Level 2

Could someone please explain, what in their opinion, is the greatest advantage of using the Level 2 Nasdaq screen ?

My very humble opinion is that the biggest advantage must be in managing trade exits.

ie. minimising losses by getting out a long time before your stop is activated or taking profit at the right moment, before the price turns against you.

I may be totally wrong in this and that is why I would be interested to hear some more knowledgeable views.

There is not one answer to this question:

Firstly I use it to reduce risk of an immediate losing position at entry. For example, if I want to go Long I look to see if there is a good depth of MM supporting the current inside Bid.

Look at screenshot #1 and what can you see ? Well (boxed in red) there are 19 MM and ECNs supporting a Bid that is only 4c in depth. So my risk on entry if the market starts to collapse should not be more than 4c.

Contrast that with screenshot # 2 of the Bid (apologies for different Level II screens here). In this case we have 23c of range across 13 MM and ECNs. Again if the market collapses you could get hit for a 23c loss very quickly. Without Level II this cannot be seen and it could be much worse as you could have a Bid - Ask spread of just 1c but then a gap of 20c to the next level down.

Secondly I use Level II to give a prior warning of what is likely to happen a few seconds later in the trade. Lets say we are Long again and we are watching our Level II screen and all of a sudden the ECNs disappear from the inside Bid and have switched to the Ask. This warns us that it is highly likely the stock is about to go down so we would get ready to exit before the remaining MM pull their quotes. The same applies to observing how the Ax or key MM are behaving and the quantities that they display as wanting to trade. If say GSCO is sat at the inside Bid with a quantity of 1 (which represents 100 shares) and the Time and Sales screen is showing all red trades (which means that a lot of selling is going on) and he remains there then he is clearly buying all of that stock and the fact he is displaying only 1 is not his true intentions. This would indicate that rather than the stock collapsing in price which is how many people looking at T & S would read it, then GSCO is buying all of the stock to sell it at a higher price. So this would say sit tight because we are likely to move up.

If however, he was displaying an unusually large quantity say 1500 close to the inside Bid then this is done to give an impression that would indicate the opposite of what he is showing. This would be in an attempt to get people to join him in supporting the Bid where he may then be selling lots of stock via the MM known as SIZE or using an ECN on the Ask.

Lastly I use Level II to optimise my exit and may use a specific order to exit depending on what I see on the Level II screen but I don’t want to go into specifics of that here.

Overall I use Level II to reduce risk and loss when wrong at entry and improve profits when I am right at exit. I also use it to not get phased out of a trade that may appear as a reversal on a chart when in fact we are just pausing to make the next big move. This applies to my directional trades only as when I pair trade I do things somewhat differently.


Paul

Paul

That is an extremely helpful response.

Thank you.

Are the above level 2 screen shots examples of Nasdaq stocks?

Do Dow Jones 30 stocks level 2 screens also look like this?

Cheers.

Yes they are Nasdaq stocks and you cannot get the same view for NYSE stocks.


Paul

Where can you get access to a list of MM ID codes ?

Many thanks

I have recently signed up for a free trial of Level II and my intention at first is to use it on a very basic level for the purposes of deciding whether or not to enter a trade after I have identified a good looking set-up.

At the moment all I am doing is the following :-

1. If I intend to go long I am looking at the BID SIDE and looking for a bid depth of around 25 cents to be supported by around 25 market-makers and ECNs. I also look at the ask side where I would want to see the range of the ask to be much greater over the same number of market-makers and ECNs.

2. If I want to go short I am looking at the ASK SIDE and looking for the range of the ask to be around 25 cents across about 25 market-makers and ECNs. Basically the reverse of what I do when I want to go long.

I know that this is very basic but it is a start. What I need to know is whether my thinking is correct and that I am on the right lines.

Or not ??

What is your reasoning behind taking this approach ?

Do your Level II screens allow the incorporation of the Island and Arca books ?

Who is your free trial with ?


Paul

DD - I'm VERY new to LII myself so can't comment directly. But what you're suggesting looks to be at odds with Trader333's post here on 27-10-2004.

If I'm interpreting his post correctly, the cents depth on the bid (if you're looking to go long) is your risk. He is suggesting in his example a depth of 4cents equates to a max risk (if the market turns against you) of 4 cents.

Your plan seems to indicate you'd be actively looking for greater risk?

It wouldn't be the first time I've been confused with LII so perhaps T333 can comment.

Paul & Bramble

My free trial is with Money.Net.

I don't know if I can incorporate the Island and Arca books into my LII screen - even if I could, I don't yet know how. I need to ask Money.Net.

My reasoning is that I am willing to accept a risk of 25 cents on a trade and a bid depth of 25 cents over 25 market-makers seems a pretty reasonable depth of bid and would give me plenty of time to make an orderly exit if the price begins to go pear-shaped on me.

Bramble

Yes, at this point in time I am willing to accept a higher level of risk than that implied in Paul's previous post.

If you are looking to have only a minimal move against you ( eg. 4 cents ), then you have to be pretty damn good and very precise with your trade entry.

This is an area that I am working on but until I get more expert with my entry technique, then I am willing to accept a level of risk of around 25 cents.

Taking into account my average position size and size of my capital pot, this represents a very minimal risk indeed.

DD,

Are you using money.net on its own or via a third party software and if so which one ?

It is not possible to incorporate the Island and Arca books into the money.net screen as is but there are ways of doing it with third party software.


Tony,

As with all things in trading (being a refinement on what I have known previously), I have changed the way I use Level II since experiencing in real time how Grey1 uses it.



Paul

Paul
I am using money.net thru Medved Quotetracker

No problem then, you can open another Level II screen and just click on "Site" and select Island Level II Streaming then open another Level II screen and select Arhipelago Snapshot and set the refresh time to 1second.

You will then have 3 level II screens which is what I have.


Paul

Tony,

I should have said that what I used to do when entering a stock was as I have said in my 27-Jan post and that was to look for support (if Long) down the bid so that I know I can get out at a particular price. As I now trade stocks that have a daily volume of 1.5M or more then the frequency of stocks with poor depth on Level II is less than it used to be for me.

So I tend to pay less attention to that and focus much more on the volume of stocks at particular price levels which is much easier to see if you have the Arca and Island books available. I also look to see what happens (for a Long trade again) when the price moves down to the entry price I have determined.

This is only part of what I do before entering a trade but is the final part of a trade setup.

I hope this explains why my views may appear to change over time. At the end of the day I am as open to new learning as anyone else and if I learn something that I find to be better than I was previously using then I incorporate it into my trading plan. There is every possibility that I will change again in the future as my knowledge and experience increase and I apologise if this creates confusion for others as it is not my intention.


Paul

Thanks Paul. I will get the Level 2 screens up like you have suggested.

Otherwise, do my comments re basic use of Level II make sense ?

Damned Level 2 screen is confusing the hell out of me. Been on a free trial for a week now. I declined a short trade yesterday, even though I got a good strong sell signal - because Level 2 was showing about a US$ 2 range on the ask over approx the top 20 to 25 MMs and ECNs. There were some very large gaps on the ask size as I looked down the list and this frightened me off.
The stock price headed south beautifully and I missed an easy dollar + run.
I must be reading Level 2 wrongly. Maybe I should bin it and just rely on the chart formations and indicators that I use ???

I believe that DD may already have taken some trading tuition including Level II but is still having some difficulty with it ?


Paul