What is a Level 2 Trading System?
Level 2 Trading Systems
Stock market trading is a risky investment venture that requires research, an appropriate understanding of the trading options and vital information about the risks associated with the selected stocks. Penny stocks are among the most risky investment options, but using Level 2 Trading Systems can help reduce certain risks for day traders.
What is a Level 2 Trading System?
Investors who are considering the use of a Level 2 system for penny stocks must understand what it is and the risks associated with the system. Level 2 refers to a very specific area of a stock trading system.
The Level 2 system is essentially a book of orders placed on the Nasdaq stocks. The order book arranges stock-related information based on participants in the market who have set bid prices and ask prices for the stocks.
Level 2 shows the best bidding and asking price for the stocks and the number of shares the participants in the market are willing to trade. The result of the information provided in the system is that it is possible to watch the price action as it occurs, giving day traders an edge that improves the chances of succeeding in risky penny stocks trading.
See Why Smart Investors are Turning To Research Driven Alerts for their
Penny Stock Picks.
Receive market and technical information on trending
penny stocks. We analyze robust upstart companies and give you a chance to
capitalize on their escalating profits 100% Free.
The Listed Details
When working with Level 2 systems, it is important to understand how the information provided in the order book is arranged to actually use the data. The arrangement of data is organized in a relatively simple manner, which makes it easy to apply to day trading.
Details are provided in a simple list format that will show the market maker involved in the trade, the selected stock, the price and the number of shares in hundreds.
Market makers are the large companies that ultimately make the market even when investors and other parties are not currently involved. Market makers include the large banks or investment firms that are required to buy and sell every day.
The selected stock is listed with the symbols used to identify the stock for investment purposes. It is usually between one and four letters long, though particulars vary by stock.
The price information is either the asking price for stocks the company already owns or the bid price for the stocks the company is trying to buy. Prices are subject to change based on market conditions. The number of shares is always provided in the hundreds so if the shares column states 20, then the market maker currently owns 2000 stocks because 20 multiplied by 100 is 2000.
The Market Players
The players in Level 2 systems are always one of three possible categories. Depending on the category, the information provided in the order book is slightly different.
The market makers are one of the three players involved in the system and listed in the books. Market makers are the institutions like large banks that are constantly involved to provide liquidity in the market.
The electronic communications networks, or ECNs, are the systems that enable market makers to send the order electronically, eliminating the middleman or brokers that charge a commission for each order placed through the difference in bid-ask price, also called a spread. These orders can be placed by large institutional traders and a wide range of other investors in the market.
The final player listed in the order book is the wholesaler. Wholesalers buy order flow, usually from brokers, and then execute orders. The orders executed are usually from retail traders, but might include other brokers in some situations.
The Ax is a term used in Level 2 that describes the market maker who is currently controlling the price action on a given stock. In most cases, the Ax is the maker who is dominating the stock when compared to other market makers involved in placing orders on the same stock.
Investors who are involved in penny stocks need to identify the Ax to make the best use of a Level 2 system. The Ax is the market maker controlling the price of the penny stock, so identifying and watching the Ax will help improve trading strategies for better risk control.
Risks Involved in Trading with Level 2
The major risks that are involved with Level 2 systems trading is related to the tricks an Ax might play to better control the market. The tricks involved in Level 2 trading are worked out by the market makers and might involve electronic systems to hide the large purchases a market maker is placing to reduce the market impact.
Beyond hiding the purchases by placing orders electronically, the market makers will also vary timing and orders to cause traders to either short or buy. By varying the order, making changes and working out certain timing strategies, the market maker can cause an unexpected and opposite effect.
“How to Make a 1,000% Return in the Next 10 Days.”
Penny stocks have the potential to return profits from 100%-1000%
when traded appropriately. Penny Stock trading can be a possible
way to make a ton of money.report
Using Level 2 Systems for Penny Stocks
Level 2 systems are useful in every level of trading, particularly the speculative market of penny stocks. Unlike other stocks, penny stocks are naturally speculative and risky in nature. Level 2 systems provide an edge in market research by watching for potential trends that will improve the possibility of making a profit.
Watching the Ax for the particular penny stock will provide an opportunity to notice any trends or changes in the stock. The Ax is the market mover for the stock, so the trend in buying or selling is often managed by the orders the Ax makes.
Due to the potential risk of deception by the Ax, who has brokers trying to make a profit by shorting and buying, it is important to watch the system carefully for a few days before making a purchase. Pay attention to any order changes that are a signal of the opposite effect on the market than the original expectation.
Beyond using the trends set by the Ax, an order book also provides the opportunity to spot irregularities in the market. Since penny stocks are highly volatile, noticing order irregularities can help determine when to buy the stock. Irregularities in the market suggest that the market movers are trying to quietly buy the stock before the price increases, which signals that it is a good time to invest in the speculative stock.
Getting out of penny stocks before they drop is also an important part of managing the risk of the stocks. Level 2 systems show when the large institutional traders are trying to get out of the stock early to limit the losses, signaling that a drop in the stock is likely to occur.
While the system is useful in helping reduce the risk of making a poor trade in the speculative market of penny stocks, it is still important to take measures to hedge risks. Due diligence is required to ensure the stock is an appropriate investment for the portfolio and that the possible losses are managed before investing.
Trading with Level 2 still requires taking the time to research the possible stocks and limit the risks of losses because it is possible that the market movers will engage in deceptive behaviors. Planning for the possible tricks in timing and order placement will make it easier to make a profit on the trades.
Penny stocks are speculative and highly volatile, but Level 2 systems provide better opportunities for predicting the trends in the market. As market movers make orders and set prices, it is easier to recognize potential changes in the market and act effectively for a successful and profitable trade on the individual stock.
100% FREE – JOIN NOW!
=> Get Free News and Alerts
=> Practice Free With Virtual Money
=> Learn How to Find Hot Penny Stocks
Join the Free Growth Stocks Newsletter to Get News and Alerts on
Penny Stocks. We can’t promise to find you the next Apple, Google
or Facebook, but our analysts will do our best!
Top Free Reports
Top Stock Alerts