's trading in 4 channel (usually happens dunng lunchtime; though theseare typically times where 2 stock weakens as well) - and enter a limit buy order at the current bid(either the inside bid or 1-2 levels outside), after you get filled then immediately offer it out at theask.
This works only if you're trading 500-1 or more shares at a time; since your profit on teenies(1/16ths) is only $62/1000. | try to scalp 1/8ths, which is $125 per round turn per 1K shares. The keyis to find a relatively liquid stock that's trading flat, using L2 and T&S to time your bids and asks
This does Not work, of course, if you trade like new traders da, buying at the ask and selling at thebid, you're giving up 2 spreads this way, which 1s unprofitable, The only time you pay retail is if thestock is moving quickly and you want to exit fast - the retail exitis the fastest way to go.
Also play around with different order routing strategies in this type of trading, eg limit buy SOESingamm or selectnet preferencing to see if you can get a price improvement It's "fishing by selectnet"so to speak.
Most of the time, though, I'll just bid for stock at the inside bid (or 1/32nd higher if T&S is bullish),and then offer out at the ask immediately (or 1/32nd lower if T&S is bearish}. These roundtripsshould take no langer than 5-10 minutes maximnurn. Unless, of course, the stock is quickly headedup and you want to ride the momentum for 4 larger gain.
Tip #3: Using L2 to trade Stocks in MotionStocks that are rapidly rebounding off@ low (or making new highs via a
 
breakout) are the two bestpays 10 EES yecawaner Sl) [P| LT) MORN oes ——] finevachor =) LPI)
Let's look at how L2 can help usrecognize and make these tradessuccessfully
In this DBCC bounce, we see the lowwas at 10 1/2 (remember largefractions, the 1/45, 1/2s and 3/4s) aretypical pivot paints for under-$40stocks in general.
 
We see lats of trades gaing off at 107/8, which is bullish. If | had entered atthe 5/8 or so, 'd offer my stock out at10 1516
Why? There's a lot of sellers at 11,501 want to be a teeny ahead of them, so! can exit my position |f thestock runs through 11, whichis unlikely, | can always buy it again at 11 1/16th or so
This is an excellent “unknown tip" to follow: if you're long a position, sell right before it hitsthe whole number resistance.
If you're right and it falls back, great, you got the max profit out of the deal. If you're wrongand buyers continue, you can always buy the stock back at a teeny or an eighth over thewhole number. This is a great way to give yourself insurance in a trade. | seldom try to hold an under-$40 stock through a whole number price level unless T&S is solid green and it's "running", I'll sell intothe whole number buyers, and wait to see if the crowd pushes it higher Sametimes they do, sometimesthey don't. | want ta “sit out" all low-percentage plays, and punching through whole numbers Is lowpercentage. Particularly decade or fives, eg 20, 25, 30. Wall of bricks, since there's a lot of marketstops/sell orders lined up at these whole number price leyels
The reverse is true for entering a position on a bottom bounce, eg if it's tanking from 29 to 27118, you might want to buy at 27 1/8 and use 26 15/6 as your stop. This is a high-percentageplay that L2 can help you with.
Level 2 helps you to see these walls of support and resistance. Bounce scalps off them toprofit.
More tips will be added in time; keep checking back as new momentum plays are developed and postedMODULE 2
<=> Module Two: Worksheet 1- Stops and Spreads in Level 2
« The Powerpoint worksheet below will help you learn how to set andkeep track of your stops correctly using Level 2« You should use both the 1-minute intraday chart support level Andee Level 2 to set your trading stops.« Use Level 2 to determine the best stop by looking at the size of thebids at each price level:
Meduke Compichensive Level 2 Trading Techniques: Back te
1. Itis usually best to set your initial stops no more than 3-4 spreads away from the current market.
2. Using the pice spread on Level 2 that the "anc" trades at should give you an idea as to the tradepotential. Eg, if SBSH is the ax trading AMZN and his Bid is 82 1/2 Ask $4 5/8 that tells you thatyour trace potential should be roughly 2 points, assuming you bought where the ax did on anuptrend.
3. Ifthe bid levels start to shrink and T&:S shows a string of trades going off at the bid then sellers are lein control and you should exit the position immediately.
4. Ifthe trade is wiggling within a 2-3 spread range then watch T&S ta see if a trend develops, if itdoesnit then get out of the trade if the market (¢COMPQ, sector index) starts to go down.
5. Ifthe trade goes your direction and more buyers come in, set a trailing stop 2-3 spreads awayfrom the inside market.
POP QUIZ Question #1: Ok here's DELL, you just gotfilled an ISLD at 53 9/16 and SBSH is the ax. Where'syour stop?
My stop is set at:
A) Ident have one, DELL is a good company
B) Fa OVI6
53.374
0)5338 Ie
E) A and D above
 
Bonus Q: How wide is SASH's “trade box"?
 
POP QUIZ Question #2: Here's AMZN, you bought at 9113/16 and MLCO's the ax. Where's your stop? AMZN - 9178 b 9178 a 9Z 1x27 105M 14:50A921
F) 90
oot 12
D) I don't have one, | like AMZN
(Answers at bottom of this page)
 
| Eee yet 
You should use this worksheet (or a similar one you make yourself} to help developyour skills to correctly set and follow daytrading stops using Level 2.
Directions:
1 Choose 1 stock to follow and set up your level 2 window next to a 1-minute chart
2. Following the example that's been filled in already, enter the ticker, current bid and ask thatyou would buy it at (a papertrading exercise), where you would set your stop at (no morethan 3 spreads away, using your level 2 window), and the width of the mm's trade box. Also,enter where you would set trailing stops and your profit/loss on the trade
3. This is a great technique to get familiar practicing setting stops using a Level 2 window.
Level 2 Stops Daytrading Worksheet Goa: Improve my ability to set stops using Level 2
TICKER CURRENT INSIDE BID x INSIDE ASK Where is 3 spreads away How Wide is the Trailing Profit/LossWHERE | WOULD BUY IT from the inside Bid? “ay’’s trade box? Stop At?
 
 
NOFL BELG SL LI8 30778 (your stop) SBSH 32 1/6 x 32 12
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Pop Quiz answers: For DELL, your initial stop should be set at D) 53 3/8 (or even a spread higher). DELLSBSH Trade Box is 53 1/2 x 53 3/4, only 1/4 point. For AMZN, your stop should be set at C) 91 1/2
Module F |Two
<> Module Two: Worksheet 2- Market Maker Headtake Plays
« The Powerpoint worksheet below will help you learn how to avoidbeing taken advantage of by mm “headfake"-type trading
 
Back toMODULE 2
S
1 I|want you to develop an experienced, practiced eye for suspicious market maker activity inthis exercise, You wall be examining your L2/T&S for the following
« Acting like a buyer when they're really selling« Posting fake bid sizes to give the illusion of buying or selling support¢ Flipping from the bid to the ask/vice-versa or fading back 2-3 spreads
2. Your primary guide will be "how strong and consistent is this trader's buying vs selling" as confirmedby a) the length of time he stays at the bid/ask in the face of buying/selling and b) the trades you seaexecuted in the time anc sales window.
3. Your objective is to \earn to avoid geting suckered into “bull traps" and "bear traps" (making it looklike there's buying/selling when there realy isn't) and to better anticipate market maker direction
You should use this worksheet (or a similar one you make yourself) to help develop your skills tocorrectly identify and avoid the most common and costly market maker headfakes that professionaltraders use:Directions:
For one trading day, Choose 3 stocks to follow intensely and look at nothing but the L2 and T&S for them
2. Whenever you see one of the "market maker headfakes" that we described above, make a note of it onthe chart and identify the Real Pivot (top/battorn) that the stocks drops to or gains to
3, For each of these headfakes, | want you to jot down 4 brief note that describes what "warning signals"were there, if any, that you could've / should've seen to help you keep out of the trade.
4. lfyou were wrong {it looked like a headfake but wasn't}, |dentify why, and what you could've done differentlyto capitalize on that particular trading situation
 
Level 2 MM Headfake Daytrading Worksheet Goal: Improve my ability to avoid getting faked out by the mm’ s
 
TICKER = Tppe of Suspected MA Headyake: The Price this was The Real Pivot! Notes for howActing like Buyer Fake Bid Size Flipping/Dropping Observed At: Breakout Price = should’ ve traded itCPWR | X (48cO) 2i if2 20118 T&S showed all sellers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Module hen: 42 Ti Techn Ss: atte
<> Module Two: Worksheet - Graphs, T&S and Level2« The Powerpoint worksheet below will help you learn how to integrateall 3 sets of indicators: 1-minute graphs, T&S and Level 2 into yourdaytrading skill set.
&
1 Remember that you only want to risk your cash on “high-percentage daytrades”, where severalindicators Ine up, Be the elevation and windage im a nile scope, to give you an achievable target trade
2 This worksheet will help you Gavelop the discipline needed to complete @ “mertal chacidist" of thingsto identify correctly before entering a bade.
Use this worksheet (or a similar one you make yourself) to help develop your skills to integrate all 3sets of indicators prior to buying (or shorting) a stock:
Directions:
1. For one trading day, Choose 1 stock with good volume and volatility (over 1M/day volume and S%+intraday trading range) to follovs intensely and look at the L2 window, T&S and 1-minute chart for
2. You will be searching for when the technical indicators, L2 And T&S ail tell you the stock is @ buy
3. Enter the details for Why each of these 3 indicators told you it was a buy, along with the actual price youwould buy the stock at. (this is a papertrading activity)
4. Enter the stop you would set for the stock based on your 1-minute chart support level (or 3 spreads downfrom the buy price, whichever is smaller)
5. Finally, enter where you would have sold the stock at. NOTE: Your Exit criteria (when you sellicover) can bebased on something looking bad (an “early warming sign") in Any of the 3 indicators; your Buy criteria,however, should be when all 3 look good at the same time
Screensnap: Worksheet 3 - Click here to dil Powerpoint worksheet file (43 K)
Level 2 Combination Daytading Worksheet Gains mysbiiy's Kesh whenio beyhaseton atcoe, TA, un ca
‘ninat oo you see earn owarta yous ag”
% Stock Ticker:The 3Indieaters: sing is nies?
fe AL Inticsiog
1-Minute Chart: oe
ee
Time & Sales: Price You Boughethe Stock at
Prise You'd Set the Stock at
Level 2:is you Selle Sen orto Lae(ercle ntuch one)
(Mave yours naitbe exacr pivot‘ime utc 8 you" ude, n't‘sory abou Ie nor,
 
 
 
 
 
 
 
 
 
 
 
 
 Module Co ive Level 2 Trading fechniques: Back todiuile ta ha TN te 1s wan
Module Two: Worksheet 4 - Shadowing the Ax - Recognizingand trading with the Market Maker Buyer
« The Powerpoint worksheet below will help you learn how to followQe the lead market maker (ax) who is buying stock at a given point intime.
 
e This worksheet will help you figure out how ta recognize net buying actiatyby a major market maker and to profit frorn this activity. You should buy 4stock when you see a market maker buying in the face of weaker sellingpressure, as the price will nse.
i
Use this worksheet (or a similar one you make yourself) to help develop your skills to "jump on boardthe train" and buy stock when a major player (mm ax) is also buying, so you can ride the momentumup for profit:
Directions:
1. STOCK SELECTION Choose one stock you're farniliar with and first determine if the stock is ina 5-dayuptrend, downtrend, or flat and choppy (indeterminate) trend. ‘fou want to find a stock that's breakingabove a key resistance level, not a stock that's in a downtrend (no bottom fishing for this technique, whenyou're first learming). 
 
you're first learning).
2. MARKET MAKER AX RECOGNITION: Next, Using your Level 2 window and Time & Sales, during thetime period of 9:45 till 10:45, pick out "3 favorites" that you suspect may be the ax for the stock duringthat time period. Try and narrow it down to one market participant, learn how to spot who's buying it up
3. What should you look for? See if, in T&S, you see either: trades going off at the bid and one mm is“holding the price up", or, preferably, you see the mm jumping up to the inside bid repeatedly as the pricemoves up several points, eg you see a major market maker “chasing the stock" on the inside bid
4. DAYTRADE PLAY & TRADE MANAGEMENT. Ok, you think you know who is a buyer of the stock; let'snow use that to prafit. In the worksheet below, your papertrade exercise here is to see “how right you wouldhave been", had you followed that ax in the trade. Mimic the mm ax's behavior, eg buy as he's buying, sellwhen he either drops away from the inside bid by 4 couple of levels or flins to the ask. How would youtrade the stock based on what you're seeing?
“Shadowing the Ax: When is he Buying?
Stock Ticker:_ _
Which of the following marketmakers co you think is doing themost buying of this stock duringa given 10-20 minute timefrarne(one of the 'waves' in tradingactivity from 9:45-10:45)7
___ SBSH__GscO~~ MLco__MscO“MASH___ DEAN“HRZG___ SHWDPWC~~ SLkeDEAN__ MADF“BEST___ Other:
Notes: Remember, this works best.for stocks that aren’t as heavilytraded on ECNs (eg ISLD, ARCAINCA). Also, pick a moderate-volume stock (600K-2M/day)priced from $15-$80 that’sbreaking tha a key resistance levelor is in a steady uptrend
Goal Improve my ability to identify when a market maker is
buying stock so | can duplicate his trading for personal profit
At what Price cic you see the mrn startto buy more of the stock at? When?
At what Price cid you see the mm stopbuying the stock at? When?
 
 
 
 
 
Your Daytrading Activity:
How would you trade the stock based onthis “buy pattern"? YYould you join him atthe bid, bid a teeny or 32nd more, or payretail (inside ask) for it?
 
100? 2007 3007 500? 1000? 2K or more?
 
 
 
 
How many shares of the stock would you buy?
Once you see the market makerstop buying, how co you trade iteDo you exit the entire positionimmediately, do you wait, or do youscale out of the position (eq sell halfnow and wad
  
 
 
 
 
Did you Sell too Soon or tooLate? (circle which one}
‘What's your Net Profit/Loss from
the trade?
 
 ModuleTwo
morenensive Level 2 Trading Techniques: Back toMODULE 2
<> Module Two: Activity 1 - "Name That Ax"
sete
=
re
« Being Able to Spot the Market Maker who has the most Buying/SellingActivity at a Given Point in Time on Level 2 Is an Important DaytradingSkill
« Following the ax is a relatively safe way to play stocks.
© This activity is designed to help you with your "ax recognition" anddaytrading skills.
The GOAL for this activity is for you to be able to correctly identify who the "ax" marketmaker is in a given stock using your Level 2 screen.
Directions:
1
Ma
Examp
. Wirte down the following:
Choose 1 stock to watch all day in a Level 2 window that has an average daily volume>3million shares. Do not pick a DELLICSCOMNTC etc. that has ask/bid colurnns 5-10market makers wide; instead Choose a stock who's level 2 inside bid ask averages from1-4 market makers wide with volume over 3Mil shares and an intraday trading range of atleast 5% (eg $1 on a $20 stock}.
Carefully watch the level ? action’ premarket, of the two, is it market makers or chippies onARCA/INCAISLD etc. the main player premarket? ¥hich one is moving the price?
. After the market opens, watch the stock for a half hour or so and see if you can
determine which market maker is frequently on the inside bid or ask.. Make sure tofollow a major market maker like SBSH MLCO MSCO GSCO (not hrzg/sikc etc).
. Write down the following:
stock's closing price from yesterday,
today's opening price,
the name of the market maker you think is the "ax" for the time period you'rewatching,
humber of times this market maker is at the “best bid" or “best ask" in a 2-hourtimeframe (use a simple checksheet to keep track of this)
Which of the following important trading signals do you observe? A) The MarketMaker is Buying in Size (he keeps refreshing his bid, and you see him buying more that40K shares (or more than 12-15 transactions) in time and sales at the same price level};B) The Market Maker is Selling In Size; you see him stay at the inside ask and sell morethat 10K shares at a given price level, Headfakes and Switching fromm the bid to the askrepeatedly (he's probably net the ax if he doesnt buy or sell a lot, jumping around).
Finally, develop a trading strategy based on your observations and consider buying orselling in response to the "ax’s" buying and selling. Try to shadow the market makers’movement. Examples of axes | follow. SBSH for NOVL price movement, MSO for SPLS.Note that the ax may frequently change throughout the day, or from day to day Look forwhoever's buying or selling a lot of stock in a given timeframe, and follow that traders’ lead.Practice trading small sizes of 100-200 shares by following the ax after papertrading forseveral days with this ax See how it works for you Good trading
   
bess:
Looking at this Level 2 chart doesn't tell you much without seeing it “in action", but for now let'sassume that SSCO is the ax on SBUX and is buying a lot of stock here. How would you trade:it? Join his bid at the ask, use a larger size {or increment the bid by 1/32) to frontrun him? Wait?Check Time and Sales? It all depends on the price action and technical signals on your 4-minute SBUX chart.Looking at this Level 2 chart doesn't tell you much without seeing it “in action", but for now let'sassume that GSCO is the ax on SBUX and is buying a lot of stock here. How would you tradeit? Join his bid at the ask, use a larger size (or increment the bid by 1/32) to frontrun him? Wait?Check Time and Sales? It all depends on the price action and technical signals on your 1-minute SBUX chart.
The immediate “battle” is betweenGSCC and whoever's selling onINCA (Instinet). The players line up.under these two for the mornent,no real strong mm's next to thisaction, SBSH and MLCO areeach a couple of levels down. It'san indeterminate L2 window untilwe see a pattern of buying orselling in the time & sales window.
IFINCA fades and we just haveISLDINITE left, with GSCO stayingstrong you might BID SBUX 275/8 1100 shares or 27 21/32 500shares etc. to frontrun. The battlegoes on.
 
MODULE 2
<> Module Two: Activity 2 - "Finding T&S Support and Resistance"
« Next to “Being Able to Keep Small Stops", this has my vote for the MostImportant Daytrading Skill to Develop
« Reading the trend of the sales going off in T&S is the best way to seewhat's really golng with the stock's price movement.
« The pace (how many trades are going off, is it faster than itwas 20minutes ago?) as well as the ratio & size of trades going off at the bidvs. ask is important to keep an eye on.
Module Comprehensive Level 2 Irading lechniques: Back to
Ef The GOAL for this activity is to help you become skilled at determining when a stock'sprice is about to "pivot", or change and go in the other direction based on your& watching trades go offin the time and sales window.
   
wen Directions:
1. Choose a stock to watch from 9:30 am til 11:00 am in a time and sales window. (Bythe way, I'd disable the "time" part of time & sales Ifl was you, there is no reason to see thetime that a trade goes off at, itis distracting cata that you don't want to have).
2. Keep an eye onthe 1-minute tick chart as well, especially from 10 00am til 14:00am
3. At first, | want to encourage you to just get a feel for the rhythm of the stock during thedifferent 10-20 minute cycles that it buys, sells, buys and sells. The rythm means the paceof the trades, how fast are they going off? Are there big blocks in there (over 5K shares), orare they mostly 100-1K size trades? How fast is the tape printing?
  4. Next, lwant you to look for directional trends in the t&s display How long does each“run" in one direction or the other last? Do you see “ir-between" trades going off at a pricein between the bid and ask, and is it signaling a pivot in the price?
5. The most important skill to develop here is to find the difference between a "RealDirectional Change" in buying vs selling versus the "noise" of individual trades, or smallflumes ot 5-7 traces, that are part of the trading patter.
6. As the stock gains momentum and you see more and more buyers (or sellers)coming in, try to estimate how long, and for how many spreads, the directionalchange will last in the time and sales window.
9° Write down the following:
specific times that you belleve the stock Is about to change direction as you watchthe t&s window (e.g, its 9:50 and, watching the t&s you think to yourself “ok | think it'sgoing to heac down new", so you write 9.50 NOVL going down on a pad of paper).
the actual times that it really did change direction that moming
how far you think the direction change may be good for, maximum (eg “ok NOVL'sgoing down, based on chart support, L? and t&s momentum | think it may be good for 3/6point change maximum")
the actual amount of price change the stock went in the direction after the "pivot"
Over time, by practicing this way, you should gain a feel for the directional support andresistance using time and sales “Reading the tape” is the most important observational skill youcan develop as a trader, the “small stops" is the most impertant trade management skill you candevelop.
Again, | would strongly recommend that you choose 2-3 stocks that you want to make a livingdaytrading from, you need a core of stocks that you know like the back of your hand. Somestocks are more difficult to trade than others, definitely avoid the most actives, as these tend toattract the best traders and have low-%aqe volatility. See my latest 4-monitor esignal anc cyben:,setup for 4 look at the stocks | was following in January 2000 (note: ARIA/TIVO were just plays forsetup for a look at the stocks | was following in January 2000 (note: ARIA/TIVG were just plays forthat day, sorne of the others like CIEN NOVL DCLK are my core trading stocks).
Your success at “tape-reading" 1s determined by your ability to correctly identify when the "tide 1sabout to tum" in the opposite direction, so that you can a) buy bottoms and b) selshort tops.Invest a lot of time in watching the tape for a couple of stocks you want to trade for a living, frorn9:20am-11:00am and perhaps 2:30prn til 4 pr. Don't burn yourself out by watching the tape allday. Best wishes!
i SIM ies: Back tBags Comprehensive Level 2 Trading Techniques: wuaiietee
<> Module Two: Activity 3 - "Reading the Outside Bid and Ask"
« As aleading indicator, it's useful to learn how to trade in response tothe strength or weakness you see in the outside bid and ask bands inyour Level 2 window. There's 2 patterns to watch for:
 
 
1. Seeing movement of mm's from the 1st outside level (green band) tothe inside (yellow band) indicates that they want to lock in theirbuysisells at this price level.
The other pattern to look for is the width of the green band (numberof market participants) either increasing or decreasing in response toabreakthrough or breakdown past a key supportresistance level.
by
The GOAL for this activity is to help you become familiar with how to look at the entireLevel 2 window as a system, including the outside bidfask bands. Of course, T&S is stillthe most important indicator. Use the activity of mms in the outside L2 bands as asecondary leading (early warning)- type trade direction indicator.
Directions:
 
1, Choose a stock to watch from 9:30 am til 11:00 am in a level 2 window
2. Identify the "most important market makers" for this stock based on who's buying ancselling on the inside (yellow) bands initially (with first preference givento MLCO MSCOSBSH GSO, as usual).3. The most important skill to develap here 1s to see how the actuity of the market makers andECN's inthe green (1st outside) band affect the the short-term momenturn trend of thestock price.
4. This is yet another tool that you should add to your bag of trading tricks, itis yet anctherLevel 2 trading indicator an experienced trader watches to help assess the momentum ofthe stock.
[interval Chart
Quick L2 trading example: hereyOu see a bearish setup as far as.the 1st outside (green) band goes:LEHM bid 1 vs 4 market makerseach offering 10 at the ask meansId think this stock would go down to26 1/16 before it will go up to 26 f ery3. oe
Remember, it's dynamic, screspond with your trades inaccordance with the pattems ofbuying and selling strength &weakness using charts, T&S and2
 
‘Of course, the selling pressure in the inside ask is also bearish, and T&S is mixed, so it's pretty obvious inthis example that the stock will retrace a bit. For your stock, check the pattem in the green band to see wherethe other tracers are lining up their bids and offers, using it to help time your trade entries and exits.
e i iques: BackModule Corntiprchensive Level 2 Tracing Techniques: woes D be
Activities Module Two: Activity 4 - "When the Market Maker Flips Over"
« Often times you'll see a market maker filp from the Inside bid to anoutside ask level, or vice versa. This Indicates he's "through" withthe stock In the direction he was playing It, for the time belng (maybeafew minutes or so), and gives you an indicator that you might wantto bail out of the trade at that time.
Once a market maker has finished selling {or buying) for themoment, you can mimic his trade direction, again with confirmationsfrom T&S and your 1-minute charts, to gain a momentum edge onother traders.
AS always, be careful to watch the tape, as he may be fooling aroundwith posted bids/asks to give the appearance of buying or sellingwhen his true direction is routed through an ECN, however this isn'tas likely for the 4 major mms we'