Nasdaq level 2 lesson with graphics.

[Naz]

Nasdaq level 2 move with graphics.

Just remember that if you get level 2 you dont automaticaly become a better trader you have to learn how to use it correctly.That means off a Nasdaq trader who has learnt all the tricks.Otherwise you'll make huge mistakes as you go thru the learning process.This example is for the more serious trader who needs to know what it could do for him.The learning process starts at a very easy and gentle level building up to this level of understanding and beyond.

Here we go,this might be your thought process.

The graphic is a level 2 screen with Arca, redi and island's book imposed into the level 2 screen.

The Stock falls $2 denoted by the -2 arrow at the top.looking for a place to buy.Whose the axe?(who is running the stock) In this case its MLCO and MSCO.Where are they ?what are they doing?

One of them is holding support at 31.60 and both of them are at 31.8 and 31.81.As they are the biggest players in the stock thats where true resistance may hang out.

I'm going to place an order on island at 31.72 for 2000 shares. Now i'll probably get about 1500 shares at 31.68.

I note that i can sell to island and redibook all my stock with a maximum 8c loss if things go bad.Thats my stop and i focus on doing that.If the stock turns, i'm out. Profits look after themselves.

I place an order on island just under MLCO at 31.79 to sell 700.Why do i do this because i'm a scalper and i want my first profit out of this stock.Just incase it turns back down.

As the stock rises its just enough movement for it to appear on graphs as a
support area and the first technical analysis people to enter the fray.Thats probably why MLCO and MSCO are sitting where they are to judge the order flow.The stock moves up to them my order gets filled and i,ve just scalped 11c.

If i can i've just entered a swing play with a scalpers entry,and 8c risk.My risk reward will be huge and i'll just get on and manage the position.

Hopefully the stock goes thru $32 and starts appearing on late players screens as change in direction. Loads of short covering will go on as the stock has fallen $2 and the momentum is fed even more.As my position is now a swing play and i got such a good entry i now trade it with a swing players mentality ,giving it bigger stops and see how it runs.As its dropped $2 it has the potential to get all that back.This would give me $1600 profit.

That is one way how to take a swing play with a scalpers stop and get in before the crowd.

I thought it all looked complicated when i first saw level 2,but you just need to change your perception of how to take trades,think of yourself as a market maker and not Joe Public.I know other players would have different ways in playing this screen,but it is just used as an example.

I hope all this may help some people on the board who wanted to take a more in depth look at what it does.

 

[RogerM]

Many thx for a great post Naz. I look upon this as learning to play chess. Just because you have learned what each piece is on the board, what it is called, and the moves it is allowed to do, it doesn't them mean that you can play chess with even a small degree of proficiency. You will get the best tuition from a Grand Master (GM), but you would be wasting valuable time with the GM if you didn't learn what each piece on the board was, the way it moved, and also a basic understanding of the rules of chess first. This should be a pre-requisite before going to the GM, to enable you to gain the most from the time available. You don't need a GM to teach you that the "horse" is called a Knight, and to learn what moves it's allowed to do. And whilst the GM may be able to teach, only you can learn.

So by now you would be disappointed if I didn't follow up with my customary questions!

You say the "Axe" is MLCO and MSCO. Why? Is this something you know, that you have looked up, or is it clear from the screen? If the latter, how have you identified them?

You say that MSCO and MSCO are the biggest players in the stock. Again - how do you know?

Why have you selected Island to place your bid at 31.72? Is it because the size is in 100's and therefore you need everything from 31.66 to 31.72 to fill your order for 2000? Will your order be filled from lowest price first, or can the fills come in any order and value up to 31.72, which presumably was a limit order?

And what does 90S mean alongside Island on line 4 of the ask?

You say that you can sell back to Island & Redibook for -8. These are both on 31.60 in the green. Why these 2 MMs at this level and not ones higher up, and where there is much greater size in the yellow sector at 31.65 for approx -3?

I think I'm with the rest of the post. Sorry for the blizzard of questions to your every post, but I would be surprised if I am the only one not to know the answers!

Regards,

 

[Naz]

Roger i'll do this quickly because i'm in a trade.

Yes its like playing chess.You can normaly tell who the primary and secondary ax's are in real time on the screen.

Yes the sizes are in hundreds.90s means 90 shares.

If you notice i said a maximum loss of 8c.I would very much hope to make it less than that, but i like to look at the worst case scenario.I'm not silly enough to think the higher bids may still be there when i want to sell.but if i'm quick the ones at the lower level may well be.

I hope this helps

 

[Naz]

During the day i was mucking around in the QQQ's.It was quite slow.After every little pullback i'd buy some on island,then i'd put in another little cheeky price on the bid and grab some more.just scaling in waiting for a 20c run and selling out.

This 4/1 margin giving you so much buying power that its worth using it on a stock thats got loads of liquidity where you can easy get in and get out.Then i looked at all the commissions i was paying and they were mounting up.

So i checked out my list of web addresses and found www.echotradeonline.com.This brokerage lets you pay $1 per 100 shares.There is no set transaction fee.It allows you to scale in and out of positions only paying for the number of shares transacted and not the number of trades.Interesting.

 

[Mr. Charts]

An enjoyable post - thank you Naz.
I don't understand what you mean by a "hidden" trade. Could you please elaborate when you have time?
Do the axes not place misleading bid/offers on the book to suggest false support/resistance? Is there any other way than carefully watching an axe's behaviour on an individual stock all day to guess (and I use that word advisedly) their true intent - and will that not vary continually anyway?
From my own US trading matching L2 and tick charts I've found more reliable trades on Brocade (and a score of other highly liquid long travel range Nasdaq stocks) come from TA moves on nasdaq futures which are then quickly followed by major changes on L2.
I'd greatly appreciate your putting me right on this - though I suspect you will say I'm putting the chicken before the egg

Roger, buy "The Undergroundtrader.com Guide To Electronic Trading" by Jea Yu isbn 0-07-136016-6 if you want to get into this.
Check out the website too.
He seems to trade like Naz - quite an eye opener!
This trade2win is a really quality site - thank you
Richard

 

[Grey]

just a few addition to NAZ'z post
1) Watch the support/resistance on the book. These levels can be artificially set to trap traders.

2) The true support and resistance are Non-local VWAP ( all trades) and not the local one (L2 VWAP).

3) L2 trading is excellent but needs huge exposure to take advantages of Gurantteed Moves.

4) L2 traders are often excellent TA traders. They also look at the OB/OS levels to trade the market.

5)L2 trading is not easy even though you can see other player's hand.

6) Analysis of L2 trades in a fast market is near to impossible.

 

[Naz]

Yes you are putting the chicken before the egg.The trouble with so many people is that they try and run before they can walk,and fall over.They think it dosnt work because they cant see whats happening.

For instance many people trade the screen and dont know that you can hide orders on island.lots of people dont even make sure they get that facility from their broker when they choose their software.

It means you can hide orders so other players cant see them.To tell you the truth 90% of islands players ,i reckon dont know how to use it or dont know it exists.Lots of players just havent done their homework and understand exactly what you can and cant do with island.

I repeat you cannot trade level 2 successfully unless you are taught and practice.

Now on to Jea.I've read the book,traded in the trading room and know one of his traders personaly.

He has his own unique style.If you try and trade with them all in the room without being A1 at using your level 2, you just wont be able to do it.I repeat again you have got to start at basics and learn how level 2 realy works before you start.

For example heres some of his trades for fri.
JNPR +25c QQQ +10 c QQQ + 3c AMAT +25c VRSN +40c MSFT +10c

By the time he calls a stock and you swich into it.You couldnt fully appraise what was happening on the screen and when it was time to get out,your skills wouldnt be fast enough to work out the quickest and best way.

Mind you i've had some great fun anticipating his calls in a stock and waiting for players to come into the stock.I do like his style,because it is very similar to my own.Not for the faint hearted though.Mind you there is more to level 2 than manic scalping.

Finaly, through lack of knowledge to many players fail because they have jumped in feet first without taking it nice and easy and building up slowly with some help.Then the failures go around saying "of course it dosnt work because its all manipulated."

The great thing about it is that there are always so many uninformed people playing it, that its always offering so many oppertunities.

With 4/1 margin and stocks at such low prices relative to last year it is easy to buy 1000 shares in a stock, take 25c (ie $250 profit,bank it and look for the next trade).To buy 1000 shares would now only take $7500 of your own capital for a $30 stock.

Do this a quick four times and you just made $1000.

Some how its just worth having a crack at it.