/below liquidity trap or rejection wick
• Use 1x ATR buffer if market is fast
• Exit immediately if DOM flips or order flow reverses

Step 5: Take Profit

• TP1: Previous structure or visible liquidity cluster
• TP2: Round number or next key level
• Trail stop as price moves in your favour using price action or order book flow

Example: EUR/USD M5 Reversal Trade

• Price forms double top at 1.0850
• Pin bar forms with long wick rejecting the level
• Level 2 shows stacked sell orders at 1.0852 and no follow-through buying
• Entry: Short at 1.0845
• SL: 1.0855
• TP: 1.0810 (VWAP support)

Best Timeframes and Markets

• Timeframes: M1, M5, M15, H1
• Markets:
  • Forex: EUR/USD, GBP/USD (with Level 2 access)
  • Futures: ES, NQ, 6E
  • Equities: Highly liquid stocks (AAPL, MSFT)
• Ideal during session opens and high liquidity periods

Optimisation Tips

• Combine with VWAP or volume profile for institutional confluence
• Avoid trading when DOM is empty or erratic (e.g. lunch hours or pre-news)
• Train with replay tools to develop DOM-reading reflexes
• Practice patience—wait for DOM to confirm chart setup before acting

Advantages

• Higher accuracy than chart-only price action
• Real-time validation of support/resistance zones
• Allows earlier entries before full pattern develops
• Useful for scalping, intraday, or short-term swing trading

Limitations

• Requires Level 2 access and screen focus
• Fast-paced – not suited for passive traders
• DOM can be manipulated (e.g. spoofing), so confirmation is essential
• Not all brokers offer true depth-of-market data

Conclusion

The Level 2 Price Action Strategy bridges the gap between visual price patterns and real institutional activity. By combining price action setups with real-time order book insight, traders can dramatically improve timing, reduce false signals, and execute with greater conviction.

To master this strategy and learn how to read the order book like a professional trader, enrol in our Trading Courses and transform your edge from visual to tactical.