Swing trading penny stocks and being able to take advantage of these price swings can add up to big profits and because we want all of our subscribers to be able to profit from our picks, we’re going to give you some insight on how to become better penny stock traders.
Understanding Level II is essential to be a successful penny stock trader. What to look for, how to read and how to target profitable trades based on Level II. As you know, there is a ton of profit to be made from playing the price swings on our stock picks. These price swings can generate as little as 10% gains or as much as 100% gains plus in a very short amount of time.
So, what exactly is Level II?
Level II is essentially the order book for stocks. When buy or sell orders are placed for a specific stock, they are placed through many different market makers or market participants. Level II will show you a ranked list of the best bid and ask prices from each of these market makers or market participants, giving you detailed insight into the price action.
Simply put, Level II shows traders the best bid and ask price of a certain penny stock.
For example, lets say you go to buy shares of penny stock ABCD and you pull up the Level II quote and this is what you see..
BID – NITE .048 100,000 ASK – ETTM .053 250,000
So, on the bid side you have the market maker NITE bidding at a price of .048 for 100,000 shares.
On the ask side you have the market maker ETTM asking at a price of .053 for 250,000 shares.
Now, lets say you want to buy 50,000 shares of penny stock ABCD. Well, you can do this in two ways.
A) The quickest way to get filled on your buy order of 50,000 shares is to buy on the ask.
B) You can make a bid of .051 for 50,000 shares in which now you will be the highest bidder. Do note that this route will likely take longer to get you filled on your order and of course there is a chance that another trader can out bid you.
So, lets say you bought 50,000 shares at the asking price of .048. When you go to sell your shares, the same principles apply, you can either sell those shares to the highest bidder or offer (ask) those shares at a certain price.
So, what exactly does NITE and ETTM stand for?
These are known as the market makers and are recognized by the four letter ID through Level II. For the above example: NITE is the four letter ID for Knight Capital Group and ETMM is the four letter ID for E*trade Capital Markets.
For a list of market makers (A – Z) visit AlphaTrade.
So, who is the most important market maker?
The most important market maker to look for is called the Ax. This is the market maker that controls the price action in a given stock.
How do you find out which market maker is the Ax?
You can determine which market maker is the Ax by watching the Level II action. The market maker that consistently is the highest bidder and has the highest offer is the Ax.
Okay, so how do you determine if a stock is bullish or bearish through Level II?
Let’s say you pull up the Level II quote for penny stock ABCD and you start to see a consistent amount of orders going through the ask at .053, then .054, .055 and so on. This would be considered bullish because traders are buying at the offer and hence the price per share is moving up.
Now, lets say you pull up the Level II quote for penny stock ABCD and you start to see a consistent amount of orders going through at the bid, first at .048, then .047, .046 and so on. This would be considered bearish because traders are selling to bidders and the price per share is now moving downward.
Also, its important to note the size(s) of the bid and ask. A large bid with a small ask is very bullish while a large ask with a small bid is bearish. Very important to keep this in mind.
So, how can you obtain Level II quotes?
Getting Level II quotes through your brokerage is the best answer to this. They will be able to provide more information on how you can go about obtaining level II quotes through them.
Importance of Level II
We can’t stress enough how important Level II is to trading penny stocks. It not only provides vital information but it also allows penny stock traders to guage how bullish or bearish the penny stock is.
Think of it this way..
Would you go to a restaurant and order from their menu with a blindfold on?
This applies to penny stock trading as well because without Level II your trading blindly.
Hopefully this explanation helps you to become a better penny stock trader having a better understanding of Level II and its importance to your trading success. We want all of our subscribers to be able to profit from our picks. The better trader you become, the better you will understand the market.
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