How to use Level 2 and Time & Sales as a Momentum Day Trader

alright guys so we're going to do a little video lesson here on level 2 so what we're going to look at is I'm just going to put up the 1-minute chart here and look at the level two on direct access software this is the desk trader demo this is where we're watching all of our students trading and this right here is the level two I'm going to make this a little bit smaller see so we're looking at praa and this has some news out on it and it's selling off it just dropped eight points in the last few minutes so you know it's selling off with some serious volume and now the reason this is higher risk is because this particular stock has big spreads when you look at the level 2 you see 46 98 on the bid 47:25 on the ask there's a 27 cent spread between the bid and the ask and look at how quickly this is moving 47 90 by 48 okay so the break over 48 there is important that's this little flag breaking the upside and look at how quickly we just went from 48 to 49 to 50 you know this is a lot of volatility here and that's a nice bounce but the risk is really high so traders who got in this a little bit early right under 48 and it did down here on this candle wick to 46 25 it dipped down almost two points we can take trades without having to take really high levels of risk so let's write it now saying that d FD sheet will be discussing mostly function that down that's the benzene go pro radio so we'll look at the trade we took earlier on a TVI this is a short here shorting the first woman to candle to make a new high okay so your stop is 3780 in your short at 3766 so you're risking 14 cents all right you could take 2,000 shares and you're risking 300 bucks all right now the profit potential on this with 2,000 shares from 3766 this came all the way down really without giving you an exit indicator to 37 so that's 1,200 bucks based on $300 risk and then all the way here down to 36 50 36 $62,000 based on $300 risk so that is a really good profit loss ratio you risk 300 to make 1200 right now when we flip back over here to praa we're looking at a chart where you had to risk two points right to make well two points it popped up two points so if you took a thousand shares you're risking a you're risking 2,000 to make 2,000 if you took a hundred shares you're risking $200 to make $200 so the risk reward ratio just isn't really there now you could say well I wouldn't have let it go that far I was going to keep a tighter stop but then look at how quickly this moves this moves very very quickly all right so we're talking here just to start about the chart patterns okay so looking at setups that offer two to one profit loss ratios that's really important with trade the critical keys to success is a trader number one risk management learning how to manage your risk on every single trade you take number two proper stock selection this is a high risk stock to trade it's not wouldn't be great stock selection to take this trade versus one of the easier ones all right and then you also need to understand chart patterns finding the right entry now this is a decent entry here it just happens that this is on a stock where the spreads are really brutal where the slippage would be really bad and where your risk is higher okay but this pattern itself is okay and then lastly you have to understand the nitty-gritty pickles of how to trade and that means reading level two so the level two here your typical stock is going to offer you a simple level one that's the bid and the ask every stock trades with a bit of mask spread so right now the bid is 4903 and the ask is forty nine forty two got a forty cent spread that's the bid in the ask alright you can buy on the bid you can buy on the ask you can sell on either side or you can sell in the middle level two offers you more depth it's also called market depth it shows you how many shares are actually sitting on either side okay so in this case the seven represents 700 and the two represents 200 the 10 represents a thousand so when you've got this one here that's a hundred shares sitting on the bid and then on the ask you've got another hundred shares okay so now we're getting a little more depth we understand the current price of the bid and ask but say you wanted to buy 10,000 shares but you only see one share here or one 100 shares there aren't enough people selling at that price to allow you to buy a thousand shares or 10,000 shares okay so by reading the market depth we can get a better sense of the strength or weakness of the market in this particular name I typically I'm going to look at this first level this is the current price okay so we've got 48 56 and you see one two three market makers are all sitting there offering shares to buy okay so someone is a buyer sitting here now remember the market is closed and it's closed in the sense that when a stock does its IPO its initial public offering they release a fixed number of shares onto the market so let's say just for simplicity they release a hundred million shares okay so every time you are buying you're buying from someone who's selling and every time you're selling you're selling to someone who's buying we're just rotating shares within that hundred million share pool okay so stocks that have a bigger pool of share have a lot more trading activity a lot more people are involved in the stock and that means there's a tremendous amount of supply so look up here on our trade ideas information window let's see look at praa this has a float of 47 million shares that's how many shares are available to trade on the open market 47 million sounds like a lot of shares let's look at Bank of America 10 billion shares and this is important there's 10 billion shares a Bank of America this is a huge level of supply Bank of America is up 1% today when you have a huge level of supply it would take an equally large amount of demand to create large moves in the price of the stock so stocks that have limited supply will move a lot faster than stocks that have really big supply that's why we look at the lower float stocks now it's not the float is not relative to the price of the stock because here's a 3/4 dollar stock with a 600 million share flow so you can have high float stocks heavy float stocks that are still low price and you can have expensive stocks that have very low flow so the float and the price are not intertwined they're not related ok but what you will notice is that when you have a lot more supply the spreads tighten up so here we have a 30 cent spread you know that means if you buy if you want to get in this right away you've got to buy on the ask okay so you're gonna buy a thousand shares 48 92 91 okay so you could buy that and then as soon as you're in it you're already down 30 cents because if you wanted to sell you've got to sell to a buyer on the bid right there down 30 cents that's that's a $300 loss instantly so usually a trade or a day trader doesn't want to trade stocks that have huge spreads just because the risk is so much higher as soon as you get in you're down you know 30 cents it means it needs to go up you know 60 cents on the ask so you can sell for a 30 cent profit down on the bit you know and of course you can try to sell on the ask and you got to wait if you're going to sell here you have to wait for a buyer to come buy shares from you okay so when you've got a low float stock it's not uncommon to see bigger spreads that's why I'm especially cautious of trading low float stocks that are high price because they can be so volatile a low price stock stock under $10 that also has a low float a big spread maybe five cents or eight cents which is big but it's much more manageable than a big spread on a 40 or 50 dollar stock okay so look here when you look at the level two you've got the first level of market depth okay so this is you've got the buyers here at 47 49 oh seven forty nine ten forty nine nineteen eighteen alright so who's who else is lined up here we've also got a buyer lined up in 49 ten that's the red bar and you've got more buyers lined up at 4902 and if somewhere in here you end up seeing a buyer that has a lot of size like a 20 or 30,000 share buyer that indicates some level of support there's a large buyer there he's putting in a bid and he's propping up the stock alternatively on the ask if you see a large cellar somewhere down here whether it's a 49 or 54 56 57 that could indicate someone that's holding the price down a little bit and this is all information that you wouldn't have if you only look at level one you have to look at level two to get this market depth now just a moment the moment ago we saw this drop from 49 48 90 down to 48 60 where it is now and you saw there was a pretty big buyer there holding it up right but all these red sales went through let's scroll back here they all went through at 4890 4890 all these red sales were going through that buyer got filled and the stock dropped and it instantly dropped once that support was gone it dropped very quickly down to 48 65 so learning to anticipate those types of moves can help you as an active day trader because you can watch the level 2 and kind of learn to anticipate where you might get pops or where you might get quick drops but remember also that we don't trade just on level 2 you know we wouldn't trade level 2 and not trade with a chart you can't do that you trade the chart first you look at the price where you want to be buying say it's at 48 dollars or at 50 dollars wherever it is you look at the price you want to buy on the chart based on the pattern and then you look over at level 2 you take a look at the spreads right do we have a 10-cent spread or a 20 cent spread or is it a tight spread so the stocks that we were trading earlier ATV I could take a look at that one ATV I this has a 1 cent spread look at the float 335 million share flow okay so the floats a little heavier but it's still moving quite a lot today it's moving because it has a catalyst so this is the right type of stock to trade it's a stock with news that has a respectable flow of the floats a little heavier than I usually like but the news is strong enough there's enough demand for the stock to really make a big move and you can see that there's a lot of buyers and sellers so if you want to take larger size you could get in with a thousand shares or 2,000 shares because there's a lot of people selling and buying on both sides of the bid and ask okay and this right here is you know a fairly tight spread 1 cent spread but the stock is still moving quickly if we got in a thousand shares we're first looking we're already you know we've already seen $100 down and now back up but then in contrast praa right now 50 cent spread how do you manage risk with a 50 cent spread you have to have a very very high level of confidence because as soon as you get in you're risking a lot if you put out an order to buy if you want to get in this you can get in on the bid alright and you can just sit here on the bid and wait you have to wait for a seller to come through and sell you shares so when you see these orders going through remember how I said this is a closed market this is a pool alright we know we've got X number of shares whether it's a hundred million or ten billion so what we see here is being buys or sells well they're both at the same time you're selling and someone's buying what makes these red or green is whether the price takes place at the bid or at the ask what takes place on the ask it's a sign of weakness someone is unloading shares right at the bid price and white takes place at the ask someone is buying right at the ask price so that's more bullish that's what that red and green mean and then the white is when transactions take place in between the spread okay so anything in between the spread is just going to be white so when we see red we know that people are hitting the bid they're bailing out and you can see how quickly this drops but look here you've got ten thousand share buyer at forty eight twenty five so there's a little bit of support down there at 48 25 this is typically something I would look for this indicates that someone is here holding this up a little bit so and look at that look at how quickly that got that got taken out all right so what problems are there there's a there's a 7600 share order that went through someone sold seventy six hundred shares another person sold 2000 and then the 25 was gone and we dropped from their 50 Cent's and of course this that type of drop is consistent with the level of volatility that you'll have on the stock of this price range that has a low float that's trading you know with news so when a stock sells off from $55 down to 45 five dollars you might think well Jesus couldn't be a lot of opportunity here to profit and on the one hand there is there's certainly opportunity if you can capitalize on it but it carries a lot more risk you have to think of every trade as being a certain level of risk you're taking a risk every time you trade so you want to minimize that risk you want to take trades where you can really get the most profit with the least amount of risk that way even if you're wrong five times in a row you're not going to destroy your account you're just going to take small losses but with this praa it would be almost impossible to have small losses because of the spreads so it is certainly hard to watch the level to when it's moving really fast when I first get into a trade you know the first thing I'm looking at is the chart pattern do I like the chart pattern do I like the stock can I manage my risk alright and that's just general I know right away on this one it's going to be hard to manage risk because of how much it just dropped but you know I try to get a sense of what the risk will be like I look at the level two and then I can again do a little more risk analysis what's the spread like you know how thin or thick is the level to so this is a very thin level - you've got big spreads and each level is separated by like 10 cents 20 cents so we've got 48 80486 49 49 50 190 I've got a lot of big spreads in those levels not just between the bid and ass but between each level on either side whereas a thicker thickly traded stock like Sprint for instance you've got a ton of people sitting on both sides with a one cent spread and it's it's so thick it's not even showing the next level because it's just it's so tight alright so this is a very thick level - something more in between will be probably a TVI you know where it's fairly thick and you can see you know each level is one cent away so you've got 29 28 25 another hi I usually look for something that's kind of a happy medium I would never date trade something like sprint or Bank of America because they're just not going to move right we're day traders we need stocks that are going to make big boobs but then on the other hand a stock look praa is going to move so quickly and make such rapid moves that it's going to be really hard to manage risk it'll whip around yeah so this might trade in the tight spread momentarily the way it is right here but generally it's it's a thinly traded name and as soon as that 58 is gone and you'll have 26 up so you know you're you'll be down 26 cents as soon as that 58 is gone it's a little heavier on the ask side with 73 75 78 and I know when you're first looking at level 2 it seems like a lot to read and that's why the first thing to study is not level 2 it's not the most important thing the first thing is studying risk management stock selection and chart patterns right learn how to recognize those bull flags like today we took a trade on a V XL and this is a good example a V XL we are watching this long over 1440 ok so let me pull this back here ok so right here where we said we like this long over $14.40 so then ok the chart looks great we've got consolidation we've got one two tops and we're coming up for a third tab so we've got a little bit of a flat top level of resistance pretty simple we look over at the level two and we saw ok at 14:40 right here there were 20,000 shares so someone was sitting there trying to sell 20,000 shares of 1440 alright so initially that person's kind of putting up a little bit of a wall but then once you start to see the orders come through and they're all going to be green you know 2,000 shares 5,000 thousand eight thousand all at 14:40 right as that's about to break I jumped in and instantly we popped up to 1450 and again there was another little wall there 1450 we need buyers to come in and buy up all the curves that someone was selling 1450 broke and next thing you know we were at 1475 and that right there was $500 profit and the daily goal trading a simple chart pattern right but also understanding the importance of level 2 so see right there this is a good example again the 25,000 shares sitting on the bid you've got support there and how quickly it broke from 1450 and just popped up I'm sure what this is doing here so we're actually coming back up here to a double top on the daily on the intraday we've got a high of 14 84 so when we see double tops we know that these are typically not the best pattern to buy because look at all this empty space here in the middle right the safe place to enter this was like way down in this area down at the bottom of the circle okay now I'm not sure that I would have entered it down here at 2:30 in the afternoon but that would have been the safer place to get in now okay it's come back up well we have this Big W shape that down up down and then back up so what we need to see this do is consolidate so we've got this double top the u-shape typically these pull back and then we want to see consolidation right here so this is going to be a cup and this area here will be the handle once we have the handle will have consolidation underneath this 1475 level and then we'll be looking at the level to 1475 for the breakout and what may happen is we look at 1475 and lo and behold there's a 20,000 share seller someone is sitting there heavy of 1475 because that is a critical resistance level and it's not going to break easily when we see that big seller on the level two it confirms what we suspect that this is an important place on the chart other people recognize it too it's not just us so that's what I would look for whether or not that happens on this particular name you know at this time in the afternoon I'm not sure it may just come up here double top and sell off a lot of people do like to short double tops with a stop right over this level simply because of the fact that it is extended from this move down here from 12:40 it just made a big pop up okay so now the software we're looking at here is - trader Pro so what we have we've got the bit on the left the ask on the right you see we've got a short a cancel replace and a bikie alright so if we want to get in this I would click on the ask that'll change the price to the current ask price and then I can just press buy alternatively I can go down here and use market order or I could route directly to one of these market makers this is called direct access routing when you route directly to a market maker so this right here is kind of like a little island right and traders from all around the world are coming to meet right here and this is the current bid and ask but you can come in to this island from a thousand different directions in those different directions would be Nasdaq ARCA edge X that's byx night right these are all different routes into the island okay but they're all going to land at the same place and we're looking at the same price this is where we all come together and the great thing about trading online is that we're all trading on the same level playing field because we're all meeting at the same price okay so you can choose which route you'll use because some will be a little faster than others all right so some will match you up with a buyer a little quicker than others and that's why I like to use direct access routing some of the full-service brokers that you know are out there some of the really big names they don't offer direct access route and they just offer a limit or market orders the problem with that is the routing is usually a little bit slower so a direct access broker like speed trader which uses - trader pros the platform is a really good place to trade okay so you choose your route we'll say we'll use our kalimba 'the long thousand shares 1449 all you got to do is press the Buy button and you're in cancel and then once you're in this is change from saying short to saying sell will give you the option to sell those shares back on the market now you can of course sell up here on the ass you can be a seller up here 1449 but you'll have to wait for someone to come and buy the shares from you okay every time shares are sold there's a buyer so right here you've already got someone saying they're willing to buy 100 shares a 1435 so if you don't want to wait a 14-3 1449 you can just hit the bid press that 1435 click the sell button and you're out alright but this is all part of level 2 you wouldn't be able to see any of this when you're looking just to level one level one looks more like like that okay that's all you see but that that leaves you almost blindfold you can't see the depth of the market right you don't know well who's below 1437 is there someone sitting at 1436 with a hundred thousand shares providing a ton of support or is there nobody until 14 and who's above 14:47 is there someone right above there providing creating resistance or is there nothing until 15 so that's when we start to need to look a little bit deeper see okay there's someone at 1425 with someone at 1455 or there's two buyers here at 14 31 when there's only one at 14:40 that's selling this helps us understand the market a little bit better when I started trading I didn't know anything about level 2 you know all I knew was level 1 when I logged into my you know regular old etrade account you would just see you know this kind of thing okay well I can by 1437 and just type in 2000 shares you click buy and you gotta click refresh a couple times and it comes back up and shows the new price then you click sell right but that's I mean that's not feasible for day trading it's really not going to work you need to be able to see everything else that's going on ok so this window here is called the market depth the level 2 and then this window is the time and sales these are each order going through in real time the price the number of shares and in the exchange right this was the route used to get to this place right here ARCA edge X F a DF etc now some traders instead of having to click here and type here to buy they'll use hotkeys now the advantage of hotkeys is that you can go up here into your into your windows whereas it it oops that's why okay so we've got all these hot keys so what you can do is you can go into the hockey configuration and you can map specific keys to do specific things in this window right here so you can create a key to buy 1000 shares at the ask price or to sell a thousand shares of the bid price or you could create a hotkey to put out an automatic stop 20 cents away so if the stock drops 20 cents it'll sell your position for a loss so it won't just keep going down you can create hotkeys to change which route you'll use down here how many shares you want to buy how many cents above the ask you want to put this to give you a little extra room to get filled right because at this moment here we can see there's 600 shares the 5 plus the 1 is 600 ok so say you want to buy a thousand maybe you get filled 635 and then it pops up to 1440 alright so by putting this up to 1440 2 or something like that we ensure we'll get the first 600 and then also leave room to fill the rest maybe a little bit higher

Channel: Warrior Trading

Views: 478,809

Rating: 4.7376084 out of 5

Keywords: day trading, day trading strategies, trading strategies, how to day trade, beginner trading strategies, momentum day trading, stocks, trading, how to trade, stock trading, penny stocks, pdt rule, shares, float, volume, candles, profits, Wall St, finance, brokers, Ross Cameron, warrior trading, day trade warrior

Id: pJuG5YtVF84

Length: 28min 54sec (1734 seconds)

Published: Tue Nov 03 2015