Color with Numbers
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. Understanding the supply and resistance demonstrated on the Level 2 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 what action is required. The ability to read the immediate momentum or lack thereof on the Level 2 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.
Now to the Level 2, the Bid and Ask columns show possible support and resistance 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 to 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 up. Prints in yellow show these active buyers paying higher prices or "extreme buying pressure" pushing prices higher, faster.
Prints in red are active sellers that satisfy the demand of passive buyers on the Inside Bid. This should push prices lower. Prices in purple mean that active sellers are willing to take lower prices and represent more extreme selling pressure.
Yes, passive sellers that wish to sell at prices that are higher than the Inside Bid are considered away from the market. This is resistance for future price. If they are filled from aggressive buyers, you would see yellow prints. If passive buyers want to hold out for better prices, they post below the Inside Bid and are considered away from the market. This is future support and if panic selling sets in, they will create purple prints if filled.
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 screen. For more detail, and to understand some of the intricacies, you should attend the Professional Trader course at your local Online Trading Academy center. Until next time, may all your trades be green and your losses small!
Brandon's Upcoming Schedule
December 29th-30th Orlando Broad Market Analysis Course
January 5th-11th Houston Professional Trader Course
January 15th-18th Chicago Professional Trader Course
January 26th-27th Irvine Broad Market Analysis Course
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As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An OTA graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for OTA in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the OTA family late 2005, he now balances trading, teaching and a real estate career.