Color With Numbers

Brandon Wendell
Instructor, CMT

At Online Trading Academy, we teach trading. That doesn’t mean that you have to be a scalper or momentum trader to benefit from our education or even to benefit from understanding the data presented on Level 2 or TotalView. Understanding the supply and demand zones demonstrated by those tools will benefit swing and position traders as well. All traders should be planning their trades before they enter them. The three critical pieces to that plan are: the entry level for the trade, the target for profit, and most importantly, the stop where you will exit if the trade doesn’t work out.

When an entry price or target is reached, the trader is faced with a decision: should they act and if so, what action is required.  The ability to read the immediate momentum or lack thereof on either Level 2 or Totalview is important.  Even if a trader is planning on entering a trade for the next three weeks or three months, they want the best possible entry price.  Heck money is money, why leave it to the brokers!  When your target is about to be reached, you should also evaluate the momentum to see if it will continue thus expanding your profits.

If you have not seen either Totalview or Level 2, you may wonder both what they are and how they are different from each other.  The Level 2 is a trading tool that shows where limit orders have been placed by traders and are waiting to be filled.  Remember, these are waiting to be filled, once they are completed then the results would be shown on our charts.

The quotes that are on the Level 2 are only the best prices from each market participant.  Market makers, who create liquidity for the exchanges, will have many orders lying in wait at different price levels.  The Nasdaq’s Totalview shows all of the orders that have been placed by all market participants.  Therefore you are able to see more detail and the supply and demand zones.

Back to the detail on the Level 2 and Totalview, the Bid and Ask columns show possible supply and demand for the stock.  You can think of it as a newspaper’s classified section.  The Bid column is where traders and market makers place their “want ad” for stock.  These are passive buyers who want stock at their stated price.  They represent demand and therefore will support the price from going lower.

The Ask is the visible supply where passive sellers post their orders that will resist the upward movement of price. The sellers are posting their “ad” to sell their stock and must wait for an active buyer to buy from them.

One can see that with greater numbers on either the Bid or Ask side, the stock would take the path of least resistance.  If there are many passive buyers on the Bid wanting many shares of stock, and few sellers on the Ask with small amounts of supply, the stock will have an easier time moving upward and vice versa.

The Time and Sales Prints indicate the actions of ACTIVE buyers and sellers.  The prints show the true momentum since those on the bid and ask are hopeful buyers and sellers and must wait for someone to trade with them.  The green prints represent active buyers hitting the Inside Ask, removing the passive seller’s supply.  This should push prices upward.  Prints in red are active sellers that satisfy the demand of passive buyers on the Inside Bid.  This should push prices lower as demand is removed.

When you prepare to enter a trade, look to see if momentum is on your side.  There are few things more frustrating than watching a trade go immediately negative and realizing you could have had a better entry point.  Or perhaps you exited too quickly, only to see potential profits slip away.  This was a quick description of the basics of the action viewable on the Level 2 and Totalview screens.  For more detail, and to understand some of the intricacies, you should attend the Professional Trader course at your local Online Trading Academy  center.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.