1) What are BIDS and OFFERS and how do we use them?
- The left side of Level 2 represents the bid side. This is the side where market participants ADVERTISE to the world that they are willing to buy stock at a certain price.
- The right side of Level 2 represents the offer side. This is the side where market participants ADVERTISE to the world that they are willing to sell stock at a certain price.
- I purposely italicized the word willing. When a market participant (which could be me, you, Goldman Sachs, or a NYSE specialist) decides to place a bid or offer, he is doing nothing more than advertising a price or quote at which he is willing to buy or sell stock at.
- In order to buy stock at the bid, someone must sell it to you. In order to sell stock at the offer, someone must buy it from you. We will discuss later the circumstances this would happen. The purest form of trading is scalping, which means you will try and capture the bid/ ask spread. Meaning you will try and buy on the bid and sell on the offer.
2) What is Time and Sales and how does it help us place orders?
- Time and Sales is the place where you can see actual trades taking place, not just advertised quotes to buy or sell. In T&S you will see the price the trade took place, the size of the transaction (how many shares were traded), the exchange or route the transaction took place on (this is very important). Trades will be color coded so you will be able to quickly identify if the trade was done at the bid or the offer. This is important so you can tell if buying or selling is the dominant force.
- Green prints represent trades at a higher price than the previous prints, which is usually at the offer. We can interpret this as buying pressure. Red prints represent trades at a lower price than the previous prints, which is usually at the bid. We can interpret this as selling pressure.
- Also in T&S we will see the route where the transaction took place. This could be NYSE (New York stock exchange), CSE , BSE or PSE (Chicago, Boston or Pacific stock exchange), or an ECN (Electronic Communication Network) such as ARCA, EDGX or BATS.
3) Learn how to interpret and use all this information to determine how you will execute your trades.
- The very basic premise behind all good trading strategies is to identify an opportunity, minimize risk, and then place the trade.
- The very same way that we can identify support and resistance levels on a chart, we can use the Level 2 box and the NYSE quote to identify short term areas where we expect buying or selling to come in.
- For example: if NYSE is quoting 100,000 shares to buy on the bid, we can reasonably expect the price to be short term support.
- Example # 2: If we were already long stock and are looking for a place to possible exit our position, we will look to the NYSE quote for a price above the current inside market where they may be a large sum of stock for sale. We would look to exit in front of the advertised stock for sale. This would be exiting in front of expected resistance. This is an example of why the open book is so important, it will help you judge profit potential and risk potential. You can see quotes not seen in the Level 2 box.
- As price moves (up or down as seen in Level 2) and trades print in Time and Sales, you will develop a “feel” for momentum, support, resistance where activity is taking place, and how you should route your orders.
*DISCLOSURES: No relevant decisions
