Level 2 and Tape Reading - 03/01/22 Trade review
Mar 01, 2022Intraday trading is heavily based on the trader's technical analysis while some investors and swing traders rely heavily on the fundamental analysis. These different approaches to trading boils down to a person's risk tolerance. While the former is for income generating intention and the latter for wealth generating purposes, there are certain attributes that an individual must possess to become a great trader. John Netto, author of One Shot-One kill: Precision Trading using technical analysis listed the 10 attributes of a great trader:
1. Heart/Courage
2. Intuition
3. Vision
4. Discipline
5. Decisiveness
6. Patience
7. Confidence
8. Focus
9. Being Dynamic/Fluid/Flexible
10. Willingness to Learn and Improve
These attributes can be enhanced daily and can only be developed through time, with trading it's through "screen time". Anyone who is an expert with their craft knows the 10 000 hours rule. It is a common rule of thumb that claims: to master anything in life all you have to do is spend 10 000 hours on it. I think, trading is no difference. Although, that hours can be shortened if deliberate practice is applied. Through this deliberate practice, traders can shorten the amount of time needed to develop these attributes. One of the top attributes a trader needs to develop is intuition. This is an attribute that is highly needed in reading the tape and level 2.
Level 2 and tape readings are one of the leading indicators in day trading. One cannot develop the needed intuition in reading it without the necessary screen time. Screen time can help a trader develop his/her intuition beyond any best trading books nor best mentors can provide. For me, I get as much screen time as I can possibly get when I trade especially in reading the tape and level 2.
Not all level 2 and tape are created equal. If there is no obvious imbalance in level two nor massive prints and patterns that tape is forming, then this leading indicator cannot direct us to any stock direction. So, what are level 2 and tape reading? Level 2 quotes give traders an access to the market maker's order book that contains price quotes for each price level and the size on each order along with which market maker is holding that order. Tape displays the moves of the market’s large players since all transactions must be recorded on the tape. Since every single order will pass through the tape, buyers and sellers are not able to hide the transactions that is happening. This gives traders a feel to where that move is heading.
Below is the SPY's level 2, tape plus the trade that I took for the day with the highlight on reading their level 2 and tape.
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