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The Real Use Of Level II      

 

 

 

Important Review:    

Do not use Level II when choosing an entry price.  In other words, WHEN to buy.

Use Level II to your advantage, use Level II for order routing.  In other words, to WHOM to buy or sell.

Level II is constantly used by market makers (and now individual traders)

to "head fake" and hide their true intentions.  You can easily be trapped into a wrong decision by using their Level II bid and ask display.

 

Using Level II properly is a must for successful day trading.

 

 

The incorrect usage: to watch the bid/ask display at each price level for support or resistance and then use that Level II support and resistance to assist you in making a decision on when to buy or sell a position? 

 

I can't tell you enough how INCORRECT this is. 

 

For example, a trader is ready to open a long (buy) position. He or she goes to their level II display and notices  GSCO (Goldman Sachs) , MSCO (Morgan Stanley), MLCO (Merrill Lynch) all on the inside bid with say 8 or 9 other participants, with large size. 

 

The trader thinks "ok I've got support (many offers to buy), and the ax (another term thrown around the internet) on my side, this is a good time to BUY (when)." 

 

They receive their buy confirmation and a few seconds later the  stock starts to fall.  All the big boys have left the bid (buy) and are now on the ask (sell).  The stock is dropping fast and the trader feels  panic taking over. They wonder how this could happen with all the bid support they had upon entering their position.  Well, they've just been had. Welcome to loser day trading.

 

Most of what you see in Level II is about "head faking" and hiding true intentions.  In fact, it's the market makers job to cover their intentions (buying/selling) and to cause price movement in their favor for themselves and their clients. They use Level II for this purpose. That's their business.  If a market maker  has an order to buy 500,000 shares, they're not going to sit on the bid all day.  The whole world would see this and bid the price up, knowing that the market maker would be a buyer. 

 

Instead, they'll play the game. Go on the bid with large size to push the price up a little, maybe even up tick (move their bid up one level) to push the price a little higher.  All the while they're using an ECN, for example INCA, to sell short the shares the unsuspecting trader is buying (thanks Mr. ax).  Then they  move to the sell (ask) side with large size to cause a mini panic. 

 

In this case, the market maker or makers were showing a false bid on Level II.  Instead of wanting to buy the stock they really wanted to sell the stock, which they were doing through INCA.

 

As the panic heightens and the stock drops, the market maker will buy back the shares they just sold you at a higher price pocketing the difference (this is called selling short).

 

You will not see them buying back the stock because they will be buying through an ECN. Very effective, and designed to profit off of traders that look for support and resistance on the Level II screen.

 

Level II should be used  for ORDER ROUTING.  Routing is the ability to choose which market maker or ECN you wish to buy from or sell to.  Never use Level II  as a tool to decide WHEN to enter. Instead,  use it as a tool to decide TO WHOM  you wish to enter with.

 

Let the market makers play their games, pay no attention,. If our price movement charts say GO, we'll use the market makers for OUR advantage, not theirs.

 

Big institutions and market makers trade off of price movement, not the Level II screen, so why should you?

 

In my "Insider Day Trading Secrets, Tips and Strategies Program" I'll teach you the exact secrets the market makers use.  You'll learn how and when to take money  out of the market using their secrets.  Then go ahead and apply those secrets on the herd of unsuspecting online traders.

 

You'll also learn everything you need to know about charts...when, where, how.  Plus loads of other secrets, tips and strategies.

 

Don't be an unsuspecting online trader.  Click YES to learn how to take money out of the stock market.

 

 

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