Do not use Level II when
entry price. In other words, WHEN to buy.
Use Level II to your advantage, use Level II for order routing. In other
words, to WHOM to buy or sell.
Level II is
constantly used by market makers (and now individual traders)
"head fake" and hide their true intentions. You can
easily be trapped into a wrong decision by using their Level II bid and
Using Level II properly is a must for successful
incorrect usage: to watch the bid/ask
display at each price level for support or resistance and then use that Level II support and
resistance to assist you in making a decision on when to buy or sell a position?
can't tell you enough how INCORRECT this is.
For example, a trader is ready
to open a long (buy) position. He or she goes to their level II display and
notices GSCO (Goldman Sachs) , MSCO (Morgan Stanley), MLCO (Merrill Lynch)
all on the inside bid with say 8 or 9 other participants, with large size.
trader thinks "ok I've got support (many offers to buy), and the ax
(another term thrown around the internet) on
my side, this is a good time to BUY (when)."
receive their buy
confirmation and a few seconds later the stock starts to fall. All
the big boys have left the bid (buy) and are now on the ask (sell). The
stock is dropping fast and the trader feels panic taking over. They wonder how this could
happen with all the bid support they had upon entering their position. Well,
they've just been had. Welcome to loser day trading.
of what you see in Level II is about "head faking" and hiding true intentions. In fact,
it's the market makers job to cover their intentions (buying/selling) and to cause price movement
in their favor for themselves and their clients. They use Level II for this
purpose. That's their business. If a market maker has an order to buy 500,000 shares, they're not
going to sit on the bid all day. The whole world would see this and bid
the price up, knowing that the market maker would be a buyer.
Instead, they'll play the game. Go on the
bid with large size to push
the price up a little, maybe even up tick (move their bid up one level) to push
the price a little higher. All the while they're using an ECN, for example
INCA, to sell short the shares the unsuspecting trader is buying (thanks Mr. ax).
move to the sell (ask) side with large size to cause a mini panic.
this case, the market maker or makers were showing a false bid on Level
II. Instead of wanting to buy the stock they really wanted to sell
the stock, which they were doing through INCA.
the panic heightens and the stock drops, the market maker will buy back the
shares they just sold you at a higher price pocketing the difference (this is
called selling short).
will not see them buying back the stock because they will be buying
through an ECN. Very effective, and designed to profit off of traders that look for support
and resistance on the Level II screen.
Level II should be used for
ORDER ROUTING. Routing is the
ability to choose which market maker or ECN you wish to buy from or sell to.
Never use Level II as a tool to decide WHEN to enter. Instead, use
it as a tool to decide TO WHOM you wish to enter with.
Let the market
makers play their games, pay no attention,. If our price movement charts say GO,
we'll use the
market makers for OUR advantage, not theirs.
institutions and market makers trade off of price movement, not the
Level II screen, so why should you?
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