Lesson #6:

Understanding Level II Quotes

While Level II Quotes may not be worth the investment for a casual penny stock trader that does not have the time to follow penny stocks closely, for a serious penny stock trader that wants to increase their chances of executing successful penny stock traders, Level II Quotes are an essential trading tool.

What Level II Quotes provide is a look at the current Market Maker positions for a given penny stock, beyond the typical inside bid and ask that are traditionally provided when you pull up a penny stock quote on the Internet.  Level II Quotes let a penny stock trader see where all of the Market Makers in a penny stock have their best bids and offers and the size of those bids and offers.  This can be useful when trying to decide good entry and exit levels for a penny stock trade.  If a penny stock has a lot of bid support based on the Level II Quotes data, then a trader will know where to enter a bid to buy.  Conversely, if a penny stock is rallying and a trader is looking for a good price level to exit a trade, Level II Quotes data can reveal walls of shares above the current asking price that signal to the trader where to set their limit order to sell.

To help you learn how to use Level II to bolster your chances of making money trading penny stocks, we have included several examples of Level II situations that provide attractive trading opportunities and ones you may want to avoid.  Remember, penny stocks that have few Market Makers near the current asking price (which is known as a “thin ask”) and a good mount of Market Makers supporting the price at the bid provide good upside trading opportunities, because such a Level II setup indicates more buying demand than selling demand at the current price level.

Another thing to remember as you look at penny stocks on Level II is that some Market Makers show only 5,000 or 10,000 lots of shares on Level II.  Unlike big board stocks, you cannot trust the share data on Level II for penny stocks, because government regulations do not require Market Makers to show all of the shares they are bidding to buy or offering to sell.  In reality, a Market Maker may have significantly more shares to buy or sell than the amount they are showing.  The way to uncover this discrepancy is by watching the price / sales action on Level II.  If a particular market maker keeps buying or selling shares, despite only showing 5,000 shares to buy or sell on Level II, then you know that they have a lot more shares than 5,000 that they are either seeking to buy or trying to sell.

The Following Is a Good Level II Situation for a Sub-Penny Stock:

What this Level II setup shows is very strong bid support at .0005 and an ask that appears thin with only two Market Makers trying to sell at .0006 and only one more before .001.   In this Level II scenario, a large .0006 buy could cause the stock to race higher.  If you were holding shares that you bought at .0002 and wanted to sell for a nice 150% profit, there are plenty of bidders to sell to at .0005.  You could even try to sell at the asking price of .0006, and book a solid 200% gain, since the bid support is strong enough just below .0006 that an offer at .0006 may entice buyers.

attractive setup

The Following Is a Level II Situation That Indicates It Is Not Time To Go Long: 

This is a Level II setup that indicates that it is not time to commit money to this stock.  With a thin number of bidders and the ask stacked with sellers, this stock is a lot more likely to fall than rise.  This would be a hard stock to sell with so few bidders.  Any substantial sell orders could cause the stock to crater.

stay away

An Example of What a Large Spread on Looks Like on Level II

A large spread is when the bid and ask for a stock are wide apart.  In the Level II example below, the ask is more than double the bid.  This is a treacherous Level II setup that indicates a stock that should be avoided.  If you buy at .005 and decide to sell, due to changing circumstances, you would have to take a large loss of over 50% by selling at .0022.  To make money on your .005, significant bid support would have to build at the .005 level and push the stock higher, which is unlikely in the near-term with a large spread setup such as the example below.

large spread

An Example of Upside Resistance on Level II

While bid support at and just below .0125 looks healthy on this Level II screen, the large number of bidders at the ask at and just below .013 are signaling upside resistance.  This is a stand-off, and does not provide a good upside trading opportunity, but warrants monitoring in case the ask thins out.

thin ask

An Example of Good Bid Support and a Thin Ask on Level II

The bid support at and just below .005 is quite good on the Level II screen featured below.  The ask is thin, with only one offer to sell at .0057 and the next offer all the way up at .009.  This provides a good upside trading opportunity, as bid support is good and upside resistance is non-existent.

nice level II setup

Understanding Level II quotes is very important if you want to successfully trade penny stocks.

Lesson #2:

Finding Penny Stocks

Lesson #3:

Fundamental Analysis - Performing Due Diligence on Penny Stocks

Lesson #4:

Successful Penny Stock Trading

Lesson #5:

Setting Up a Stock Trading

Lesson #6:

Understanding Level II Quotes

Lesson #7:

Placing a Trade

Lesson #8:

Chart Setups

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