Guide to Day Trading Strategies

H O W T O D A Y T R A D E
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Image showing various routes available. This is the bene
À
 t 
of Direct Access Routing. Image from Lightspeed.

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R O S S C A M E R O N
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As you can probably imagine, the Level2 moves around very quickly. Orders are constantly 
Á
owing through, prices are moving, and learning to read the Level2 while it is moving can take 
some time. One of the things you will notice on the Level2 is, that each row will represent a price, 
a number of shares and the ECN that is holding those shares. If for instance, we see that ARCA 
(an ECN) has 1,000 shares at $5.00, we could use direct access routing to try to quickly buy those 
shares directly from ARCA. If we send the same order through the ECN route NYSE or EDGX, they 
would both try to get the same shares from ARCA, but they might be just a few milliseconds 
slower. The Level2 is like an island where all the ECN’s come together. They communicate with 
each other, and buy and sell from each other. As traders, we will learn to recognize that on 
some stocks, a certain ECN is more dominant than others. When that is the case, I could choose 
to route directly to the ECN that is displayed as holding shares. Remember, that in regard to 
execution times, the difference between different ECN’s may be only milliseconds. The difference 
between using a full service “in house” route versus a direct access ECN could be several seconds. 
If you choose to always use the same ECN with a direct access broker, you probably will not 
notice any loss in execution speed, especially on stocks with above average relative volume. I 
generally 
À
nd it easier to always use the same ECN, preferably ARCA or BATS.
Time and Sales
To the right of my Level2 window, I have a time and sales window. The time and sales window will 
show each transaction that passes through. While the Level2 is jumping around giving you the 
latest quotes, it does not actually show orders that are placed. The time and sales window will 
show you the number of shares, the time, the price and the route where the trade was executed. 
I watch the time and sales and Level2 closely while I am preparing to take a trade and while I am 
holding a position. If for example I see a heavy seller sitting on the ask, I will look to the time 
and sales to start seeing orders 
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owing through, indicating the shares are being purchased. If I 
see large blocks of 5,000 share orders going through time and sales, that may give me increased 
con
À
dence that traders are taking large positions for the breakout. Alternatively, if I enter a trade 
and suddenly the time and sales comes to a stop, and the market stops moving, I may begin 
to think I mistimed my entry and should sell breakeven or for a small loss. Time and sales will 
show the volume that is passing through in a very visual sense. When there are a ton of orders 
executing from other traders, the time and sales window will be 
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ashing as they pass through. 
This is what we want to see for strong momentum stocks breaking out.

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