VIRTUALLY SPEAKING
Beyond Bid And Ask
Get That Edge In Your Trading
by Clem Chambers
When knowing the bid and ask is not enough, electronic order books like NASDAQ TotalView can give retail traders the tools to succeed.There is no such thing as too much information when it comes to investing and trading. On a level playing field, if used in trading, our money will simply earn a little more than if it were parked in a certificate of deposit. Not many of us would go to the expense and trouble of speculation if that were the case, and for every trader happy to live without alpha, there are a thousand who would choke on the prospect.
WINNER TAKES ALL
However, of those thousand hungry traders, more than half are likely to end up with less than alpha, and many will end up worse off than if they had put their cash in a sock. There are several reasons why trading can be worse for your wealth than buying a CD. First, trading tends to be a game of winner takes all. In trading, there is no such thing as "enough," and that means the gains go to the winners - often in big lumps - while others are left, at best, with the crumbs.
This is because in reality, no trading environment is a level playing field. So many variables are involved in trading that it is in effect an arms race, and the losers in this preparation for battle end up ceding to the parties with an edge. An edge is all it takes to make the difference between success and failure, and when traders use big positions to capture tiny but regular gains, that critical edge can be minute.
Stock buyers are familiar with the concept that delayed price quotes are not good enough. These days, no one would consider it prudent to buy a stock off of a 20-minute delayed price, yet today, Level 1 is as obsolete as 20-minute delayed data because the real action in the market is going on in Level 2 data.
Level 2 is the core of any market, and even those markets still driven by humans have their own version of Level 2. Level 2 is the next level of key information that sits below the bid and ask; it is a list of all the outstanding buy and sell orders that can be accessed by a trader who wants to buy and sell.
...Continued in the July issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the July 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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