Increasing Profits by Really Understanding the Level II when Day Trading

With Level II, just like poker, always ask yourself why is that person willing to tell me what is in their hand? Chances are that they not willing to tell you, they are trying to make you think that you know what they are doing. Always question what you see. If you had 50,000 shares to get rid of, would you just put out an offer for 50,000? No you would try to thin it off at a good price. You might do this by putting up some bids to push the stock a little higher; when it pops up a few cents you sell some shares. And you do this till you are out of shares ideally. Consider this when you are watching Level II.

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Now just pulling up a stock window and seeing a large bid or offer does not mean you just punch into it. You need to have watched the stock, and have a little bit of any idea of what is going on. There are times when seemingly unrealistically large bids or offers are legitimate. The person posting is well aware that most people will think that he is bluffing those shares and will start to punch out his shares in an effort to get the stock to react like I described above. While it is impossible to know all the buyers and seller in the stock, if you have watched the Level II and the ticker tape a little while, you will have a better idea of when the large bids or offers are legitimate and when they are not.

And just as a note, when I say large bid or offer I mean in comparison to the stock's daily average volume and also average print size on the tape. A stock that trades 200,000 shares a day and where the average print is between 100 and 500 shares, the type of large bid/offer that I am referring to is probably 3000 shares +.

Remember also that there is a massive contingent of mutual funds and hedge funds out there looking for places to park there capital and if they can do it in fewer trades they will. By that I mean they look for large liquidity, and often they will take a large block of shares even at a premium price since they need places to put all that money (and the mutual/hedge fund industry is very competitive, every moment capital is not being utilized costs the firm in profits and clients).

The Level II can also sometimes offer you a few extra cents on your positions when you are looking to exit. Your indicators have signaled that you should start to look for exit. Watching for the same tactics mentioned above, you can also use them to exit. If you were long and the stock has had a bit of a run up, it is very possible that you will see last efforts to push the stock a little higher by those that got in late in the rally. So instead of just selling when you get your signal, wait to see what happens on the Level II. If some bluffers come in and push the stock up a couple of cents, take that bit of extra profit, although do it quickly.