Advanced Day Trading
Day Trading is like any
othe rbusiness. If you are going to make money at it, you need to
understand it inside out. You need to be familiar with more advanced
day trading concepts such as level II, ECN, what Market Makers are,
Moving Averages, reversals and other technical indicators.
Level II includes the
best bid and ask for a particular day trading stock at any particular
time. Level II goes beyond this by showing you all the bids and
asks available for a particular stock in a long list. As you can
imagine, the value of this information can't be overstated, day
trading relies on having sufficient information to make a trading
decision, and Level II gives you ALL the information - where EVERYBODY
has their prices, however big or important they are.. Level II also
helps you guage the momentum (the rate of change in price) of a
stock - i.e. is it accelerating upwards, or is the strength of a
move 'slackening off'?. Level II gives you not only the bid and
ask for each participant, but also the number of shares they want
to trade, and how they want to route the order.
Level II screen are usually
pretty simple, with 2 columns (one for bids, one for asks). Each
column is split into 3 sub columns, the NAME of the participant,
the SIZE of the order, and the PRICE they are willing to trade at.
On the left you can see
open buy limit orders (Bids) starting with the highest (best) price.
On the right you can see the ASK prices, which are open sell limit
order arranged starting with the lowest. "Name" is the standard
4 letter symbol of the participant who placed the order (eg: Goldman
Sachs has an open order to buy 400 shares of VOD at 24.5 or lower).
Sometimes the participant is an electronic system (eg: ISLD has
an open sell order for 100 shares of VOD at 24.39. In the above
example, the best bid is 24.5 and the best ask is 24.39 - the difference
between these is effectively the 'spread'. Traders using ordinary
online brokers such as Ameritrade usually only get to see the best
bid and ask, adn therefore can have no real feel for how 'strong'
or 'deep' the market is beneath the best price.
ECNs (Electronic Communication
You know that Level II
shows the market participants that have open orders for a stock
or security. An ECN matches orders for any buyers and sellers for
a stock. Since ECNs are computer systems, an ECN execution usually
takes less than a second to find a matching bargain and do the trade.
A direct-access broker gives day traders access to ECNs through
their trading software. The best-known ECN is Instinet (symbol INCA
on Level II) although they seem to have been having some problems
of recent times, losing business to faster, cheaper, hungrier ECNs
like ISLAND. According to the National Association of Securities
Dealers (NASD), Island traded more Nasdaq securities than any other
ECN (about 10% of the total trade volume). If you insist on using
an online broker or even worse, phoning your full-service broker,
day trading will be very difficult for you.
The other participants
you will see on Level II are generally "market makers." These are
the huge corporations like Goldmans, Morgans, and Merrill Lynch.
Market makers provide liquidity in th emarket becausein return for
certain exchange privileges, they guarantee to 'make a market' (i.e.
quote a price) no matter WHAT is happening, even if the price is
in free fall (of course, you might not LIKE the price they quote!).
Market makers trade on their own account (nibbling the difference
between the bid and ask) and they execute orders for their clients
(ranginging from small individual investors to giant large institutional
investors such as mutuals). Most online brokers send most of their
orders to only one market maker with whom they have a relationship
(i.e get a kickback for it). If you use direct access trading, you
avoid this problem.
Order routing is the
process of choosing how to send your order to the market (via an
ECN or market maker). If you day trade through an online broker
(eg Datek) or a full-service broker (shivers!), your order will
be routed how the broker wants to route it, NOT for your best benefit..
If you use direct access trading, however, YOU decide which ECN
or market maker to trade thru. It may seem confusing at first compared
to the simplicity of standard online broking, but once you get used
to routing your own orders, you will startv to understand the overwhelming
Technical Analysis (and
particularly support and resistance) are THE most important weapon
in your day trading arsenal. Even with the best order routing and
day trading information, if you can't decide whether to trade or
not, you are dead in the water. Technical Analysis uses past price
movements to predict future price movements, and takes many forms.
Major banks employ 'quants' - day trading maths jocks who create
incredibly complicated mathematical day trading models of the markets.
Frankly, this is a waste of time, and you should KISS - Keep it
simple. If you know where the day's support and resistance are,
you can be on the right side of the market most of the time, and
that is how you make money. But how do you calculate support and
resistance? There are many 'home spun' methods, such as pivots,
but the best way by FAR is to use the
from surefirething.com.Support and resistance levels are never absolute
- they are always 'zones' within which you need to be alert, and
if you understand what is likely to happen should certain trading
events occur, you can place your stock trade with confidence, sure
that the weight of the entire market is behind you.
and ask | day trading
| day trading software |
ECN | direct
access trading | nasdaq level
II | market maker | paper
trading | support and resistance
| short-term trading | spread
trading | stop loss | technical
The SureFireThing Camarilla Equation for use in day trading is available online from these