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View Full Version : Level 2 Day Trading : Why Level II Day Trading Is Not As Useful Anymore



Ken
03-10-2012, 11:29 AM
Level II based training is something I used to teach traders in my first training vhs (advanceddaytrading.com)/dvd back in the late 1990s, when we used fractions. Back in the dinousaur age of day trading. A lot of my competitors then ripped off my ideas (and some vendors are still teaching outdated Level 2 trading methods today, in decimalized trading environments!). Sheesh. Ask for P&L proof that they even trade, you'll get excuses but no proof they're even real traders.

FACT: Since the advent of decimalized trading in 2001, and high-frequency trading (HFT) algorithms, level II is largely worthless for today's retail day traders, because of the false sizes and market maker traps that these predatory experts use to show false size in L2. Liquidity traps and "dark pools" and SMART (vs ISLD/ARCA) order routing changes also render L2 based pattern trading largely worthless. As one colleague said, "Level 2 is a poker game nowadays". You can't follow the axe or other 10-year old tactics we used to use back in the old dot-com day trading era. Skip that.

Ask any professional market maker if they're still using Level II for trading. They'll laugh in your face. If you've been losing at your trades because you're following outdated L2 based training, that's why. It's an old tool and you simply can't shadow the axe anymore, because they learned years ago how to evade detection from retail traders.

Level II trading is very outdated and doesn't work anymore in HFT/program trading environments like we've had for many years recently. Period. People trying to sell that outdated training usually can't prove they trade (ask for P&L screencaps from their broker to see if they're traders (like I show). If you scalp large size (over 5k shares/per trade), then totalview/L3 may provide some limited insight, but most of us aren't trading 5k blocks to scalp .15 cents, style of trading.

If your trading style is trading up to 300-500 shares for round trips of a few minutes to 10-30 minutes (or even a few hours, if there's a strong trend), like most retail stock day traders, then you need tape reading, where PRICE action is what you follow.

Professional traders use tape reading, and so should you. It's not that difficult to learn, but you need to know what specific patterns to look for, during breakouts.

Ken
01-28-2013, 09:52 AM
Here's an article I emailed out on January 28th, 2013:


There's a lot of myths and incorrect information about how to
day and swing trade stocks (and ETFs) out there... so this article
should help you with new tips for this upcoming trading year ahead.

Here's some important tips for active day and swing traders.

Myth #1: You can still use antiquated methods like 'shadowing the
ax' and 'following the market maker' using Level 2/Totalview.

FACT: Since the markets now are mainly traded automatically using
HFT (High-frequency trading) software programs, with dark pools
and other un-seeable information, using Level 2/totalview is
completely unneccessary and a total waste of time for day traders.

I used to teach traders how to do this back in 1999, til we
got decimal markets (see video clips at my advanceddaytrading.com
site, for example), but I no longer teach that since it's not how
most professionals day trade. We use price action and tape reading
instead. I was one of the original traders to show how to correctly
do L2 based day trading, I no longer teach that since it's obsolete
(and haven't for nearly a decade, because it no longer works).

Confirmation: Even the legendary pro trader Don Bright recently
confirmed this in last month's TASC magazine; scroll down to read
his answer to this traders' question:

http://www.traders.com/Documentation/FEEDbk_docs/2012/12/QnA.html
In that article, Don confirms that it's a waste of money to use
depth of book-related information to trade. I completely agree.
Since so much of the trading volume is done automatically with
software-based algorithmic trading nowadays, you can't use mm/depth
of book patterns to reliably day trade. Ask for P&L proof from any
educator that claims that this is viable, see what I mean.

I've got professional Wall Street traders as customers, and trust
me -- if you were to say something like "can I follow the market
maker to shadow the axe?" they'd a) laugh uncontrollably, then
b) say "hey 1999 called on the phone and wants their old trading
methods back" (that's a joke). You don't need L2/follow the axe
tactics anymore, that was what us oldschool 90's day traders did
years ago; it's no longer how any genuine pro trader I know, trades.


Myth #2: Trading cheap stocks is how to trade.

FACT: Cheap stocks are subject to manipulation, and often trade
with too-narrow ATRs (average trading ranges) and dangerously
low volume to be worthwhile or smart for successful trading.

The BEST stocks for professional day & swing trading are those priced
$20-$70/share, over 1.5M shares/day (at least 15k shares/minute),
with daily trading ranges of at least 1 to 1.5 points or better.
Occasionally I'll trade higher-priced ones, like my recent NFLX
trades, but mostly I like $30-$50 share as the best range, and
as high as $70 or as low as $20 for active trading.

For example see 2-day charts of GMCR CLF CSTR SRPT PAY and similar;
those with wide, clean trading ranges (for easier trading) on
high volume and volatility are the best. I avoid tier-1 lead
stocks like MSFT/INTC and similar, since the ranges are too narrow.
I do for example in semis like KLAC and others with good ranges.


Myth #3: You should learn from people using only bar charts.

FACT: Using candlestick charts (as taught specifically, and solely
by my longtime colleague and course co-producer Steve Nison), is
the best way to trade. Combining candlestick chart patterns,
Western technicals and proper trade management is how you should
trade (see our StockTradingSuccess.com system course).

Why? Because candles provide so much more information than L2/totalview or
other nonworking obsolete methods. I always use 1-minute hammers,
shooting stars, doji and other patterns in my day and swing trades.
Only learn from educators who use candlesticks (correctly!) as a
core part of their training, like I do -- because they provide a huge
advantage over traders (and educators) that are ignorant of their usage.


Myth #4: Buying overpriced courses promoted by armies of affiliates
who all hawk expensive courses is intelligent, 'buying the hype'.

FACT: Most of the $2,000+ type courses you see the same people
cross-promoting all the time are a waste of money. Ask for proof
P&L screencaps from these educators to prove they're real traders,
and ask for video testimonials from satisfied traders before buying.
You'll get excuses instead of answers.

These affiliate-marketer types (you know who they are, they always
have their 'launches' where they peddle each others' overpriced
stuff to unsuspecting traders, always vastly overpriced, so they can
give each other big $600-type commissions out of traders' wallets,
for their $2000-type courses). Stop the madness...don't overspend on bs.
They copied the internet marketers' launch models with affiliates
in the trading industry, and are a pestilence.

Instead...learn from well-published experts and others who have
authenticity and credibility, and trader video testimonials and
other proof elements that they're worth learning from. There's a
handful of good people out there in the trading industry, very few.

But I'm deeply suspicious when I see a flood of emails in my
inbox from the same 'usual suspects' all cross-promoting the latest
trading $2,000+ type system or software from each other, with zero
proof it works. Caveat emptor.

Make sure you TEST the Free content tips from anyone who you're
considering buying from, Before spending a nickel. Because the
sad truth is that many trading educators sell overpriced bs that
doesn't work, and in fact are just people who talk about trading
instead of being actual traders, like I am. Just because someone
has a fancy website and a lot of affiliates does Not make them a
world-class educator. See for yourself, the differences, carefully.

============================

Usable trading information: Resources to look at --

For more, see my 20+ articles at Equities.com:
http://editorial.equities.com/tag/ken-calhoun/

or article previews at Active Trader Magazine:
http://store.activetradermag.com/search.aspx?find=calhoun

and 'Technical Analysis of Stocks & Commodities' Magazine:
search.traders.com/search?q=calhoun

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