's"reload" button to make sure you see thelatest modules posted as they becomeavailable..Remember to set your screenresolution to at least 1024x768 to enjoy DTU.
GE = Updated pages win last 48hours.
 
DTU Module Two Lessons:
« Level 2 Basics: Understanding Level 2 and Setting Up Your Level 2Windows for Trading« Understanding how to read market makers’ true intentions« The market maker's tools: Understanding NVVII - Nasclag Workstation II« Looking for ‘headfakes’, reversals & pivot points, recognizing net buyingiY ys. sellinge How to spot the ax using Level 2« Trading with the lead axes: MSCO, GSCO, MLCO, SBSH« When to enter and exit tracles based on Level 2 signals« Using TA and 1-minute charts with Level 2: the big picture« Time & Sales part 1: Reading blocks and volume« Time & Sales part 2: Reacling tape speed and momentum plays« Time & Sales part 3: How to read and trade tape resistance & support« Anticipating upticks in price movement using Level 2« Using trailing stops and "3-spread stop loss rule"« Seeing pivots and momentum pauses in Level 2« Order Routing via ECNs, Selectnet, SOES;incl pop quiz« How to avoid getting shaken out/faked out on Level 2: using your chartsto confirm trace entries and exits« Additional insights into how & when to use Level 2
 
 
 
 
 
 
 
 
@ — Altnew! Click the realplayer logo for a video clip to illustrateReal-Time trading relevant to that lesson. Another traderservice to help you from DTU!
=> Click here for Powerpoint viewer programClick here for MSWord view progam (3.5Megs)Level 2
« MM Headfake Plays
¢ Graphs, T&S andLevel 2
« Shadowing MMBuyers
« Name that Ax
« Finding T&S Supportand Resistance
« Reading the Outside Bidand Ask-
« When the Market Maker
Flips Over
« Stops and Spreads in
 
 
 
JOIN DIU'S TRADER FRIENDS' REFERRAL PROGRAM @Send us email DISCLAIMER
 Module Conmpredensive Level 2 Wei Techniques “4PREVIOUS NEXTTwo
Back toMODULE 2
« Levei 2 Basics: Understanding Levei 2 and Setting Up YourLevei 2 Windows for Trading
+ Level 2 is a tool that's best used in combination with otherindicators to fine-tune your daytrading entries and exits. Level2 is a microscope that must be used with intraday chartpattems, time & sales and overall market direction forsuccessful trading.
+ The Level 2 window shows you all the market participants fora stock at a given moment in time, including the relativestrength of buyers vs sellers.
« Market participants can be classified as: trades representedon ECNs (ISLD, INCA, ATTN, TNTO BTRD), Instinet (INCA),major market makers (GSCO SBSH MLCO MSCO), ARCA,and others. Knowing the difference in what it means whenthese people are representing their trades on Level 2 isimportant to success in daytrading. (eg HRZG frequently postsphony bid sizes, SBSH rarely headfakes, etc.). Following theax' is an important skill to develop.
« The Time & Saies window (on the right, ‘the tape’) is the mostimportant part of the Level 2 window to master, not the widthand sizes as represented by various color bands.
« Level 2 bid and ask sizes alone will fake out the inexperiencedtrader. You cannot daytrade with the level 2 window alone.
Understanding, NASDAO, Level 2 Charts
Take a look at this level 2chart for CHRX, trading 10.5million shares as of 11:51amEST. A block of 40K has justgone off at the bid (bearish).
Where the best bid and askoffers are displayed, in orderof size, by market participant.Most important band to watch.
A key band to pay attention to: aleading indicator to see where themms think the price will go.
CHRA + V6 b iz a 12146 81x?
 BUYERS SELLERS TIME & SALES
tata —- inThe most
This column Shows the important part
Not very important, except to shows the price levels of the dispiay,see where the ax fades to. price levels at which T&S shows theThis defines their "trade at which mmm's are size and pricebox" (more later). min's are willing to sell that stockwilling topay the stock for changes handsfor stock at at this at. It also showsthis moment. — moment. the momentum
of the stock as itscrolls by. (time
Note also that the "spread" between best bid and ask prices is not displayedfor this stock is 1/16, which is common for cheap stocks. The on this t&more expensive the stock, the wider the spread can get (from ticker, just the144 point to 34 or so). price andquantity).
Understanding What You're Reaiiy Seeing on Levei 2:
« Level 2 shows the supply and demand, the transaction pace, the tapetrend and the market participants in @ stock all in one handy display.
e The numbers that are supposedly used to indicate the number ofshares that a market participant (either a mm or via an ECN) is aworthless indicator and can be misleading. In the level 2 chart above,you see there's 8100 bids on ISLD , 4800 from MASH etc. (add 2zeroes to the number to get the number in the bid or ask). Why is this?Market makers and traders on ecns can quickly cancel their orders,and mrn's almost always use their "REFRESH" key to either keepbuying or selling stock at a given price level. The T&S shows what'sreally happening.
« The width of the color bands (especially the first outside level, ingreen) can be a very useful indicator, it shows how many "new faces"are entering orders at each price level in the bid and ask columns inanticipation of a price move.
« The Time & Saies coiumn shows the actual trades as they occur,and is the most important piece of information | use whendaytrading. We'll devote at least 3 entire lessons to this critical skill oftape-reading momentum support and resistance levels, pivots andtrends.
« An overall clockwise motion indicates seiiing in the Level 2 display(eg if buyers at 12 were to evaporate and 11 15/16 became the newbest bid, 12 becoming the best ask).
« An overall counterclockwise motion indicates buying in Level 2 (egif sellers at 12 1/16 are taken out and 12 1/16 now becomes the bestbid, 12 1/8 rolls up to become best ask).
« We're usually in an out much faster than this clockwise motion showsus, to succeed you need to intensely focus on the tape and thenumber of market participants in the yellow and green bands.
« The more buyers you have lined up in the yellow bid column, the widerthe "safety net" is to give you time to sell without losing much.
Lxemples;:
Remember our daytrading approach is always like a funnel; we make avery rapid mental checklist prior to entering a trade of these things:« FIRST: Overall Market Trend and Time-of-day, $TRINQ, spoos/nazfutures
« SECOND: Trend for Sector/sector leaders (eg $GIN/$SOX),
« THIRD: Review the 5-day support /resistance of the stock we'replaying
« FOURTH: The intraday double bottoms/tops/trend of the stock(unless it's a news or bounce play), along with volume,stochastics/RSI/MACD,
« FIFTH, the width of the bid/ask levels in our Level 2
« FINALLY: Time & Sales, which we watch like a hawk prior toentering/exiting all trades.
How iong does this scan take? Less than 10 seconds for the firstfive steps above. You patiently watch time and sales to see the truemomentum of the stock prior to buying or selling it.
Your trading rig should be set up to make this like seeing the dashboardof your car. You know where things have come from and can anticipate“where they're going” with a fair amount of certainty very quickly.
Let's look at an example here, VRTY buying on a bottom bounce onvolume strength:
FIRST: Checking [istervel Chat SINS Sea) aK)the NASDAQcompositedirection, see thenaz bounced at10:30 as usual (my10:30 naz bounceon an open sellingday rule). | waslooking to buy stockon this secondbottom bounce at10:30. Also checkthe tring, prem,spoos, naz futures ifyou like.
 
SECOND: Sectorindex or trend;Since VRTY was aspecial case(bottom bounce onoversold after badnews play) we didn'tcheck the sectorplayers. We usuallydo, however.THIRD: Five-day chart(on the bottom rightbelow in my setup, thehorizontal graphicwilevel 2), showssupport at 27. The stockoversold from 52 to 27and has bounced fromthere. A loose stopwould be at 26, my stopis always 2-3 spreadsdown from the currentinside bid. | know wherethe stock is comingfrom, and the upsidepotential based onfibonacci bands. (youshould review the 5-daycharts prior to marketopen for the stocksyou're going to trade).FOURTH: | quickly seanthe intraday chart'stechnical indicators (RSI,stochastics, volume andMACD) to see if it lookslike a good place to buy.10:30 seemed like agood place to buy - seethe MACD lines crossedand headed up, the slowstochs had just made adouble bottom, and theRSI touched the topyellow line. Volume alsojumped. Time to zero inon the trade. All systemsgo.
Level 2 and Time &
Sales:
     
FIFTH: Althoughthis level 2 chart isafter the marketclose, it was allbuys with widebands on the askfrom 10:30 up
Broo
Intradaythumbnail:
FINALLY, We look atthe Time and Salesticker window tocarefully see the paceand momentum of buyingvs. selling. Is there moregreen/white than
Sl [elas
 
5-Day CHART below:
Time to trade! Elapsedtime for this quick marketscan: under 10 seconds.It's watching the time andsales window carefullythat tells us when to pullthe trigger.through noon. Inthis chart, you cansee a lot of sellingpressure (profittaking) after themarket closed andVRTY had its 6-point run.
red/white? What are theblocks (institutionalbuys/sells) telling us?What's the consensus ofthe players in this 5-minute to 15-minutetimeframe? T&S tells usthis, and more.
Once you're in, you watcht&s for any sign ofweakness or selling. Is it"shaking", or are therereally more sellers in thestock for the next fewminutes? These are thequestions we'll learn howto answer in futurelessons.
| encourage you to use a similar setup for your level 2 windows: have thelevel 2, time and sales, thumbnail intraday chart and 5-day chart all togetherto give you a macro-to-micro look at the stock you're trading. Also have asingle expanded intraday chart like the one above with all your technicalindicators on it. It works!The Role of Using NASDAQ Level 2to Help You Manage Your Trades
« Lots of pretty flashing colors.Billions of dollars are madeand lost using this deceptivelysimple-looking device.Remember that Level 2 canfake you out - it's the tapeand TA that counts.
A pros‘ skeptical look at thislevel 2 chart: |In this example,SBUX went to 5/8 andbackpedaled all the way downto 24 1/16 before bouncingagain. The yellow looks strong.But look at T&S: lots of tradesgoing off at the 1/2, indicatingselling. MWSE and HRZG areno-name market makers on thebid. Tough to tell what thetraders on instinet (INCA) andISLD will do. Meanwhile, solly(SBSH) and MONT are sellingstock. In a battle of chippies(ARCA etc) vs big mm's thi
Mee ee ee ey re ie
market makers win.
How do You manage your tradeswith Level 2?
Don't get me wrong, I'd be veryhesitant to daytrade without level2; however it's just one of a handfulof things | consider before | buy astock. Hopefully the methodoutlined above will help you make alot of money, as it has for me andother traders.
Go with the tape flow; use therelative width of the bid/ask bandsto help you manage your tradeexits. Level 2 primarily helps medecide whether to jump in on anask level that's about to evaporate,to shadow a lead market maker axwho’ buying or selling in size, andto exit when the buyers are dryingup and backing off the inside bid.
pax s-avor EE
SBUX + 249/16 b 24V2 a 249/6102x1 600K II:
[wap [bid [elmo [ask [a] =I
I
 
Quick tips:
Again, the bid/ask sizes are pretty muchworthiess and misleading. Look at thetape: MONT has just sold 800 shares ofSBUX even though his advertised ask sizeis for just 100 shares (a 1"). Refresh keyin motion. He might have 100K shares tosell for all you know. This is level 2, notlevel 3; you don't know the true order size,and the mm sure as heck isn't going to let
you know. They're a bit more useful for theyou know. Ihey're a bit more usetut tor the
ECNs, such as ISLD, but even those canget canceled in a quick second. Doesn'tcount.
The "flow" of time and sales, and thevolume going off at the ask price, is amuch more useful indicator.
Use the level 2 price level thicknesses tohelp you decide how to bid for stockand how to offer it out on the ask.That's all the pretty color bands are for.Again, you never pay up two spreads bybuying the ask and selling at the bid(unless you're in a panic to buy/sell, whichshould occur less than 20% of the time).
Follow one of the major market makers(GSCO MSCO MLCO SBSH) for a stockall day and trade like he does. You don'tsee a professional pay up retail and sell atwholesale, neither should you. He will havea "trade box" that he makes money in,buying at one level and selling at a higherone. Use level 2 to help you manage yourtrades like a market maker does.Module Compceinensive Level 2 Trading Techniques: — @PREVIOUS NEXT®
Back taMODULE 2« Understanding how to read market makers' true intentions
@ Main Points:
« Market makers’ (mm) primary obiigation is to their ciientaccounts; they often buy or seil large quantities of a givenstock (‘work an order’) and need to disguise their actions.
« Market makers’ secondary role is to “make the market” in thestocks they trade, providing liquidity by buying and sellingwithin a given ‘trade box’ from 2-6 spreads wide.
« As daytraders, we can profit from iearning how to read theintentions of one or more market makers by seeing patterns inthe ievei 2 window (eg., number of times they are at the bid vsask, when they flip. how many times they refresh).
+ Learning how to trade on the side of the primary market makercan be profitable, learning how to avaid trading against the ax isimportant.
« Some market makers are “bigger” (better capitaiized, trademore share volume} than others, and you sheuld pay moreattention to these big piayers (MSCO MLCO SBSH GSCO etc.).Identify the main mm's for your stock with this link.
« Market makers frequentiy disguise their order fiow buy buyingand selling on the ECNs like ISLD, ARCA etc. - therefore,watching the action on “ECN buying/seiiing" vs “Big MM buyingseiiing™ is an important skiii to deveiop as weil.
There are 3 main Market Maker tradingactions you shouid iearn how to read on alevel 2 screen for a specific mm:
+ BUYING IN SIZE« SELLING IN SIZE+ ‘GRINDING' (making the market)
Let's look at how each of these works, and
how to profit from it:ixamplesi
You have to understand how this whole system works beforeleaming how to daytrade within it. I'm going to take the marketmakers’ perspective first, to show you how these guys deal with thestocks they trade. then show you how to profit from it. This wholemarket maker section takes up 3 different lessons, starting with thisone.
Exampie #1 - BUYING iN SiZE: Let's say you're a market makerworking for MLCO and you're working W/COM again today. You geta new client order to buy 250K shares WCOM for your client, amutual fund manager over at Vanguard. Your performance ismeasured, in part, by your ability to buy near the lower end of the
Are you going to just jump on the ask and buy up 250K shares? No,you'll run the price up 2 points in the process and buy up for yourclient at the top of the day. They won't be calling MLCO to workWCOM any more, and MLCC's trading desk director won't be happywith you.
Let's say the level 2 chart on WCOM looks like this:« First, ask yourself"where is the tradebox for the marketmaker I'm watching"? Inother words, what priceis he willing to buystock at, and whatprice is he willing to sellstock at?
Answer for MLCO: Tradebox is inside the market at77 bid WCOM, outside at77 118 ask WCOM. Noticehe's on the inside bid andone spread out on the ask(yellow band for bid, greenband for ask).
« Second, iook at theorder flow on Time &Saies: what's thepattern you see? Astring of transactionsgoing off mostly at theask is bullish, at the bidis bearish.
Third, look at whetherthe market maker is“hoiding the bid" at acertain price level(bullish) or "holding theask" (bearish). In otherwords, lets say in thisL2 box sellers usingINCA (Instinet) don'tbudge from 77 1/16and you see well over10K shares being soldat 77 1/16. If the bidtier at 77 starts toevaporate (as buyersrealize there's a lot ofstock being sold) thenthe price will drop. Thisis why T&S is soimportant, the levelsmay be fake since themm can refresh orbuy/sell thru an ecn tocover his tracks. T&Sis so much moreimportant than the
 
Ok, back to our MLCO WCOM example.MLCO ay in fact be buying stock throughISLD, and may fade his ask by a level ortwo if seliers start to fade. He may besitting out the action for now, waiting fora more favorable entry.
Daytrader's Play: The lead MM who isbuying in size may go short and sellsome stock either directly or through anECN to push the price downwardsinitially, then buy a bunch at the bottom,working his order up.
We play it by carefully watching severalthings:
« The number of refreshes at theinside bid vs inside ask (eg a mmisshowing 10 bid (1000 shares) but wesee him buying 13K shares in T&S.
« The technical indicators on our 1-minute chart (stochastics, RSI,previous support/resistance levelsand volume).
« The response from other tradersas they see what's happening. Youmay well get a bunch of buying (eversee a ‘volume spike uptick?). Don'tchase at first , you should haveentered when you saw the mmcolor bands alone,use them incombination.
What else is useful? Inesignal, you can highlightspecific market makers, as| have for MLCO, and seeeven more info in T&S ifyou wish.
Other software, such asEnsign, also gives you theopportunity to plot marketmaker activity against thestock price. Someprograms let you see the“number of times at best"bid or ask for the marketmakers playing a stock; a
good way to see net buyingor selling for the time period
you're watching.
following one of these patternswe've identified.
e Ax flips/reversals vs headfakes: ifMLCO suddenly disappears from theinside bid (or 1-2 levels outside bid)to the inside ask, he's tellingeveryone he wants to sell. Thequestions is, how much volume doeshe sell? If its over 20K or so you canbe pretty sure he's not trying to fakeyou out.
Exampie #2: This time, let's say you're the market maker at SBSH andyou're working NOVL today. You get a new client order to sell 700Kshares NOVL for your client, a mutual fund manager at Fidelity.
« SBSH is in line sellNOVL at 21 1/2, not ina big rush here. Howdo you tell? In level 2,your “order in iine"preference isdetermined first bythe price, second bythe order size. Now,SBSH may want tosell more NOVL thanall the mm's joininghim at the 21 1/2 bid,but he’s not going totell you that. MASHgets first in line bysaying he's offeringout 107 (10,700shares) at 21 1/2. Itmeans nothing. Hecan drop that in theblink of an eye, he isonly obligated to buythe tier size on SOES(which is 100, 500 or1000 shares etc).What counts is the
 
[wai [eid [ea [ase | a. [4]
Sore
SBSH 2114 10
Daytraders’ Play? What do you think,gang? Well, we're on a downtick, so youcan't short it here right now (see the minussign in the upper left corner next to NOVL inrefresh rate that youobserve in T&S, alongwitraders' responses.This looks like abearish level 2 chart,confirmed by thefrequency and size oftrades going off at the7/16 in T&S. You'dhave to watch thetape for a minute ortwo to get the feel forthe momentum in thestock.
Please note that mostlevel 2 chart buyingand selling is not asobvious like these twoL2 charts appear;typically you'll seeinside levels of 2-5mm's wide. You needto pay attention to #of refreshes in T&S.Tape reading is howto daytradesuccessfully. Forexample, when do yousee "the tide turning”and trades going off inbetween the bid/ask?(especially for netstocks like DCLKYHOO AMZN). Thisindicates potentialreversals.
the dark green band?). If you've beenfollowing NOVL and know that SBSH is theax (which he usually is, by the way), thenyou might want to join SBSH's bid at 21 1/4for the stock (LIMIT BUY NOVL bid 21 1/4).
Ok for the "A" students, lets say 21 1/4 isasupport level, and you think the price willbounce hard off 21 1/4 and give you at least1/4 point scalp on the rebound. How do youfrontrun SBSH and buy before he does?(which will run the price back up before youcan get in’).
Answer: Don't bid up higher than 21 1/4.Don't wait til it bouinces off 21 1/4 and youhave to enter at 21 3/8 in the middle. Bid 211/4 size 11. That will put your bid in ahead ofsolly and behind NITE/REDI. If you could geta short off here ahead of the 21 1/2 wall ofselling that would be great, but it's unlikely.Again, use 1-minute chart TA to help identifysupport/resistance and trend info. in additionto level 2.
Example #3: Today, it's a choppy low-volume day on the street, not muchmarket direction. But, you still have to make money for Mayer Schweitzer,MASH, your employer. You have to make the market by grinding out3/8's; buying at the bid and selling at the ask for AMZN a fewspreads/levels up all day. It's boriing, but you make money doing itconsistently. As MASH's AMZN market maker you need to correctly setthe limits of your "trade box" based on volume, price momentum andtechnical indicators.
Again, identify the marketmakers’ "trade box" to seewhere he is playing it. Makenote of what causes him toback off or lift stock at eachlevel. Eg, is there a time of dayeffect (| find may axes often sitout lunch and fade a fewspreads in either direction, or
en iife-svot- SEIN
- 978 b97B a 92 10x27 105M 14:50
 bid it down to buy for anafternoon run).
To grind a stock by followingthe ax, simply trade like hedoes: join his bid if he staysthere through 5K-10K or moreshares of buying (perhaps frontrun by 1/32 or a size increase);as soon as you have a tradeconfirmation then offer to sell itat the price level he is at.
Note that you have to be abieto fade and lift like the mmdoes in order to scaip usingthis method. So, aprofessional direct accessbroker like cybercorp.com ormbtrading.com isrecommended, so that you canimmediately sell or cancel yourbid with rapid speed. The ax willdrop his bid if he sees a lot ofselling pressure, and you needwith speed. Waiting fora —browser-based broker to giveyou confirmations etc. isprobably too slow for this typeof trading.
a ae
Ok, what's MASH doing here? His trade boxis outside bid 91 3/4 size 2 by inside ask92 size 10. What's he doing? Offering stockout here. Which is a good idea, wholenumber resistance is a good place to parkyour sell orders to see if you get a sell.
What would you do? Since there's a lot ofsellers at 92 I'd wait until the bid firms up abit more before entering a bid (or, you couldenter a bid far away from the action, say at91 1/2). Time and sales is bullish in thisscreen, as more sales are going off at theask than the bid. It's a "indeterminate" orlow-percentage situation here; I'd wait tilyou get better indicators before trading thestock. Grinding it with MASH would say, ifyou're already in from lower, than offer it,at 91 15/16.Module Comprehensive Level 2 Trading, Techniques: @FREVOUS NET
Back to.MODULE 2
« The market maker's toois: Understanding NWii - NasdaqWorkstation ii
« Market makers use a software tooi caiied the Nasdaq Workstation ii(NWI) to manage their trading activity.
« Sun Tzu says "Know your enemy's strengths and weaknesses..."
« As a daytrader, if you understand how the market makers" key toolworks you will be better equipped to trade against them using yourlevel 2 screen.
¢ There are severai Adobe Acrobat .pdf guides on how NWii worksavailable at this www.nasdagtrader.com link: download and reviewthem, especiaiiy the NWii Users Guide, Market Making Guide,Selectnet, SOES and Optimark users guides.
¢ It is very surprising that not a single book or other daytrading siteon the internet mentions this critical tool of the market maker andhow you can understand and benefit from this knowiedge. DTUscores another scoop.
¢ iii add exampies of how to trade against the market makers as idevelop them: for now just familiarize yourself with this marketmakers’ tooi.
« Market makers are charged $1500/month each to use NasdaqWorkstation 2! Thats $18K/yr.
Sety Colors Elfects
¥% *\2 8 8 2) 8 8 =
Finish Cancel Studio  SaveAs Print Preview’ | Zoomin Zoom Out bi Copy Unde
 
Setup Order Repart Scan MarketMaking InfoServices Toolsrenee) recyb147Q DLT LdCem Lie) as60 a79 58Qeee) Eek) ee)
Pere Ree er er) are1900 SUNWY 4311/16 Q ..... 1900 SUNW 4311/16 Q .... 200 INTC 86 Q ....INTC INCA 85 1516 8618
 
 
slOutput set to %s [898463051 6Mx 2
 
 
 
 
 
Nasdaq Broadcast t Current Server: 22900961 07/16/97
 
 
 
 
  
Hasdaq Workstation IlSetup Order Report Scan MarketMaking InfoServices Tools Supervisory Utilities Help
200 MSFT 83 1/4 Q BURP seas le] UT es See ay 00 MSFT 33 1/4 @ 500 MSFT 88346 Q ...RU cid os a a ee
coe |t SEM cust [02610
AIPH 249 COMS [1635 5/80 FO SIZE EXHAUSTED in TESASHD |4b37 1:40 CSCO |$bES 14160 IFES Minute Waning
 
                      
     
u BLSI b2 465 CVUS 24 11416Q Ft Noaeharival restr[Comb 7 J | TESTA & TEST SECURITYa at ae vances QUOTE CLOSED EXHAUSTED SHES| Lo: 50 146 MMiOGoTo Dynatluctens: J 50476 @ soars @ 10 - 200 1 __Berodimagute | =Your: 5015 S03M6 mn -40 O1-1
| G Addition] Messages in Queue© Both O Bd OAs ORT Gorn Oe 0 KS
up 148 a an | @ sent © Nasdaq Cle |
FAHR (50146 50 916 10-10 FCOL 494446 50 3416 10-2%NEED 50 50 5/3 10-10 TSCO 8049 1/4 50 38 10-10VISH