Market chat

[Naz]

We've been having an exchange of views on another thread.but i'm bringing the argument overhere and going to see if we can look at things a liitle more logicaly.

Of course its on those same old topics US vs UK trading(NL2 v t/a).Trader Pattern and myself are always praising Nasdaq level 2 and of course the majority of people on the bb trade UK stocks or they spread bet indices.

Now of course things can get a bit heated because we all stick up for our own form of trading and as trader pattern says passion can sometimes sound like anger.

So calming it down.Lets look at things.Many of us may have first looked at fundamentals and then moved on to t/a because price changes dictated a movement in a stock and this could be easily shown on a graph.therefore with certain analysis of the price movement we could hopefully recognise patterns that repeated themselves and profit from potential moves.However we were always stuck with an antiquated trading system that operates here in the UK.

So some of us disgusted at being totaly ripped off in the UK looked to the US. (as a side note i wanted to buy a UK stock recently and the spread was 23p-27p can you see why my blood boils over at the sheer exploitation and monopoly that these market makers have here.)So even if you follow t/a you can still find yourself in an impossible position if you want to trade.

In the US in the 90's there were court cases where Nasdaq market makers fought to keep their monopoies and failed.So what happened was that that instead of a 23-27 spread.i could then come in and be a market maker myself and offer to buy from anyone in the market place at 23.1 and sell at 26.9.

So joe soap in Arizona or London didnt have to transact with a market maker he could deal with me.Now the monopoly had been crushed, the spread steadily collapsed and i would suggest it is now 24.98-25.02.This hugely benefited normal investors and traders.You can see why the market makers fought tooth and nail to stop it happening.

However the openess of this system also allowed people to view how everyone wished to take their trades.So this could be used to anticipate where the possible direction might be heading before it took place.There was also the added ability to trade with anyone who was making a price in lightening quick electronic executions.

This is a simple version of events.Now the UK still operates a monopoly and robs UK traders blind no matter how they trade.They also will not allow US brokerages to advertise their level 2 systems overhere.I wonder why?So it is left to some of us who have discovered trading on the Nasdaq to extoll its virtues.

Some of us have become very streetwise at trading it and it may sound as if were a bit aggressive about trading it.But it is truly an opertunity for anyone what ever style you trade.It truly might be worth checking it out because it can save you THOUSANDS upon THOUSANDS in trading costs compared with the UK and if used correctly can give you an enhanced view of the market.You find you are not blind anymore, the action is there infront of you.

It should not truly be seen as one style against another although NL2 does i feel offer a window on a stocks possible move,but an example of a free and open trading system.Which unfortunately cnnot be said of the UK.

This of course is just a personal view.

 

[Naz]

Well we got a bit carried away at the weekend on the other thread talking about Nasdaq level 2.However its generated a lot of e-mails to me which i've enjoyed responding to,please keep them coming.

I would like to say that i was interested in Chartmans thread which gave a very good overview of everything.I liked his analogy of not liking cars with an automatic gearbox and now he's changed, finding it a dream.I was also interested that he is convinced that the problem is fear of the unknown.

I know that NL2 is not for everyone but if you want to ask those personal questions i'm always available for a chat on [email protected]

Please if you want to look at it further think about learning it from guy's that street trade it,because we tell you how its realy played and those things dont appear in any book.Call me!

 

[neil]

cybertrader

Well, I've downloaded cybertrader demo to watch the NL2 beast for a while. OK I admit it, the subject has grown on me and I must learn more about the beast since I have met avid UK based traders of US markets.

Neil the nearly converted

 

[Naz]

Right lets talk about the naz level 2 screen and get rid of some unknowns.(From a true trade just recently on ebay)Not a scalp.

I looked at the graph of the stock and saw where the previous days support was and then turned it off and looked at the level 2.

The stock opened the day and sold off down to the previous days support.Now how did the players react at this level and who was in control and how manic are all these newbies on their ECN's.All the time you can sit and wait and gather in information waiting for the time you want to pounce.The stock bounces from support and then gets driven back down to test it again.The possible entry is going to be on the pullback.It pulls back and Goldman the ax steps in buying the stock.I'm in with Goldman he's my man because i've been watching him.

Yes i'm right up we go.I dont need a graph to see the pullbacks i need to see if Goldman supports the pullbacks and how utterely mental the ECN's are.Yes up we go stair stepping with Goldman.

Then after about $1.25 rise he holds a pullback level and when other players go for the next run he stays put.so the breakout fails and runs down to him.He stays put so everyone's happy and the ECN's jump infront of him again and it looks like were going up but he just dosnt want to know.Down we come to him he drops his bid and i'm out because he is my stop.

He then flicks and becomes a seller.I short the stock because so far all the way up he hasnt been playing games so i'm going to give him the benefit of the doubt.You guessed it down we go all the way to where we started and i bank another $1.25.Then for interest i have a look to see what all that trading looked like on a graph.

Nice and simple no manic trading but just sitting back and watching the play on the screen to get the feel of the game being played out.

This is a simple way once learnt to play the screen.The trick is to undersatnd evrything that is going on.Because no two days are the same ,no two stocks trade the same,but experience will give you the information to trade like a panther watching and waiting for signals before pouncing on your prey.

If you want it gentle simple relaxed its there,if you want it manic,aggressive then its also there.You pick the style you find it easiest with.However whatever your style you have to learn what is actualy going on and this is where the learning process happens.

 

[neil]

Naz

Naz
Excellent post and easy to follow.

Neil

 

[Naz]

Very Quickly.Trading Ebay today,now on the open,i buy the stock because it takes out the high of the previous day and we run for about $1.50

Pure momentum but it starts loosing momentum so i sell half i'm just about to run with the second half and bang whose there on the ask at resistance Goldman.Thats it, in one order i close out the long position and go short for the run down to the round number and take 40c.

Why was level 2 so important to me because i'd traded it on a different day and knew how important Goldman could be.This time he played it differently but he gave me a short term top and a short for 40c.All the information you get day by day feeds into knowledge on how your stock trades,and all this info is staring you in the face on your level 2 screen.

 

[Naz]

Lets imagine that now you are a trader that wants to take things a little more slower on Ebay.You take the same information and when Goldman called the top which he surely did when this post was made.You take the short because you are waiting like a panther stalking your prey and with direct access you nail it about 10c from the exact top.The scalper takes his 40c,but you have different trading ideas.

With fantastic risk/reward charactersitics you gently meander your trade lower and because of your superb entry you can easily manage your position.At the time of posting this, the gentle meander down had made a maximum profit of $1.30(thats $1,300 profit on 1000 shares)

Here are two different ways and time scales of taking the same information but applying it to two different trading styles. One fast and furious and one a lot slower.

The key for both trades was that Goldman nailed the exact top,not a graph,GOLDMAN SACHS.Direct access meant any order to take advantage of this knowledge was taken in the blink of an eye.That was the morning move for ebay that profited two sets of different style Nasdaq level 2 traders their profits.

I've just done this today after all the weekend talk to show how two styles out of many, can be used on NL2. The fast trader who liked the action(ie me) played it first and then handed over to another trader who was prepared to take things slower.Its not perfect but it was real action from today.

 

[Spamula]

Ebay & NAZ

Hi Naz,

Interesting how you talk about following Goldmans moves on level 2 , Goldman helped you call the top by joining the ask. Do you ecspecially look at the bigger market makers in there hand at determining where the stock goes and do you focus only on particular market makers for certain stocks? Did GS stay mostly on the bid while the price was moving up and then suddenly move over to the ask or was he in and out?

Also the practice of shorting do you borrow the stock from the broker or the market maker and sell it off straight away, then have a contract to replace those shares at a later time with shares you have hopefully purchased at a cheaper price. Please explain short selling.

I also have a interesting stock for you to watch CWON check out the 12 month.

Regards Sam

 

[Naz]

Hi Spamula,

Iniitialy ebay took out the high of the previous day and my only first thoughts were which order to use to get in.Because i could see the momentum was for real. As the momentum ran it was so strong that to be honest i was just watching my p&L running up and smiling. Then when it started hesitating near the round number i started to try and find if anyone was running the stock,playing games or anything at all.

At that time my stop was 20c from the action and i had my plan for an exit i knew which order to use and who i was going to hit(this obviously kept changing as the action changed).When it ran over the round number i sold half when it dithered.Then MSCO looked like he might be in control and was prepared to take it further.(Yes it is more important to see what the larger market makers are up to)

Finaly i could see the resistance at the 50c level on the level 2 screen and i was interested at how we were going to attack it.Then all of a sudden Goldman appeared in the area for the first time and his moves were not a fake they were for real.As i've played this stock before i know that Goldman has played the ax,i know how importanat he has been before at signaling tops.This is good enough for me.

So in one order i sold twice the stock i owned this meant that the first half that was sold was mine and the second half was electronicly borrowed from my broker.The net result is that i'm the same amount short.Where are we going to run to? Well the best guess is down to the round number.That was my plan my stop was just over the high that Goldman signaled, and when we reached the round number i offered to buy the stock to cover my short on the bid,saved the spread and some kind soul out there in electronic land sold to me(ie i acted like a market maker)

Now the fact was that i used information from reading the stock on a different day to make use of it again.Goldman had called tops before in this stock , people that knew sold, others that didnt know sold when the price action started falling,The drop in price action from these decisions then appeared on a graph.Do you see how you can be behind the action if you were looking at the graph of the stock and not the level 2 screen.

---------------------------------------------
Selling short.(This is just an easy way of explaining it for people,please dont take it literaly)

I think the stock is going down so i sell say 1000 shares of stock i dont own.It is electronicly borrowed from my broker.When i sell it i receive say $60,000 and this goes into my account..At a later stage in the day i see that i can buy back the same 1000 shares for $57,000.

So out of the $60,000 i've put in my account i use $57,000 of it to buy the 1000 shares back.these 1000shares are then automaticly retuned to my broker.The net result is my broker has his shares back and because buying them back was cheaper i've got left $3,000 in my account.This is my profit.

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Finaly

Happy birthday to the Market chat thread, 1 month old today and 3,000 views just incredible!

 

[Naz]

The Nazdaq becuase it is so liquid tends to follow various patterns time and time again.i posted this on this thread on 17/11
______________________________-

"Sometime ago we were talking about the Naz comp liking fib levels.Well whats brewing up is this.

The Jan high to the September low at 1400 has a fib retracement of 38.2% falling at approx 1963.

The may high to the September low at 1400 has a fib retracement of 61.8% falling at approx 1963.The 50% level would be exactly at the level where the Nasdaq would close this latest gap.

If you take the low of this last weeks leg up starting at 1780 and make the point where the Nasdaq would close the gap the 38.2% retracement,then the 100% move of that line would finish at,you guessed it approx 1963.

So you could argue that if the Nasdaq comp trades down and closes the gap in this next week and makes a higher low then the next move up could be to 1963."
_______________________________-

Well thats exactly what happened the Naz closed the gap last week as stated, made the higher low and ran to a high of 1965.I shorted only because it was at that important fib level and down it went.

The naz also likes to have daily patterns,loves fib levels and closing gaps.If you look out for them they can be very profitable.

 

[Naz]

Altough i pick important levels from a graph thats the last time i look at them.So last night i just let the comp run into 1965 and forgot the graph and traded Q's on my level 2 screen.A nice run down from $41 to $40.Using direct access on island.I tell you the liquidity on island trading the q's is incredible.Eat your heart out UK players.(Island now trades 25% of the total volume of this Nasdaq 100 tracking stock)Sweep the island book,hide your orders,pay no spread,no up tick rule its all there.No wonder thats all some players trade.

I also look at tc2000 daily to search for interesting support, resistance levels from where i might look later in the day for action on my level 2 screen.

Just because its there i have an MACD histogram underneath the graphs.Now i've said before that lots of Nasdaq traders are ex UK t/a people that saw the light and changed markets.So you hardly turn your eye away when you see something.

On the MACD that i keep looking at every day everything has got MACD divergence,stocks,indicies and sectors.Although i dont need it for my trading I would truly welcome any comments from other people on this if anyone else has seen it.(my settings are 5,35,5)

 

[TraderPattern]

The great thing about QQQ is that it is possible to play it in every conceivable way. Depending on the market environment it can be scalped, swung intraday, or swung for several days... in all cases the QQQ trader (and I know some people who EXCLUSIVELY trade QQQ) can benefit from the fact that it is usually in the top 3 list of liquid stocks on the US markets. That liquidity is most certainly a gift, for it enables the astute trader to buy bid and sell offer or short offer and cover bid. When I occasionally play the QQQ, I only use ISLD... fills are awesome.

The great thing about QQQ (for the T/A people out there) is that, since QQQ is a reflection of 'the market', there is no Ax (major market maker, who influences the price for his own ends or for the ends of a client institution). QQQ's price dynamics are purely driven by futures prices. Therefore, for stocks like QQQ, SPY and DIA (these are called ETFs- electronically traded funds) a great deal of Level2 expertise is not a pre-requisite. For the newer players, these stocks won't have you up against the savvy Level2 players (no Ax) so these stocks are a good starting point for playing the US markets... what even fairly basic Level2 skills will enable you to accomplish in the case of QQQ is optimisation, par excellence, of your entries and exits... post-entry, a QQQ trade can quite easily be managed using whatever brand of T/A the trader believes in (this is feasible, given the lack of an Ax).

So, QQQ is one of those vehicles where there need not be acrimonious debate between Level2 players and T/A players, on the relative virtues of their approaches. Indeed, in the case of QQQ, I am a keen advocate of mixing the two approaches to achieve the best results.

 

[TraderPattern]

Reading level2 for a short at round number resistance

Here is something I was looking at from last Wednesday... SUNW was on a run... I was looking at the bid and ask action and the time and sales action to see if 14 could be broken... if it couldn't be, that would be a set-up for a scalp short. As you can see from a historical chart, you could have pretty calmly accumulated a 50cent-75cent profit. Using Level2, risk would be no more than 10-15cents. With upto 4 trades on simultaneosly (in my case), Level2 allows you to get out of the dogs and ride the stars with ease.

[To view it you will need Windows Media Player - comes pre-packaged with your computer usually - you will also need a zip program, although more recent platforms may automatically unzip]

 

[Naz]

Ttrader Pattern and myself have mentioned just recently in this thread about QQQ's.I've just been reading Sunday Business and there is a front page article in the second section on the Q's and the Spiders.

Headline.
Exchange -traded funds are hot property.Last week the amount of cash invested in them broke the $100bn barrier for the first time.

Which stocks are the most actively traded?Microsoft ,GE,or Nokia?.The answer is the Qubes and the Spiders.
These are not the latest hot Nasdaq stocks or the new names for a huge company you have always known.They are the nick names for QQQ,the stock ticker for an exchange-traded fund based on the Nasdaq 100 and traded on Amex and the S&P depositary receipt fund...........................

 

[phoenix]

Naz,

New to trade2win, and have enjoyed this extremely informative thread no end, thanks to you and the several other contributors. Invaluable background. I trade UK futures and options and would like to ask if any of the Nas level 2 mechanisms that you describe happen with the FTSE future? Small number of retail traders in the UK with a level 2, direct access, futures screen I guess, so probably still a fairly "closed" game? But in principle do the same things happen or is it a completely different animal? I'm thinking of getting the PATS system and wonder how best to exploit it?

phoenix

 

[Mr. Charts]

I trade ftse (and US futures) with direct access, level 2. There are a large number of traders around using PATS. An excellent system but the UK brokers charge a fortune per RT + extras.
This is nothing like L2 SETS/SEAQ UK or NASDAQ L2
I have a friend in a Chicago firm who will charge you only $3.95 a round turn for ftse! No, not a typo. Anyone who wants an intro and then can assess the firm for themselves, just send me your email at
[email protected]

Richard

 

[Naz]

On 30th November on this thread i said the following

Check the graph of the Dow out.People just think that 10,000 is a key level but actual resistance is under the JULY and AUG support at approx 10,090.Which suprise ,suprise is just where the 61.8% fib retracement of the last MAY to SEP move is.

Well interestingly enough the Dow did indeed go and visit this July and Aug support level and just went over the fib level.But if it rallies back to the 10,000 level and reverses it will have made a beautiful head and shoulders that could be so perfect that any market technician could see.Would that signal a pullback in the Dow?.

At the time of writing the 61.8% retracement of this last move down does actualy fall at 10,000.Which would make the ideal right shoulder.

 

[Naz]

I see we did rally from the last post to the fib retracement at 10,000.A lot of people also havn't noticed that whilst the Dow came back to 10,000 the Nasdaq has just closed the gap it made at 2010 on Dec 13th.

 

[ChartMan]

I'm at a total loss as to where this perfect head and shoulders is/might be.... can you post the dates and values for them....

 

[Naz]

Let me explain my technical analysis.I reckon if you can see something on a graph the move is over and you cant profit from it.So i look for posibilities and then take measured swing trades with risk /reward based on what might happen.

I want to take swing trades in the same direction as the overall market so i look to see where and what the index might dn Friday the Dow had made a large move down from its high at approx 10170 down to approx 9740.As major reversal moves can start pm in the US and the overall market was firming i started looking for where it might run to.Thats when i saw the 62% fib retracement of this last move down would finish at 10,000.

Coincidentaly i thought if it ran to 10,000 and reversed it would make the start of a head and shoulders.Based on the left shoulder area formed on 26/11 and the head formed on 6/12.

Either way there were two possibilities for a possible run to 10,000.I dont care if it runs thru 10,000 ot reverses all i'm interested in is getting there.If the Dow runs up it will drag the Nasdaq,so i look for strong stocks in strong sectors.

I know the move will take a number of days but thats what i want with my swing trading sometimes.The move made 260 points on the Dow and also dragged the Nasdaq along with it.My swing trade made money and as far as i'm concerned the move was over the minute the Nasdaq closed a gap at 2010 and the Dow reached the 10,000 area.

Whatever the Dow and Nasdaq do now is imaterial.The point of the exercise was to make money based on projecting possible probabilities and then using sound risk/reward and managing the trade.

It may be slightly different but then everyone has different styles of trading and the nice thing about this board is that everyone shares them on the BB.