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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: WaveSeeker who wrote (7370)	3/13/2000 1:53:00 AM
From: Jon Tara	Read Replies (1) \| Respond to of 18137

On misdirection and L2: WaveSeeker, I'm curious as to what kind of misdirection you think is going on with L2? If you mean the static configuration of MMs at any moment - I would agree that it is often misleading, even though many traders swear by setups with a large number of MMs on the bid and few on the ask, etc. I can't tell you how many times I have seen an L2 quote go from what looked like a slam-dunk 8-8-1-1 and completely reverse in seconds and go the wrong way. So much so, that I hardly pay attention to static setups any more. I recently bought a half-a-handful of recently-published books on daytrading. One of them introduced a concept that I hadn't thought of - even though I suppose it should have been obvious. When viewing L2, watch for the clockwise or counter-clockwise rotation of the columns. (Clockwise, of course, is bearish, counter-clockwise is bullish.) Instead of focusing on how many MMs at the bid and ask, focus on the rotation. With practice (not even that - just an awareness and spending time looking at L2 with that awareness) you will be able to smooth-out the small moment-to-moment fluctuations in your mind, and see which way the money is flowing. Sure, everyone's watched an been mesmerized by the growing and shrinking columns. But I think that many of us just think of that as an inconsequential light show that comes with the territory. The mental technique, again, is to envision the clockwise or counter-clockwise rotation. It may help to defocus your vision a bit. :) (I've also experimented with using sounds to help "visualize" (auralize?) trading - left for bid, right for ask, volume proportional to size, distance proportional to price away from the market. I haven't used this in a while - may give it another try and somehow bring L2 into the equation. I'm not convinced that this does anything useful, but it's cool as hell. :) ) Here's another L2 thought - something that I've never been able to satisfactorly resolve. On exchange-traded stocks, it's always been a rule of thumb that "direction follows size". That is, say a stock is 50 x 50 1/4, with 100 shares at the bid, and 10,000 shares at the ask. Following the rule, you'd expect the stock to move up. The explanation of this phenomena is that whoever is offering the 10,000 shares is confident that the price will move to them. On NASDAQ, though, at least when using L2, the opposite is true. (Or at least thought to be true.) A lot of shares at the bid, and few at the ask suggests the stock will move up - exactly the opposite configuration. The thought is that there are a lot of buyers, and few sellers. Why the opposites? Is it because of the different natures of specialist/open outcry and MM markets? Is it because of L2? Something else? Either one of both rules totally bogus?