15/16(again, set it 1/16th under awhole number or majorfraction).
Do Not neglect to usetrailing stops, they lock inyour profit and keepwinners from turning intolosers. It's better toconsistently take 1/4s,3/8ths and 1/2's off thetable, keeping 1/16th-1/4point stops than to takelarge hits
Another tip: You can alsoset Your stops using aDollar Amount; eg | neverlet a stock go more than$200 against me (whateverthat works out to in terms ofthe nurnber of stops etc.).‘Your stops should be "smallcuts" you take on the way to.successful, larger trades
Get used to stopping outearly, stopping out oftenThe extra commissions areasmall percentagecompared to loss of biggerchunks of your tradingcapital.
| used to get stopped outfrom 60-80% of the time:even on 4 great day | nowseldom clo better than 70%right on my trading calls; it'sthe money managementpiece of it that keeps itinthe green and keeps itprofitable.
 
Bs afeeawenct SEIT ps frevercnenSPLS + 2614 b 26246 o 260410%74 256M 1299 7[wap [sid [ei/palo [ask “hal =|
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Wi iat
i i Ww
Wall ol Sellers here at 1/4,Time & Sales goirg at Bid
The trailing stop you use depends on three factors:1) Time of day: use tighter stops if you are outside of "prime time", eg trading after 11:30 EST.
2) Momentum: If the stock is running up then ratchet up your stops faster and be prepared to sellquickly, before, the other sellers do. What goes up fast also drop fast as well
3) Price Levels Widths for Your Stock: Some stocks have each level only 1-3 participantswide, athers like SPLS will get as thick as 6-8 participants. In general, use a larger number ofspreads (up to 5) for stocks that are trading with thinner numbers of participants at each level.
Remember: You can make a living daytrading by being right only 20% of the time. Keeping tinyfrequent stops and trailing your winners up to lock in profits is the key to success |n daytrading.
Avoid the ternptation ta buy bottoms and short tops all the time; it's like fishing. Wait instead forVolume Reversals and pivots, using a stop at the previous low (for bottomfishing) or previous top(for shorting}
Stocks like WCOM and DELL are very difficult ta daytrade since everyone's scalping them all thetime for a living, try trading easier stocks at first.Module Compiehensive Level 2 Trading Techniques: MPREVIOUS NEXT
Back toMODULE 2« Seeing pivots and momentum pauses in Level 2
In addition to charts, your Level 2 window can also be helpful in identifying where theprice trend is about to change, either with new buyers coming in for a bottom bounce orselling at a top occurring, before the price crops.
Pivots: occur when the sellers are finished and new buyers come into buy a stock thatlooks oversold; or, conversely, when buyers are finished and everyone wants to take profits,where the stock looks overbought
Momentum Pauses: occurs right before a price trend pivot, where the buying and sellingpressure Is about equal. Uncertainty before the run (either up or down) is a good time toenter your trades, if you can read the tape correctly.
Momentum Pause price actionis sometimes seen in time & sales as "in-between" tradesgoing off between the current bid and ask, for example if the inside looks like 44 1/4 x413/3, you may see people splitting the bid at41 56 This is one possible indicator of apending change in direction of the price trend
One thing worth noting is that these plays are for bounces and tops that are extreme, egusually characterized by a Change of at least +/-5% for the stocks’ price action. whenyou have your portfolio tracker open these are the plays for the stocks at the ends of thespectrum, who have either gained or lost quite a bit on the day (eg shorting a top of a stockthat's up +14%, or attempting to bottom-fish a stock that's down -7.2% etc). These pivot andtmomentum pause plays are not for stocks that are in a trading range, rather it's how toidentify the "turing points" with a fair degree of accuracy on the extremes. As always, usesmall stops.
Level 2 Pivots and Momentum Pauses
Buying bottoms and selling tops is alrnost impossible; however, you can use Level 2, Time & Sales, and risk/stop.management to profit off of these corrections in stock prices. If takes practice and attention to your L2 windows.
 
te ee oe) oyselling after a run up
Pivot off the bottom,Be uae et
 Don't even try to nail the tops and bottorns exactly; the best I've done on average is 10-15% of the time for nailing itwithin 1/16th The main thing is to take a piece of the action consistently, using small stops, eg if you buy what you thinkis the bottom, make sure to sell if back if you're wrong and the stock goes against you another 1/8th or more. DELL onFeb. 8th 2000(aboyve right chart) is a good example; it kept selling off toa around -6% before rebounding later in the day.
Let's look at how to use Level 2 to help identify where these pivots and momentum pauses occur
Pivots: When you see one side (bid orask) stacked heavily in one direction a pivotmay be about to happen Note that in thisPAGE L2 box the inside (yellow) buyers are
Paces] Jesutwanst =) BI a
PAGE + 3272 b 21216 0 32732179 x10 442M 14:22
stronger than the inside sellers and the [el] [al]majority of the trades going off in T&S areat the ask, a bullish sign
I would be careful with this one, however,since the 1st outside (green) band is muchstronger with sellers.
Identifying the pivot. using t&s and therelative speed and price momentum of thetrades is helpful, as is the mm movernentwithin the bands For example, you can see
MLCO and MASH are buying here, but are . ,making the market at 3 7/8 offered Daytrader's Play: Watching the price action in T&S as we've learned
Deytrader sentiment seems bullish, as we in eerlier lessons, Keep an eye on where, within the yellow and green
have 179 bid ISLD vs 10 ask. And, as I've —- bands, the major rnarket makers are placing their bids and offers.
mentioned numerous times, HRZG's large
sizes are almost always fake, so ignore They are experienced traders and are always fading in and out of
them. positions at different sizes. (eg MLCO may have been a buyer at 3 3/4through 3 13/16, and wants to sell severall hundred thousand sharesfrom 3 13/16 up through 3 15/16, for a sizable profit In terms of piyotsand L2, watch for clues by seeing the width of the 1st outside (green)bands as 4 leading indicator, and watch to see if the major mm's areflipping frarn one side to the other
 
‘You may be relatively safe joining the ISLD bidders here at 3 1316, oreven paying up 3 27/32, with a stock like this I'd sell itif we got down to3.4 market makers at 3 13/16, though. Lasing traders would hold theposition down to 3 5/8 or something and hope for a turnaround. Get outfast in fast-moving high-volume stocks on pivots like this one.
per a] feeswore a) es)
Momentum Pauses: Again, these areDELL + 37V8 b 37146 a 3718 69x33 5A9M 14:22
where buying and selling pressure is aboutequal, right before the pivot occurs
In this T&S box for DELL you can see thatthe inside bid and ask depth is about thesame, with 7 players on each side. Moreimportantly, you can see a number of "in-between" trades going off inside the spread,at 37 3/32, 37 5/65 etc. If this keeps up, youwill slowly start to see the trend slip in onedirection or the other.
If, for example, we see trades going off atthe ask, 37 1/8, and the number of players
 
on the inside ask Start to drop you might Daytrader's Play: Pivots are dangerous to play, as the trend |swant to jump on board and hitthe askbefore ‘usually but not always’ your friend; the stock may pivot for 1-2itrolls up to 37 148 x 3/16. Even better, just spreads and then reverse back to continue it's original directiontry bidding with the “in-between” bids at 37
3/32 to get 4 fill for eny last-minute sellers. Keep especially tight stops when you're going against the trend
waiting for a reversal, as these are tougher to play than other typesWatch also in T&S for a relative slowdown in of daytrades. When done well, you feel great, and they can bethe pace of trades going off, and watch your highly profitable. You may need to take several small stops "on the‘-minute chart to see what's going on with way down" before finding the real bottorn; that's fine, justthe volume. Fading volume tends to precede remember that your adds are better when you're playing pivots ona change after a big cirectional move (either extreme moves.up or down), as ‘that crowd'/sentiment wearsdown, before the direction change occurs Of course the best pivois are to short huge gaps up on open andbuy huge gaps down on the open (huge meaning over 11-15%);again they are dangerous thoughModule Comprehensive Level 2 Trading Techimiques; — 4FREMOUS NEXT hm
Two pane
MODULE 2Order Routing via ECNs, Selectnet, SOES; limit/market order routing
DTu's Guide for Daytraders
@ Main Poinis:
« Once you are with a daytrading broker, you will have many more choices as to how you wishto route your order (how you decide to place @ buy or sell order ta execute your trade)Learning how to use these different order routing choices is important to yoursuccess. We've fried fo make this the easiest-fo-understand visual guide fo Nasdaq orderroufing available.
Besides using market and limit orders, you now have the added flexibility of Who youwant to try and buy and sell stock with: you can trade with specific market makers anduse specific ECNs to trade with that you see on your Level 2 screen.
There are Two primary ways to route your order: Using the market systems (SOES& Selectnet) and using the ECNs (ISLD ARCA etc.).
Most market makers trade on Selectnet, many online trading firms (like Datel} representbuy/sell orders using the various ECNs, eg Datek uses ISLD.
The major difference between the two. Because trading on the Nasdaq is computerized,ECN orders get handled instantaneously; but when trading with the market marketmakers via Selectnet, the mms have a choice as to whether or not they want to tradewith you (and, SOES is mandatory for mms, but as with ecn orders you will be competingwith other traders and may not get filled at the pnce level you wart). Overall, trading on ISLDseems to be the fastest and safest way to go. YVe'll get into the details below.
Nafes on using dayfrading vs. anfine discount brokers
e After leaming the basics with a browser-based online broker like Datek, you should get alevel 2 service (like esignal) and choose a direct-access daytrading broker like Cybercorp,MBTrading, or others. | would recommend using Datek or another Fast online browser-based broker for your first few months, then switch over to a daytrading broker
Many new daytraders go with daytrading brokers from the start, and the speed causes thento spend a fortune in commissions and bad trades, wiping out a lot of their trading capital.Think of it ike racing, if you want to be a racer start by driving @ sedan first, then migrate tothe Formula One racer..if you start with the fastest thing out there you can accelerate yourtrading losses. During the first 3-6 months, use a reasonably fast online discount broker. Ifyour online broker can't give your order confirmations and fills within 60 seconds on average,though, switch. | made a lot using Datek for well over 4 year; now I'm with Cyber.
New traders might want to consider using longer trading timefrarnes (eg swing/overnightholds} or longer intraday trace times (eg buy at 3:50 sell at 11 3C-type trades); you shoulduse a direct-access daytrading broker if you like to scalp within under-20 minute roundtriptype trades (my favonte). If you don't need to have your order filled within a few minutes(because you buy it at 9:50, sell it at 11:30 etc. type trading}, there's no reason to spend theextra commission load to get the faster fill tne Just be sure to always use limit orders tobuy.
Your Order Routing Choices:MARKET SYSTEMS:{trading directly w/mms}
\
OR
ECWNs |Blectronic Communication Networks}:
[trading with all traders
in the market,
including both mms and daytraders)
  
 
  
SOES. ISLD (IslandSelectNet (Smal Order INCA ratelyExecution System) ARCABIRDREDISy BRUTLet's look at the differences between ‘i ATINthese I've organized a table below ‘showing the rules, when to use, andcosts.SelectNet SOES ECNsA clSelectNet is the systern that SOES 1s a system that reba up buy and seinatket Maer Use lio Wee) lets traders trade in the order received The ISLDwith You can also trace directly blocks of 200, 600 or ECN, used by Datek andwilh mms using Selecinet 1000 shares (only), many others, is the fastestIstte orders. You cannot post called ters. SOES and most efficient ECNNadhiat Es pigsiotier[on|Eevel using executes against mms available to trade on, allowingHow does it work? Selectnet. There are 2 types of without their choice for instant executionsSelectnet orders you can make: .SOES orders are S|i : The ISLD book lets you seeBROADCAST: Your order is automatically executed all the | open orders ae eachsent to all market makers against the market price level, ECN's are the Vesimultaneously, they can maker, but the order is most popular way fordecide whether or hot to trade. held in" daytraders to trade. ‘You canLowe-priority for mim's, seconds. trade odd lots easily onused much by daytraders ECNs. and they are verBeene ene E ane anymore because ECNS quid) ‘along tars tradessend to a specific market are more efficient. ‘You can also get pricemaker, eg SBSH. Only he sees improvernents if the bid/askies Dictest order yOulere) pnce on the book is bettermaking. Hi-prionty for mms. than the one you erter.7 a ; » Srinute rule onceE e Once entered, you cannot ou've entered a :es cancel Selectnet orders ona order you ren orders tnust be inaig Rules for 10 seconds the 100s.for Tras System iy 5 cannot enter « ‘You cant send+ For preferenced orders, another order for conditional Selectnetthe mm must respond with the same stock in orders (eg al-or-none}an AcceptDecline/Partial the same direction to ECNs.to you within 15-20 (buy or sell) for 5seconds. minutes. But, itresets any time you &reverse direction,eg you canbuy/sellfbuy againwithin 5 minutes« SOES cantexecute againstECNs.* AI SOES ordersare done at theinside market.‘ Advantages ADVANTAGES:Disadvantagesfor Daytraders ADVANTAGES: ADVANTAGES: Speed and instant
You can execute orders outsidethe market for fast-movingstocks, eg preference ammwho's 2-3 spreads away.
As long as you're first inline, you can usually get afill at the ter sizeadvertised hy the market
executions. PriceImprovement possible.Liquidity is great. You canplay market maker(especially pre- and post-You can try for priceimprovement, especially if youare tracing in size, since the rmmay want to buy without“showing his hand", preferencedorders are silent to the market(thought the trade will show onthe t&s tape)
DISADVANTAGES:
For fastimownag stock the mm'sreponse time (up to 30 seconds)can cause trading delays. Maindisadvantages are speed andcost, you might get a faster fill ata better price using anECN.
Costs
Selecinet broadcast $2.50
Selectnet preference’ $1 00
 
Pop Quiz on Order Routing.Ok here you are trading from thehood of your Mercedes, placingan order to buy 1000 DELL.
 
‘You see this level 2 screen, anddecide you want to buy yourDELL on ISLD
Q1: Which of the following is theonly real Market Maker on theinside bidfask playing with allyou ECN traders?
a) INCA
b) BEST
c} ARCA
di ISLD
 
like the ECNs, where ,Selectnet is totallyoptional
DISADVANTAGES:
SOES only works on theinside market, you maynot get filled, the minutetule.
Cost free
market} by expciting the widespreads (buy at bid, sell atask)
DISADVANTAGES:
The ECN's dont’ always havestock in their books at eachprice levels, where the marketmakers may have the priceyou want available ECINparticipation varies by stock,some are more heavilytraded on ECNs than others.
Cost ISLDINTRD direct free:RED! .002/share
BRUTANGA: 015/share +$1if preferenced thru Selectnet
ATTNBTRDITNTO:O0Sishare + $4 ifpreferenced thru Selectnet
 Nofe: These pop quizzes are the resulf of a severe!fraders asking “do you have quizzes and fests af
2: Oops, anews story DTU?" so, Ml work them in as | have time
comes out saying DELL hasbeen sued by a group ofdaytraders because of faultykeyboards (they're not coffee-proof lol}. ‘You think all the ECNbooks will be traded too fast, soyou want to preference 4 marketmaker to sell outside the market.Who is the best out-of-themarket maker you should try tosell to using a Selectnetpreference order?
a) SBSHb) BTRDc) MADEd)ISLD
Answers below.
is
Quiz answers:Question 4: Answer is BEST, Bear-Steamns, the rast are ECNs
Question 2: Answer is SBSH, the outside bid matket maker with the biggest sizeModule Comprehensive Level 2 Trading Techniques: “@PREVIOUS NEXT IeTwo Back toMODULE 2Haw ta avoid getting shaken outfaked out an Level 2: using your charts to confirm tradeentries and exits (stachs, MACD, RSI etc.)
® Main Points:
Some market makers like HRZG MASH often show ridiculous bid sizes (eg 58, 104 etc} togive the false impression that there is buying strength in the stock. As soon as people start tohit their bid they often vanish (drop back a spread or two). You say "wow | thought there wasaton of buyers, where did they disappear to? These are common mm tricks to panic newdaytraders out of their positions. Let's fight back, ok?
Other times, as we saw in earlier lessons, a mm will pretend to be a seller when he's reallybuying a boatload on ISLD or INCA. The way, as always, to tell the truth of the situation is tofollow the mormenturn in Time and Sales - this tells you the genuine directional flow of thestock price.
A general rule of thumb to repeat stocks that are heavily traded primarily on ECN's (whereyou see alot of ISLD INCA ARCA action in the inside bid/ask instead of the big mms MSCOGSCO SBSH MLCQ) are not as easy to anticipate and follow using level 2; I find level 2 ismore useful for stocks that have active participation by the big mms. For these ECM-tradedstocks (eg DCLK} I find the one-minute chart is the most useful tool | still watch L2 of course,but it does not play as big 4 role in helping me to decide whether to get in a trade or net.
Some of the stocks for which L2 has been particularly worthless to me include WIlOM, INTCand MSFT, yet another reason to avoid the "most actives" when it comes to daytradingwhy? Inthese stocks, the bid/ask columns are usually 5-12 participants wide and there 1sseldom ary clear direction for net buying/selling. Of course, the T&S is still very useful here,as is the 1-minute chart.
Avoiding Fake-Outs on Level 2
Exemplos:
If you had made the common new trader's mistake of just relying on Level 2 in the example below,you'd have been wrong. Look at the price action and time: In just 3 minutes (from 9:52 to 9:56) the 1/4 bidevaporated and the stock started selling off.
Look at the Level 2 box on the left: it looks like the price may go up, right? There's a lot of bidderscompared to sellers. Now look at the Level 2 box on the nght just 3 minutes later and nothing but sellers. Fake-out!
Haw did this happen, you ask? Hopefully you didn't pay retail at 19 5/16 and sell back at 19 3/16 ar lower once itstarted dropping, that's how professionals take your capital away.
Quiz: There's TWO CLUES THAT SHOULD HAVE KEPT YOU OUT OF THIS TRADE. What are they?
(Answer below)fox lfen= t= BNIB Pon Ee-an-no EIEN
NOVL + 19174 b 19/4 a 1957680 x10 455M 09:53 NOVL - 1914 b VW o 19 51610 x 225 4.77M 09:56
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Answer
1) Time and Sales shows primarily selling action, a lot of trades going off at 19 1/4, including the block trades of 6K and7K shares. Very bearish sign
2) Weak bidders vs sellers: MADF (a small mm) and ISLD/ARCA bidders are weak. VVhen you look at T&S you Seethat over 3K shares have been bought from ISLD at 19 5/16, yet the ISLD book is still strongly weighted to sellers, it didn'tdisapper, telling you that the depth of sellers on ISLD at 5/16 is heavy. Also, MSC is right under the ISLD/PRUS asks,and he's a strong market maker.
Daytraders' Play: Keep your eye on the ball, which is Time and Sales, and the 1-minute chart. I'd look to buy this stockoff 19 support, maybe put my bid in at 19 1/16 and have a stop at 18 15/16.
Stops: Again, mms know that most traders set their stops at whole numbers and large fractions (1/4 3/6 1/2 5/8 3/4 etc)Use stops 1/16th under where the mm's drop the stock to at these major whole numbers and fractions. For decadesupporbresistance, you might want to Increase this to 3/16ths stops Follow the major mrn's closely for these plays
Example #2: In this CPWR L2 window and chart below, what do you see going on?
A lot of buying at 26 1/16th; even though It's ran up 1 1/2 points off it's bottom, Time & Sales is tellingus there's still plenty of buyers of this stock at 26 1/16. Also, sinc? SBSH is on the bid (bullish) and onlyISLD is on the ask (could be anyone, no direction indicated), It might be safe to enter a trade bybidding 26 1/32 or enter a buy 1100 CPWR at 26, frontrunning SBSH
At this point in the trade, you missed most of the major momentum, and are looking for eitherincremental scalps (eg I'd scalp this ta 3/16 - 1/4 max expectation), or short if itloses 26, for a shartscalp down to the 5/8-3/4 support. Again, ternpered by overall market direction - if it's a runaway bullmarket then | may stay in the trad a bit longer Ifit's choppy or down, I'll be very cautious on any longpositions and look to scalp only.
Declining volume that you see is also 4 bearish indicator, we may see sore weakening of the stock,unless 4 major mm steps in to buy more. Note that sell yolurne was higher than the buy volume, and thebuying ran up very quickly (weak high here), so again, cautious long even with a bullish tape; beprepared to fire off a sell (or short) if we drop back to 15/16   
he eon io mei 2 | JoPwR EA [irterveichar
(rea a)
Example #3: The old "Trying to look like a buyer when you're really selling a boatload trick" (saythat in your favorite Maxwell Smart voice), "Missed it by That Much".
Well, anyways, let's look at the L2 window below What is MADF daing, buying or selling? Would youbelieve, Selling"? No? Ok, how about "Looking like a buyer when he's really selling 50,000 shares onINCA"? (perhaps). It's hard to tell, all we know for sure is that SSCO is really buying since his bid is firm at 275/8 as seen by the tape action.
MADF, Even Though he's on the 2nd autside bid, he may be selling on INCA So could FBCO and BRUT, forthat matter What we need to always monitor is the tape and the bid/ask size’ are they staying the same?(indicating refreshed orders, impossible to tell the deoth/order flow), or are they shrinking/getting bigger?
Daytrader's Play: Looks like they're selling it for now, you might want to put in a bid forthe stock at 27 1/2and wait for 2 bounce, or sit it out until the tape shows clear direction of selling resuming
seus __|ifsexcvaker_ EIB
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in Summary, there are a few new points worth remembering about Level 2:- It should never be used as a primary directionftrend decision-making support tool
- Eis useful to monitor your precise entry and exit timing, when used in combination with 1-min chart andT&S
- MMs will either a) flip from the bid to the ask or b) change the parameters of their "trade box", (egwhere exactly they're bidding and offering the stock out at), when they believe the stock will changedirection, you should be on the side of these major players when you see it happen
- MMs will use Level 2 ta advertise false and misleading bid/ask sizes to panic out and whipsaw theinexperienced trader
-L2is useful as a trading tool only as a specific entryfexit indicator once T&S and TA has confirmed thedirection or pivot point of the trade you want to enter. Eg, if both the major sellers of SBUX got taken outabove (this time its ecns: ISLD/INCA) and NITE is alone on the ask, and T&S shows lats of trades goingoff at the ask, then you might want to pay up and buy retail at 27 11/162 Itading Techniques. PREVIOUS NEXT &
     
Module Comprehensive LevelTwo
          
  
   
Back toMODULE 2Additional insights inta how & when to use Level 2@ Main Points:. hove to integrate2 in Module Two. Level 2 isck, after usinnot a trend directior. d wall add
   
panmentation in6, Continually refine
n layoutth the
          
    
inthe use ofbased on pesome day
        
fortune with or without L2, it's aa dtrip trades in under 20 minutes. Timportant ‘to have, soit may be worthwhile to have an L2 provider for T&S access
 
How and When to Use Level 2: More TipsExamples: NeTA | Besttiarket =] BI 7
TIP#1: Recognizing and acting on high-percentage vs."indeterminate" market signals in Level 2
We've alreacy covered the high-percentage plays youneed to be effective in using Nasdaq Level 2; forexample knowing the difference between an L2 box thatshows no trend vs. one that shows buying or sellingdirection.
Pop Quiz:
Which of the two Level 2 boxes on the right shauld you [com ie]|[Bex maker >] P| oT) GRIN
buy stock for, all else being equal?
 
a) NETAb) WCOM
c} Neither
 d) Both
e} | don't know
 
answer: a) since theme's not a2 many sellers as huyore And TES is slightly biasedtothe buy side
The point is: don't buy or sell stock based on L2 alone,
particularly if it shows an "indeterminate" pattern like the
\WICOM box to the right Use T&S and chart TA to
determine stock trend and entryfexit points, not L2 be
In the WCOM example, now, if it had just tanked from 51to 45 1/2, and was starting to get buyers back, thenmaybe I'd enter a long position far the bottam bounceThe L2 alone isn't enough. T&S is king, followed by 1-minute chart technical analysis pattems
Tip #2: Making the Market for a living Using Level 2
Chris Farrell's rather uninspired "daytrade online" book goes into this method for listed / NYSEstocks; | wouldn't try to make the market the way he describes - fortunately, our L2 does becomemuch more valuadle for this type of trading.
It's simple: find a stock that