Monday, September 28, 2009

After Hours Trading and Level II Charts

Okay, this blog isn't going to be anything fancy, just a place to jot down my lessons learned as I begin a new round of equities trading in 2009. Today's notes....

I realized something today that I'd never really considered before:
After hours trading is inherently wacky because of the low volume.
During the normal trading day, one wacky trade is just a blip on the tape, and is quickly "corrected" by the sheer volume of "normal" trades being executed at the market price. But after hours, a single wacky trade may end up being recorded as the opening or closing price for a given time period, and is therfore accorded a sort of legitimacy that could never happen during high volume trading. What is a "wacky" trade? Any trade where a buyer is willing to pay significantly more than the market price, or where a seller is willing to sell for significantly less than the market price.

Speaking of buying and selling, here are my (new) ideas on Level II charts:
A Level II chart shows half of a potential future development.
Actually, it shows two halfs, but only one of them is going to develop out of the current situation. If the price rises, the right half shows you where the resistance will be on the seller side. If the price drops, the left side shows you where the support will be on the buyer side. But since only one of those developments can occur in any given instant (either the price goes up, or it goes down) both sides can't be true at the same time. Of course, the price is always fluctuating, and in so doing, creates a whole new chart with each tick up or down. It's just too bad there's no way to put buyer's on the right side, and vice-versa! LOL

I read somewhere that trading stocks without looking at the Level II is a little like trying to walk thru the woods with a blindfold on. I thought I understood that at the time, but recently, I've found myself looking at the Level II even more than the regular charts. I think I finally "get it." TDAmeritrade has a streaming chart called a "depth chart", which is essentially a graphic representation of a Level II chart. I've always liked it, and now that I better understand the Level II, I am able to "see" a depth chart in my head when I look at it.

Trades today:
Sold CSTR (avg price $31.60) at $32.51 for a 2.9% profit.
Bought JAZZ at $9.00.

Earlier trades:
Sold CEP on 9/4/09 for 9.9% profit.
Sold JAZZ on 9/4/09 for 27.7% profit.