LEVEL 2 Screen and How to Utilize It.
If you are going bull never buy on red. If you are going bear never buy on green. This probably makes no sense but when you watch your screen long enough you will see the colors and patterns as the price changes. Just remember every time you buy or sell the market counters your transaction. Your purchase is a spike in demand despite how big or small it still has an impact. The less volume or momentum the trade has the more impact your transaction has. Knowing this and understanding the LVL 2 colors is key. During a bull trend you will notice at least 3-4 of the top bid prices are green and the bid amounts are green. On the ASK side you will see that the first 3 or more prices are red with red ask amounts. If there is less than 3 green on bid side and 3 red on ask then its either reversing or too weak to get in. On a bear if there is 3 or more green on the ask side and 3 or more 4 red prices on the bid side (remember the first 3-5 prices) then it’s a bear trend. During lower volume times or trades these numbers won’t move as quickly and getting in on a certain trend is much easier. During high volume times or trades such as today with BAC 115M volume. These prices and amounts will be changing incredibly fast and you will want to see at least 5-7 or more full green prices. You will also see changing about 5-10 times a second is the size amounts for bid and ask. Conversely if the first 3 offers are flashing mostly red amounts it means the majority of the time the amount is dropping or showing a bearish signal. If it is flashing green it is a bullish signal. Since prices can change so quickly watching the colors of the bid/ask amounts is a good indicator. Just because the price has shot up 10% in 3 minutes and there is still 3 green offers doesn’t mean it is going to remain in that direction for long. Even with green offers if the amounts are constantly flashing red there is a good chance (not always) for a reversal so be ready.
I know this doesn’t make a lot of sense but taking everything I have learned about the LVL 2 screen and adding it to the last couple of nights. These trends seem steady enough to invest off from. One thing I noticed is when the first ask offer has flashed red and I buy on it, typically the price jumps up a notch. When its green and I buy up the price typically drops a bit. When the bid is red and I buy in the price drops when I sell it goes up. This isn’t exact and is probably worked about 70% of the time. I haven’t looked into it but my assumption is that when ASK is green it is showing a strong bear trend which means there is a lot of supply so buying up has little impact. When you sell down to a green bid there is a lot of demand. Selling down is typically bearish or shorting and buying up is bullish. This is just my thought but when someone sells down (or it looks like a short) the price almost always goes up which would cause most people who misjudged their timing to hurry and buy back their short right away to minimize losses. On the other hand people who buy in during a bearish trend bought high and as the price drops they will have to sell it back at a lower price to minimize losses. This might sound weird and during high volume trades it really doesn’t happen much. Albeit play around with a FX currency pair at 2 or 3PM Pacific time when there is me and one or two other people trading. See how much the price moves when you practice what I mentioned above. It will bounce up then drop down but only in a 3 pips and never enough to cover a spread causing you to be stuck until more traders come in. In my personal opinion as stated the market always counters so if it would appear that you shorted the counter would be for the market to increase the price. If it looks like you bought in the natural thing is to decrease the price. I say all of this because understanding that concept whether it be a huge coincidence or not has helped me turn a lot of losses into break evens or small profits.
It is unethical to place a trade that you are not fully committed to going through with. No one ever said its unethical to sell a micro lot every 20 seconds to get a 4 pip increase to go from 8 trades totaling $160 loss to $160 profit. Albeit I take a quick loss on the micros which is $1 a pip so if sold 4 I lost somewhere between 4 and 16 dollars so maximum loss on that is 10% of the profit. Not that I have done this a lot but I can vouch that if timed right certain trades can help influence future price movements. I also never suggest trying this because often times it can easily do the opposite just scaling your losses. Also this doesn’t work during high volume or strong trends. However if you find that you are stuck in a dead end trade that never seems to move and you want out but are at a loss. Trying buying or shorting some of it and seeing how the market reacts. Or at the least test it out once or twice to see if I am full of it or not ?
However, when I close out shorts I typically try to close them one at a time every 10-20 seconds when the quote has flashed red. This more times and not drops the price (this is in reference to FX by the way) has dropped another pip or two. Allowing my other trades to either become more profitable or recapture some additional losses. The same holds true for stocks as well by the way. I just never traded with such speed as I do with FX. Unless I am dead center in a reversal, closing out 1 trade every 10-20 seconds seems to continue to the process of decreasing the price. In fact, when I have shorted at say .1200 (just an example. Then the price goes to .1210 and I put in another order to short and it goes to .1220 and I short once. More, eventually the original short of .1200 becomes slightly profitable (I like scalping and take quick 50-100 profits, been burned by trying to wait for the big paydays) say 20-30 bucks and the next one is nearing profit but is still a minor loss. I will close out of the first trade capturing the profits on that one. Just as long as it’s not dead on reversal the price should move 1-2 pips in my favor which is generally just enough to get the next price point up to a few bucks positive. Close that one out and continue onto the third. When you have 8 trades open you can see how much of a loss or profit you have in total based on those trades. I generally wait until I am within 20% of profitability prior to closing unless a reversal is hitting and I feel those are going to turn into big losses. If I feel confident in the trend I will wait until 20% profitable. This is based on the price of the initial spread which is $20 bucks per 1 lot of USD/JPY so 8 trades would be $160 down to start. 20% within would be about $35 loss, 20% profit would be $35 profitable. Once I reach those mile stones I decide what to do. A lot of times since movements are never exact back and forth a lot of times your initial trade will be a loser but if you captured 6 of 8 trades with $10 profit each trade and lost $10 on the other two it’s still a $60 win. I wouldn’t suggest having 8 1 lot trades open on an account unless you have $8000 or more. I like to have enough funds to cover a 20 pip movement and not flinch at the numbers as they change. 8 trades at 10 a pip for 20 pips is $1600. Of course stop losses and closing early will prevent this I like to know that if a news event hit and I got whipsawed I could endure a heavy hit and still be alright. If you can survive that there is a good chance for a reversal afterwards. Even though the $1600 will ultimately end in some sort of loss. You have the choice to either short or buy more at that stage depending on your thoughts of movement. If you feel it will continue to drop, close out current trades and short. If you feel it will pull back. Buy up more. Originally $1,600 in losses, if you think it’s coming back and you buy up 4 more trades of 1 lot or 1 4 lot trade and it pushes back up 50%. Well 4 1 standard lot is 50% of the original volume, which increased 50% up so that reduces the original loss by 25% plus if it pushed up 50% you recovered 50% from the original loss. So you took a $1600 loss and saved 75% or $1200. Never try to recoup your entire loss thinking that you need to make that money back. More times than not you will only cause my detriment to yourself. Be smart, if that loss didn’t kill you and you can easily place more trades, than it’s not a big deal at all. In FX a 25% loss can happen within minutes, and can come right back in minutes if properly positioned. It’s when you have taken losses greater than you can endure and the FEAR comes out that’s when you lose big. I am opposite, I can handle the losses and keep my cool, it’s the wins. 1, 2, 3, big wins and now I am working with a large amount of capital and thinking man I made all that in 30 minutes if I just increase the volume from 3 to 10 on this next trend which I am certain is coming I will bank on a 20 pip move. (Okay so a volume of 10 is 10 lots or $1,000,000 of the currency, its $100 a pip profit/loss) A quick 20 pip push in your direction is a $2000 payday, opposite it’s a $2000 loss. This is where I get into trouble especially when I bought 200,000,000 pesos for $10,800,000 USD. This would have been amazing if Trump had won the debate in fact my profit would have probably ended at $10,800,000. Instead he didn’t and I don’t have $10,800,000 lol.
I just want to point out this is where strict judgement and ability to forecast is needed. Also in my own personal opinion NEVER leave a futures or FX trade open unattended or overnight. News is the strongest driving force in FX and very similar in futures and 1 article can make a huge turn in seconds. You could go to bed a winner and wake up with no account. In regards learning to news trade can be very profitable, a lot of FX traders either love news trading or completely close all trades prior to big events. The day Yellen announced no hikes, I was short AUD/USD which was doing quite well and low momentum to BOOM complete turn around and the price shot through the roof when it was announced no rate hike. The dollar immediately became weaker.
So this is how I place my buys and sells now. With AAFX I actually buy market now. I am going to pay the spread regardless and it’s a lot different than using other brokerage accounts. The reason being is if, I think SGBY is going to dip down to .0185 and I put in a 500,000 order at that price (this is a little different dealing with a penny stock but it gets the point across) and I am wrong and a news article came out saying the government just illegalized all types of cannabis. My order will get filled at .0185 and then plummet with the stock to god knows where. Buying at market however I know from watching the movement and the news roughly where the stock will be in the next couple of minutes. Also when you leave a pending order on the table it’s just kind of a filler so someone sells down the price is going to drop down to the next bid, and then the next. Which means when you bought SGBY at .0185 and then it drops down to the next bid of .018 and then .0175 etc your losing .5 cents each bid, if the demand is weak and the supply is strong that price is going to hell. However, when you buy market your sucking up the ask price pushing that price up to the next highest ask price. Again though for every transaction the market counters but if you watch your lvl 2 screen, rarely do you see bid just jump up 10% at a time. You will see the one huge number for example SGBY BID 500,000 then you will see a bunch of small bid orders like 1 or 10 or 100 since it’s a penny pushing up past the 500,000. Once the price has climbed 1 or 2 points if the trend is strong you will see 500,000 at the new price point and the path will continue. Likewise is true for a bear trend. When you see SGBY 500,000 as the first ask then a bunch of small asks pop up ahead of it, then 500,000 again at the new price that it’s a strong down trend. The reason for this is no one wants to get caught holding the bag so its small pushes up or down. When I place my initial orders at market I buy up or sell off the smaller bid/asks which will temporarily push the price in the direction I want and sometimes is enough to start a reversal or build up momentum within the trend. Also watch your spread between BID/ASK SGBY BID @ .0201 ASK @ .0202 there is a lot of resistance and this is one of the ways for a breakout. If all the sudden the bulls come out and push hard you will see the AVG price go from .02015 to up to .0202, then .0203 etc. Be careful of trades where there is a large spread such as SGBY BID .0201 ASK .021. No one wants to be caught holding the bag. Say SGBY has gone up 250% over a week and on Friday the spread is this wide. The guy holding 1M shares from Monday might see a strong push upwards with someone putting a 1M bid order up to increase demand and drive that price. If the guy with the 1M shares is satisified with that price, there is nothing stopping him from dropping all 1M shares on that bid. Which you might think since the offer is there they wanted them at that price. Which could be but a lot of times when you see those large numbers its people that are already sitting on a lot of shares looking to increase the price for a better sell off. The reverse is true, high ASK amounts are typically people getting lower on shares that know the stock is going to move soon within the next few days and want to buy up as many shares as cheap as possible.
So if the guy that put up the 1M share bid hoping to drive the price up gets dumped out and knocked out. The entire force behind that uptrend is gone unless there are multiple pushes. Which ultimately means that trend could and most likely will reverse and go the other way. Now the guy who bought 1M shares is taking an immediate loss due to the price dropping. However typically not always but most of the time when you see these large pushes, it is either an individual who has a lot of interest and resources in that particular stock or a group of people who have organized to let’s say maximize their opportunities. Sometimes when things don’t go accordingly you will see a huge bid and a huge ask at designated prices that never move. When BID/ASK doesn’t move it forces people to go around them, if a bid stops at a certain price people know they have to pay more than that amount to buy shares, vice versa is true. So When you have a large bid and ask price very close to each other more times than not it’s an individual or group selling shares at 1 price and buying shares at another to recoup any losses or balance out their portfolio. You might think it is just strong bull bear but if you actually watch true trend movement. Bears know to back down when bulls push up. Bulls know to back down when bears push down. It’s too costly to go full bore the other way. If bears have broken through and become more dominant bulls will shy away until the bears have grown weaker. If the demand goes down eventually bears have fewer opportunities to sell down. As I mentioned the market counters everything so if demand goes down supply will follow to balance. That’s when bull uprise and come back to push upward. This is the war between the two and watching a LVL 2 screen you can see how it all plays out. You won’t typically see a large BID and ASK at the same time if it’s a true trend movement. Its most likely someone or a few individuals putting a monopoly on that trade. Ever been in a great trending trade and then all of the sudden it just stops and for the rest of the day it just sits at one price range? Ever notice the 1M share bid and the 1M share ask 20 cents apart and randomly you will see people either selling off at market or changing their prices to be a few cents higher than the large bid or few cents shorter than the large ask? That’s because people want immediate money and when a strong trend they thought was going to make them rich stops it pisses them off and eventually they buy in or sell out at prices they didn’t want. All the while the large BID is buy shares at say $1 and the ask is selling them @ $1.20 it’s a great way to literally do nothing for an entire day and just reap in cash. Just as long as no one comes around and can push you out. You pretty much created your own ATM. The spreads are a lot closer though other-wise people will trade around you such as the previous example was a 20 cent spread well people will trade 5 cents higher than the bid and sell 5 cents lower than the ask bypassing. So typically you will see really tight spreads usually back to back.
AI
