Access to Level II Quotes is Vital for Trading Penny Stocks
You hear experienced traders in chat saying things like “the ask is stacking” or “the bids are thin”. They are talking about the number of shares available at the bid and the ask prices, which tells you how much demand there is for a stock and how liquid the stock is.
A firm understanding of level 2 quotes is required for trading penny stocks on the OTCBB.
Let’s Start with the Basics
Under the bid and the ask columns you will see a list of market makers who are representing the number of shares they have for sale or are willing to buy at a specific price.
Bid Price – The price that market makers are willing to buy the stock.
Bid Size – The number of shares of the stock market makers are willing to buy at the specific price
Ask Price – The price that market makers are willing to sell the stock.
Ask Size – The number of shares the market maker is willing to sell at that specific price.
For example, say there is a market maker on the Ask side listing 100 shares for $1.05 and the next market maker is listing 100 shares at 1.06. If someone buys the first 100 shares, the next 100 shares will cost 1.06 and cause the stock to move up. That is how stocks move up and down in price…people clearing out blocks of shares from the level 2.
If we are long a stock we want to see low numbers of shares on the ask side of the level 2 so that it will be easier for the stock to move up in price. If there is a market maker listing 5,000,000 shares at $1.05 on the level 2 Ask we know that the stock cannot move up in price until someone buys all 5,000,000 of those shares. Also, a large number of market makers with large amounts of shares on the bid side indicates that there is a lot of buying interest in the stock and we can be confident with our position. The bid side of level 2 quotes is one of the factors that we use to determine what stocks to buy. If we see some of the bids start going away we know that the stock could pull back if they are all sold.
Here are some common phrases:
The ask is stacking: Lots of shares piling up for sale on the ask side making it tough for a stock to move higher.
The ask is getting slapped: Lots of people are buying shares and wiping out the ask side, which can cause the stock to move up.
Bids stacking: Lots of market makers piling up on the bid side indicating strong buying interest.
In summary, level 2 quotes give you a real time indicator of the buying and selling interest in a stock. Today’s stock market is full of shrewd traders and lack of level 2 knowledge will put you at a large disadvantage. You need to watch these to determine the strength of your position and react accordingly. Level 2 quotes combined with fundamental research will give you a great idea which are the best stocks to buy every day in the stock market.
