Level 2 Trading Strategies
- Traders tap into market activity using NASDAQ Level 2 from their home or office.computer image by peter Hires Images from Fotolia.com
Use NASDAQ Level 2 to observe the market for traded shares and the actual bid and asked prices for certain amounts of shares. This data helps traders to make informed decisions about entry and exit position points. The quotation system also allows traders to view activity as well as open interest buy or sell stocks. Additionally, the ability to see price clusters may help traders align technical and market information for better results. - Interpreting rapid flow of trading information from Level 2 requires experience.stock market analysis screenshot image by .shock from Fotolia.com
Use Level 2 action to shadow the "ax" in any stock. Called the ax because of the size and power wielded by the institutional player's activity in the market for a stock, traders can take advantage of the stock price movement if and when they identify the ax. The ax may use different strategies to confuse the investing public about their actual buy or sell appetite by breaking up a very large amount of shares into smaller blocks.
To make money following the ax, traders should understand how various market makers operate and act. Traders discern different market makers' personalities. If using a "scalper" strategy when following the ax, getting on the right side of the trade is essential to making money. Because Level 2 information flows quickly, the ability to make fast decisions is essential to buying or selling before opportunity trades away. - Find large institutions' buy and sell programs on Level 2.Stock Market image by Paul Heasman from Fotolia.com
Catch the wave of momentum by identifying institutional buy or sell programs on Level 2. Scalpers, whose specific intention is to capture small price moves with speed, work to get into these trades early and out before the momentum stops. Look for short pops of activity as large institutions work the market. Because many of these orders move the markets in the seller's direction, required skill to discern whether the momentum is meaningful creates trading opportunity. - Capturing narrow price spreads requires information from Level 2.business charts with us money image by Andrew Brown from Fotolia.com
Seizing the spread, the difference between the stock's bid and asked price, requires execution expertise and essential information from Level 2. Buying at the bid price, then selling almost instantly at the asked price, was the often-realized goal of many traders prior to decimal pricing in 2000.
Trading an active large capitalization stock may mean less risk and reward without access to a private trading group or network. These networks offer capital and shared performance while providing super-discounted commission rates for traders.
To counteract the effects of commissions on narrowing spreads and profitability, private trading groups like Paramount Equity Partners offer their network traders commissions as low as 0.0002 cents per share. Capturing the spread of $0.04 on 1,000 shares with this commission model allows sophisticated traders using Level 2 to make lower risk, profitable trades.
