the direction, the momenturn, just as soon as the pivot(price direction change) occurs, such as off a bottom, where the stock “looks cheap" and cthers all want to buy some‘You want to exit before everyane else "heads far the door" too, so you sell into the buying momentum. This lessonshows what that means from a tape-reading perspective; the signals you want to look for in the tape to help you maketrading decisions
For pivots, you'll see 4 flurry of selling, sorne indecision, some in-between trades, then a flurry of buying, then a shake,then more buying etc. The speed slows down as indecision grips the traders worldwide you're trading with. What willhappen next?-everyone is wondering. VYaiting until you see a flurry of buys at the inside ask is a final Indicator that thetrade is headed up, in tape reading and scalping you need to be very fast on the trigger to capitalize on these moves
 
DELL SCALP Using Time & DELL =] [oetvare =] P| |T| GR DELL SJ [intevalthar | PI PW
Sales:a 38169245 14M 1:06
Let the Tape Speed Help You
Decide When to Buy..
Let's look at an exarnple of DELLfrom late Feb., 2000 -
Chart #1: here we see a bearishpattern in T&S, trades all going offatthe bid. But, it's at a wholenumber support level, so lets seewhere it goes from here. Waitingto see buyers before entering atrade.
DELL F\[ectwaket =) |P) (7)
Chart #2: DELL bought at buyers DELL + 385/16 b 3814 a 38 516 65x 188 13.0M 1:27
took out the 38 1/16 asks 20 minslater, we see most of the tradesgoing off atthe ask, 38 5/16, stillbullish. As far a3 momentum goes,you can see by the volume bars atthe bottom of the chart that theupturn is occurring on slightly lessyolurne. The trade pace is stillbriskin T&S, so we stay in long
 
   
DELL
iieestMaket PT)
DELL - 38746 b 383 a 38746 6Ix1l §=13.6M 1L40
JOELL ll] interval Chant
EE
   
        
Chart #3 Here we see continuedstrength in time and sales - all ofthe trades went off at the ask priceof 7/16 or better. Nobody'sselling..we stay in long.ee onal in ehSeee DELL =] [sex Manet ¥] (P| |T| (GR DELL =] [irtewalChat i] [PI [Wslong. Weendup closingthe = | pL + 38996 b 3812 a 389/76 63x10 138M 1:44 j
position at 38 11/16 for a 5/8 pointgain on 500 shares, or $360 inabout 20 minutes. Not too bad.Why sell? Becuase the tape speedslowed down, and the retracermentwas fairly large for the timefrarne.and price.
 
Time and sales is our guidepostthat shows us where the crowd Istaking the stock at a given pointintime When trades go off fasterand faster in time and sales, besure you're on the side of themomentum you see
aloo Oe |
Time |Exg| Price | Gers Te. ee
 
 
“Yolume and Block BearSigns" in time and sales:
Looking at INTC here, whatpare EC ed ee) warning flags do you see?
1) christmas tree, green andred mixed, 50 we're either at aeC De a) pivat or 4 low-percenlageplace to trade, avoid it
Sh Esra 1015/8 NASD 1011146 NASD 10x36
 
2) See in the "Sizes" columnwhere Ine bidask sizes are alllCT RCPS bigger on the ask size? This isbearish too - eg 10x36 (bid xask, 36 is bigger), 10x46 etc,means there is more stock tosell than there is to buy, abearish sign
Learn to monitor the sizes aswell as the rmornentum andpace of the tape; when thesetraders are entering their tierbuy/sell sizes you know whichPPR nter) direction or sentiment theyhave towards the near-termdirection of the stock price.
3 out of 3 bid/ask pairs are1015/8 NASD 101 11/16 NASD 10x23 bearish, and there's not asteady string or majority oftrades going off at the ask, sothis is 4 stock to either short orstay out of for now:
 
Daytraders Play: Using the Tape Speed to Enter and Exit Positions
Which of the two T&S displays is faster? If this is the sarne stock, butat different times during the trading day, how would you play it?
Well, ifitwas 9.50 and we see a time and sales like the one to the left,and all of a sudden it gets fast, like the one on the right, we knowsomething's happening - either a breakout or 4 retracement willhappen. You want to train your eye to see the clifferent tape speeds,and to know how fast trades usually execute in T&S at different timesduring the day for the stocks you like to trade
Leam it and prosper.
  
A Few More Professional Time & Sales Tape Speed Guidelines:
4 Ifit Speeds through a whole number in either direction, be prepared to play the pivot 1/16 to 1/4 paint onthrough the whale number,
2. Pay close attention for blocks going off during tape speed-ups, this signals that institutional buyers/sellers“agree” with the crowd (important) and will likely maintain direction in the direction that they traded in (egblock going off at the bid, ask, in-between or outside}.
3. Be aware that a mm fake play is to fire off a string of 100-200 share trades (vs a block) in the direction hewants the stock to go in to caver/buy a block once it starts consolidating. He makes it look like there's a stringof buyers/Sellers when in reality it's just him, trying to work the order flow to his advantage. No real counter-plays for this one
4. Get to know the T&S action for 1-3 stocks like the back of your hand, know what's routine vs. price-movind.Module Comiprehensive Level 2 Trading fechniques: @PREVIOUS NEXTTwo
Back toMODULE 2« Time & Sales part 3: How to Read & Trade Tape Resistanceand Support
Our final tape reading lesson for now looks at how to recognize and trade supportand resistance patterns.
Remember using TA with our charts we expect support’ and ‘resistance’ levels atthe tops and bottoms of key trading ranges, right? Using Time & Sales is another,more powerful tool you can use to confirm breakouts, breakdowns and pivots.
Practice all three lessons’ worth of Time and Sales lessons to become and effectivedaytrader. There's more to cover, yet mastenng these three lessons alone should significantlyboost your trading profits, if practiced over the course of weeks and traded with effectively.
What do you do when the tape is showing resistance? Either sell off your entire position, scaledown (eg sell 1/3 to 1/2 of it while waiting for confirmation of trend change), or enter a newshort as buyers start to dry up.
In tape reading, always remember that you're locking for momentum (covered in the previous iNlesson) as well as the ratio of buyers to sellers (both quantity and share size). Keeping this
ratio in mind as you See transactions scrall down the screen helps you determine net buying
or selling that's going on, and make a higher-probability trading decision. The key is to
recognize the difference between a minor retracement and a genuine change in the
trend direction using Time and Sales.
Module 9 Compichensive Level 2 Trading Techniques: S@PREVIOUS NEXT Be
Back taMODULE 2« Time & Sales part 3: How to Read & Trade Tape Resistanceand Support
® Main Points:
Our final tape reading lesson for now looks at how to recognize and trade supportand resistance patterns.
Remember using TA with our charts we expect 'support’ and ‘resistance’ levels atthe tops and bottoms of key trading ranges, right? Using Time & Sales is another,more powerful tool you can use to confirm breakouts, breakdowns and pivots.
Practice all three lessons’ worth of Time and Sales lessons to become and effectivedaytrader. There's more ta cover, yet mastering these three lessons alone should significantlyboost your trading profits, if practiced over the course of weeks and traded with effectively.
What do you do when the tape is showing resistance? Either sell off your entire position, scaledown (eg sell 1/3 to 1/2 of it while waiting for confirmation of trend change}, or enter a newshort as buyers start to dry up.
Intape reading, always remember that you're looking for momentum (covered in the previous iNlesson) as well as the ratio of buyers to sellers (both quantity anc share size). Keeping this
ratio in mind as you see transactions scroll down the screen helps you determine net buying
‘or selling that's going on, and make a higher-probability trading decision. The key is to
recognize the difference between a minor retracement and a genuine change in the
trend direction using Time and Sales.Note: The higher-Yeage bottom or top youreplaying, the more likelihood a pivot is about tooccur feg if WCOM sold off by =5% on ne badnews that mamung by 10:30am).
#2: Bottoming (or topping) out, about topivot off a key supportiresistance point.
After looking at the stocks' 2-day or 5-day chartto identify likely supportresistance levels, youwatch T&S to see if, indeed, the tradersrespond to these “pivot points" where the stockeither bounces off 4 bottom support level orbreaks through 4 key resistance price.
These are most likely to occur at decade wholenumbers, eg 30,40, 50, 100 etc, occur at 1/4points for lower-priced (eg $10-$30)} stocksYou hopefully already know this
Here's what's new for Time & Sales: Watchto see if stops (or new buy orders) arebeing executed at these keysupportiresistance lines.
You'll likely see a flurry of orders occur at evenhumbers for stocks. YYait to see if the tradingdirection goes to the 15/16 or 1/16 (or
7/8, 18) either above or below this key tradingnumber, then buy or sell with the trend thatemerges after stops
Example’ VWWCOM traces up to 46, you seetrades go off faster in Tirne and Sales as amultitude of orders occur at this price; you seeeverything from 100-share trades to 10Kblocks happen Wait 2 second
Now, lets see if the price strengthens orweakens at this key price level. If you see abunch of trades begin to go off at46 1/16th,then an occasional 46 1/8th etc, then go aheadand buy, with a stop set at 45 7/8.
If on the other hand it hits 46, then sellers pourin at45 15/16, then you see 45 7/8, then up to46, then back down to 45 7/8 etc (over a 3-5minute period), then you know it may not havethe mamenturm to break past 46. Look for alower highflower low pattern on the 1-minutechart. If it looks like it's weakening, fire off ashort at45 15/16. Your cover stop should be nomore than 46 1/4. Maybe you set a cover targetof 45 5/8, or even 45 1/4 if you're lucky In and‘out, using your tape to guide your trading
This is how we trade time and salesprofessionally.
 
L2: Doesnt tell youmuch here, slightlyweighted in favor ofsellers, indeterminate
T&S: Trades going off fairly mixedhere, a few bearish blocks, need towatch tape for a trend to emerge
fecon fees oer INE
“wa [id [oT [ask [al
he A ee)
Here's WWCOM from 12/8/99 - we've shown you this chartbefore; look atit again from a Time & Sales perspective. It's a“Christmas Tree", green and red, no clear direction identified
But, since our L2 shows a wall of buyers at 77, it's kind of a no-brainer Scalp to bid 77 1/32 (or pay up the 1/16th) and sell itback at 14 or higher.
This is bouncing off a key support level, identified not onachart, but on your L2 window. Note: these setups occurinfrequently, but when you clo you're probably pretty safebuying here, as Long As your stop is "I'll sell if the wall ofbuyers at 77 dries up to 4-5 participants (from the current 21+)Your stop 1s Not uncer 77, because this 1s 4 support level. Itmay well drop to 76 5/8 or less if it loses support at 77, so usethe 77 L2 wall as your scalping supportlevel.
Time and Sales should show some interest at the inside askfor you to stay in the tracle; if everyone starts piling onto thebuyers at 77 then it may well sell down. Note that MASH isusing a bid size of 214 because he wants to be first in lineahead of solly SBSH w/77 size. ISLD buyers are 4th in line; I'dpay up retail and give up @ spread rather than risk losing outentirely on the scalp because | wanted to wait behind severalbig market makers to buy. Or, splitthe spread with a 77 1/32bid like i said (preferred).ore fees nore SEI
CHRX + 126 b 12 a 12U681x7 = 16.5M_ 1:51
This CHRX pattern shows all buyers off 12 supportin T&S, see everyone bid 12 1167, Somebody sold ablock at 40K, very bearish, but since we're trading10Millon shares today | don't worry too much
Oh, they didnt’ tell you about that in the books? heh. Youneed to evaluate the importance of blocks inrelationship to the total share volume traded so farthat day. Re-read that.
 
Of course, if our volume was at 763K so far I'd worry a lot
more about that 40K block. _Look at the second wave of action in Time and Sales to
Since all but one trade is going off al the inside ask, I'd see if the support at 121s going to hold The L2 bandsexpect WARR to stop selling and the stock to trade up to are really secondary, remember they are there to help12 1/16th x 18th. The point is, where does it go after you time when, exactly, you pull the trigger, and how tothat? 1/16th, clearing the spread, 1s only your first step. best route your order - will you try to preference one of‘You want at least 1/4 point right? the mms, or will you just use a market or limit order? L2Is not for making trade entry decisions - It can fake you
Look at the column in the right for sorne additional tips outThe Time and Sales tells you when and if you shouldenter the trade, and when the best tire to get outis.
Remember that, and you'll be ahead of 60% of the otherdaytraders out there.
Other tips about Tape Support and Resistance:
» Ifyou see at least 3 out-of-market blocks going off within the space of 20 or so trades, watch to see if thecrowd follows the direction, and be prepared to act. For example, ifin the CHRX example above we see several 10Kblocks going off at 12 1/8 or a 50K block at 12 3/16 we know an institutional trader is buying or selling ahead of thecrowd
He may well be wrong, or, more likely, will continue to add to {or sell from) his position over the course of the tradingday to work his order to the best price possible for his client. Watch the Time and Sales window to see whateffect, if any, these block trades have on the response of the other traders.
The ratio of trades going off at the bid vs. ask, when weighted with the size of shares and relative speed ofthe tape, is the barometer of the stocks’ price direction. Leam to feel the ebb and flow of the trading waves by closelywatching the trades go off in your T&S window, using a liquid (eg over 1.5Mshares/day-valume} stock.
+ Winning Hint Many new deytraders cannot afford level 2 or time and sales, and tend to play under-$20 stocks Youand the professional daytraders and market makers have a distinct adyantage agajnst them when using these tradingtools The play? You might want to add a relatively inexpensive stock (but still good-volume, for insurance) to your L2watchlist and see if you can gain a spread or two advantage against the 'budget trader’ crowd by using thetechniques we've covered in Module 2 using L2 and T&S. Rookie daytraders tend to pay up both spreads, buying atthe ask and selling at the bid; you can make a handsome profit by trading 500-1K shares of inexpensive stock like amarket maker does, offering to buy at the inside bid then offering it back out a few spreads up a few minutes later:‘You'll have to learn which market maker 1s the axe, typically the heavyweights (SBSH MSCO MLCO GSCO} don'ttrade the cheaper stocks. You may see mms like PVVUJC ec.
+ Look at a wide time and sales screen (like the INTC one in the previous lesson) to see the relative bid/ask sizes, anduse that to help you determine the trading sentiment, whether bullish or bearish, at that point in time
« Trading tape basics: remember to never fight the tape; the crowd sentiment is what you want to trade for a profit,hopefully ahead of the crowd, usually with it, out never against it, Don't short the skyrocketing stock, or buy the stockthat's still tanking; use your T&S as a flashlight to see which path in the cave you should followModule Comprehensive Level 2 Thadiag Techniques: PREVIOUS NEXTTwo
Back toMODULE 2© Anticipating upticks in price mavement using Level 2
@ Main Points:
Ge of Level 2's best advantages 1s in helping you identify the time “nght before" the stackrolls up by a spread or so.d
Know that for the most activefpopular stocks L2 is generally not very useful (egINTC WCOM DELL) and for some net stocks (like DCLKy); | rely on 1- and 34minute tickcharts much more for these stocks. Don't over-rely on L2, it can frequertly “fake you out"for example if you see what seems to be a wall of buyers/sellers it can go adainst you in ahurry, as the mm's on the most actives don't show their hand on L2. For the most actives, theoverall day's trend seems to be a more reliable indicator (eg is It above it's opening price at11:00? if so it will probably carry its trend thru to the end of day)
Remembering that T&S is your best incicator, you can also see when sellers are done Iewith a stock and will let it run by a spread or two using your Level 2 window This happens
when the ax backs away from the inside ask andior you see a lead mm jump to the
inside bid
‘One of the skills you want to refine is how to "Jump In right before it upticks", using L2properly can help you with this. Remember, when trying to catch a bottom your chances aremuch better when you're buying the first sign of strength in @ stock that has just droppedsharply vs buying into a slow decline (and of course the reverse is true for shorting/sellingtops: the market reacts to extremes fairly quickly vs. slow price erosion or growth).
Notes: In general, I find SBSH Is particularly obvious about making his buying known byholding the inside bid (eg in NOVL) and MLCQ is somewhat obvious about making hisselling known by holding the inside ask {eg in WCOM). This all depends on the particularstock etc..but these are two consistent trends I've seen over the last couple years for thesetwo mms. This is an overgeneralization, of course, but it's one observation I've found thattends to hold true over time for nasdaq techs (like the "10 20 nascaq bounce").
Anticipating Upticks using Level 2
What do you see happening in the two Level 2 windows below? 
Itlooks as though the sellersusing INCA may be finishedand the stock may go up by@ spread, The real questionis whether it will continue uppast the 17 1/2 mark.
The momentum 's tellingyou that buyers are comingin, both in the time & saleswindow as well as in the level2 width of the sellers (yellowask) getting narrow as theirstock is sold
(notice NOVL has more thandoubled since these snapswere taken just lastNovernberl).
 
 
‘bc
Another example to study:
Instinet (INCA)sellers may be done
Bevery eet peedPetey ee pe mcd
Daytrader's Play!Quiz \ell, depending on hows fast the momentum is, which of these five thingswould you do?
1 Join the ISLD bidders at 17 7/16 and hope for a fill (unlikely)
2 Enter a new bid at 17 15/32, to try and split the spread
3 Pay up retail and enter a buy limit at 17 1/2 (last resort, only do this if you're sure the 17 1/2'sgonna get taken out fest)
4, Donathing
5. Shortit
Well, which would you do? I'd try #2, unless the yellaw ask band had collapsed in a hurry (under 5seconds) and the 17 1/2 sellers are going to disappear, in which case #3 is ok
I's a zero potential short, all the buyers at 17 7/16 would have to step off their bids for the price to dropfrom here.
Try to avoid watching if you see a high-potential trade, set narrow stops to protect your capital andplay when the indicators line up, as in here
Where would you set your stop? The way | daytrade 1s to keep it really tiny; the reason | enteredwas 4 "bounce off 17 7/16 play", if I'mwrong then so be it, | sell and re-enter when buying strength istruly there.
In this case, I'd buy it and stop out at 17 7/16 if the bidders are almost all gone. Thatis, if this wall of 11bidders dropped to 2-3 and a steady stream of selling is going on in tirne & sales at 7/16 then I'dprobably sell there as well, the stock may well lose a couple more spreads (or more) before bouncing,| don't want to be there unti! buyers are back.
Remember, daytrading is largely about stopping out quickly when you're wrong, and nurturing yourwinners for hopefully > 3-5 spreads (or more} per trade for round trips averaging 1 to 10-20 minutes orso. Confusing daytrading with swing and overnight holds and investing is a leading "cause of death"for daytraders who want to make a career out of it If it's against me 2-3 spreacis I'm outta there.
‘You should risk no more than 1-39 of your capital on each trade, | prefer to make It even tighter andstop out if it's against me by $80-$150, whatever that translates into in terms of share price andnumber of shares I'm holding.High-percentage Level 2 uptick playsShould be capitalized on whenever possibleFor the actives like WCOM L2 |s generally notuseful, particularly when there's no "directionalbias" evident in the buyers and sellers
Poco lfsexnoict INI
A gift like this one to the right should not beoverlooked, however. You Know this stock willbounce to atleast 77 1/8 in all likelihoodbased on what you see here, nght?
Now | don't want to buy a $77 stock for afractional gain; I'd use the 1-rminute chart
supportresistance levels to confirm theupside potential of the trade before going in
What does this chart tell you about WCOM'sprice action?
| CE
 
 
a
[wip [eid [ei] ww [ask [a]
Ok it's falling, do you buy? Actually | say yesbecause of the following
Heavy volume at 77 since stops are taken out.Possible reversal play off whole numbersupport.
My Level 2 shows a lot of buyers are willing topay 77 for it, "the crowd" is lining up to pay 77T&S isn't all red, we're about even money onbuyers vs sellers
I've seen a lot of buying reversals in WCOMthroughout the selling, telling me the stockdoes make frequent positive retracements 4sit sells off. (they don't have that in any bookseither)..example at every major fractionbuyers come back in, atleast for 1/4-1/2 point,so lhave every reason to expect buyers will behere al 77, enough for a scalp at minimumLooking back at the 5-day chart showsprevious support at 77, eg ithas bounced off77 atleast once or twice in the last 5 days.
ed to sell at
  
In summary, Level 2 can be used on rare occasions by itself to identify good trade entries, but remember its role isa secondary one to help you time precise intra-spread trade entries and exits, using market/sector direction, T&S
and 41-minute charts as primary decision support tools.Medule Comorehensive Level 2 Trading Techniques:
Back toMODULE 2« Using Trailing Staps and the "3-Spread Stap Loss” Rule
@ Main Points:
txam
e Trailing Stops defined: Once you are in a profitable trade, you should raise your stop loss to"follow" the stocks’ price as it moves up This ensures that you will take a profit fram the tradeand not let a winner tum into a loser,
or a ‘mental stop’ if you are highly experienced - 1+ years or more fulltime daytrading) Now,let's say WCOM ticks up to 44 5/8. You would cancel your original stop, and enter a new“trailing stop" in al , say, the point you bought in at, at 44 3/8 (or perhaps 44 1/4). Evertually.WCOM breaks through 45 and ticks up to 45 1/16th. Now, you cancel the previous stop andenter a new stop at 44 15/16 (always place your trailing stops 1/16th under wholenurmbers/major fractions). WWCOM starts to tick down, you see a ton of sell orders hitting thebid at 46, it starts to get thinner on Level 2, now it drops to 44 15/15 and your stock is sold.You lockin a profit of 9/16th, or $56/huncred shares (so, if you were trading 500 shares yourprofit would be $280} This all happens in the space of 5-20 minutes.
3-Spread Stop Loss Rule: we will also see how to set your stop losses for those times thatyou are wrong and the trade goes against you nght after you buy in. At DTU we advocate a 22 spread maamum stop loss. | usually use the level 2 strength within 7 spread, as confirmedby T&:S and 41-minute chart, to set even claser stops for the frequent tmes we scalp for 3/8 -
4/2 points
Most books say "take small stops" without explaining the mechanics of how this works whenyou're using level 2 in a live trade situation. This lesson will show you step-by-step, usingscreen snapshots, how to set and manage your stops and trailing stops using Level 2
 
3-¢pread MaximumStop Loss on Level 2
3-Spread Stop Loss. ‘ou shouldset a maximum stop of 2-3 spreads
for all daytrades you do. I've 3] [BestMerket 1 pl 7 Iillustrated how this looks in the level =a ea A Sd2 window to the right. buy on the ask in this ase
You buy at 11 1/16, and immediately 5set a stop at 10 3/4 or 10 13/16.
Why the 12/16? So that you getexecuted before it ticks down to 10.
3/4.
Remember a lot of traders don'thave level 2 yet (especially good tipfor cheap stocks ike this one;cheap stock players tend to beundercapitalized and can't affordpro L2 data feeds etc. ouradvantage).
6 Soonas You Buy, put ing Stop Loss here at 10 13/16
Example You buy WCOM at 44 3/8 (putting an initial stop in at 43 15/16 using your software,
@PREVIOUS NEXT he
tayLU eed Mi leeta Scobey)Nee Ree nasretracernent to 1/2 the rarge
 Use Level 2 to help manage yourtiming for entnes and exats, Notes/Exceptione for this patticular trade: Usually, I'd join the bidders at 11, but Id be unlikely ta get a fill, givenespecially for stops and split- the strong buying (see all tha 11 1/16 buys on T&S) and thin number of weak mm’s on the asksecond timing for sell orders.
In fact, | would be likely to buy here at 1/16 and sell if the buyers at 11 thinned out down to 2-3 participants IfNever let a daytracde go more than 3 I'm wrong, | can always buy back in.spreads against you. If you're thatwrong about it, don't letittum into an As a general note, you probably wouldn't want to buy this stack now anyways, it’s lunch and it's already done"investment", cut it short quickly and its "run and retracement" for now. This trade might be good for only 1/8 point here, its a low percentage trade.be prepared to re-enter the tradewhen buyers come back in.
Trailing Stops and Level 2Trail your stops roughly3 spreads behind thecurrent inside bid. In thiscase, I'd probably sell rightnow, since there's 4 "wall ofsellers" and it just ran up.wideclining volume in the 1-minute chart.
if lwas in the trade fromearlier, my trailing stopwould be around 25 