Many traders make the mistake of buying oversold stocks or selling overbought stocks and suffer financial losses as a result.

This often happens when traders are unaware of the proper analytical tool to use. A stochastic oscillator is an indicator that can help traders identify overbought and oversold markets, allowing them to make more informed decisions when trading stocks.

By using stochastic indicators, traders can gain insight into potential entry points that may not be visible on other charts or technical analysis tools. With this information at their fingertips, they can make more accurate decisions about when to enter or exit trades and maximize their profits.

If you want to save yourself from the pitfalls of trading, this blog post will teach you everything you need to know about stochastic indicators.

What Is the Stochastic Indicator?

The stochastic indicator is an oscillator that traders use to measure momentum. This tool helps identify when a stock is overbought or oversold, which can give the trader an indication of whether it’s an excellent time to buy or sell a stock.

As an oscillator, the stochastic indicator doesn’t “predict” the potential prices of stock, but rather shows how the stock’s momentum is behaving based on its extreme values. Another popular oscillator many traders use is the RSI, or Relative Strength Index.

RSI relies on recent price changes to estimate the direction of the stock’s momentum. In contrast, stochastic uses the current closing price and compares it to a range of prices over a certain period (i.e., three days.)

In a stochastic oscillator, traders expect that the closing price is near high during an uptrend and near lows during a downtrend. When the closing price in a bullish market is near the low, it could indicate that the market is losing momentum, and a reversal is likely. Similarly, in a bearish market, when the closing price is near the high, it could mean that the prices could soon start rising.

Interpreting the Stochastic Indicator

Interpreting stochastic indicator results might confuse some, but it can become less intimidating with practice and patience. Here’s a quick guide to help you get started:

• Oscillators, like RSI and stochastic, use a range of 0 to 100.
• An overbought stock means that the security is trading above its normal range and could be a signal to sell. Overbought stocks are usually above 80 on the stochastic oscillator. When a stock is overbought, it could lead to a reversal as the stock prices normalize and the clamor around it dies.
• An oversold stock means it’s trading below the normal range and could signal to be extremely careful about buying. Oversold stocks are usually below 20 on the stochastic oscillator. When a stock is oversold, it could lead to an uptrend as buyers come in and drive up the price.

You might be tempted to buy in an oversold market, but it’s important to remember that it may not necessarily be the best choice. The market could still turn bearish in an oversold situation, so always take caution when entering trades.

Applications of Stochastic Stock Market Indicators

You can use stochastic indicators to improve your day trading strategy in many ways. Here are some ideas to help you get started:

The Bull/Bear Strategy

You can use the stochastic oscillator to detect a bullish and a bearish market and enter or exit the market accordingly. If the stochastic indicator lies between 50 and 80, the stock prices are expected to move safely upward and signify a bull market.

In contrast, if the stochastic indicator lies between 20 and 50 and continues to drop, it could indicate a bearish market. There may be selling pressure within traders, and it’s a good idea to exit the market before you suffer significant losses.

The Divergence Strategy

Another popular strategy used with the stochastic indicator is the divergence strategy. When the stochastic indicator diverges from the closing price, it’s a possible indicator that the market will enter a reversal.

For example, suppose the market is in a bearish or downward trend and the closing price sits below the 20 mark. In that case, it could be a sign of an upcoming reversal to the bullish market if the stochastic indicator prints a higher low (Around 20 to 50) than the previous one.

The Overbought/Oversold Strategy

This is the most basic application of the stochastic indicator. Many traders often use the stochastic oscillator to determine if a stock is overbought or oversold.

If the stock is trading above 80, it could be a sign that it’s overbought, and there is a possibility of a reversal shortly. On the other hand, if the stock is trading below 20, it could indicate that it’s oversold and could also lead to a reversal of the trend.

Many traders buy stocks in an oversold market and sell stocks in an overbought market. This strategy is often referred to as mean reversion trading, which could be used by traders who want to take advantage of short-term price fluctuations.

However, it’s critical to be aware of the potential risks associated with this strategy. It’s a good idea to make sure that you do your research and assess the risk before employing any strategy.

Make the Most Out of Your Trading Experience

Many lay people see trading as gambling or a way to waste your money. Often, this reaction is due to the lack of knowledge and guidance about the art of trading. Metrics like the stochastic indicator help traders anticipate and predict the market’s direction.

Unfortunately, mastering these strategies could take years of practice and experience. Leveraging trading tools like Scanz can help you elevate your trading game faster. Start trading smarter with Scanz today, and make the most out of your trading experience.

Learning new concepts about trading approaches and the stock market is critical to your success as a trader.

One such approach is trading low-float stocks. Low float stocks are a type of stock with a limited number of shares available for trading, which tends to cause more volatility in the price and create big potential opportunities for traders.

Although this sounds enticing initially, it’s essential to understand the risks associated with these stocks before you begin trading.

In this blog post, we’ll explain what you need to know about low-float stocks, their inherent risks and benefits, and some examples of low-float stocks available on the market.

What Is a Low Float Stock?

Before we delve into the definition of low-float stocks, let’s first identify what a “float” is. A float is the number of shares a trader can buy or sell in the open market.

For example, a stock with “a 3,000,000 float” means three million shares are actually circulating publicly and available to purchase and trade. A stock’s float excludes any shares owned by the company, its officers and directors, or significant investors.

Low-float stocks are those companies with limited floats available in the market, usually between 10 million and 20 million. Due to the fewer shares, there is less supply for these stocks and higher sensitivity for price movements.

What Are the Risks and Benefits of Low Float Stocks?

Like all stocks, low-float stocks have their own inherent risks and benefits. Understanding these risks and benefits helps traders make sound trading decisions.

Here are some of the inherent risks and advantages of low-float stocks:

The Risks of a Low Float Stock

As repeatedly mentioned, low-float stocks are volatile and riskier than most stocks. The restricted float makes predicting the stock’s price movements extremely challenging as trading volume is higher and more susceptible to market fluctuations.

Moreover, low-float stocks can be manipulated by more prominent traders or a group of traders who may control a large portion of the available share count. This could cause sharp swings in the stock price if the buyers or sellers dump numerous shares in the market.

The Benefits of a Low Float Stock

The volatility of a low-float stock can present some advantages to traders. Low-float stocks are often seen as a quick way to make money due to their high volatility, which can quickly create huge gains or losses. This makes it ideal for day traders who want to capitalize on rapid price movements by holding the stock only for a few days.

Moreover, if significant news about a low-float company hits the mainstream media, the stock’s price can quickly soar as traders rush to buy shares before it goes up.

What Are Some Examples of Low Float Stocks?

Now that you know what a low-float stock is and why it’s appealing to many day traders, it’s time to know some of the popular low-float stocks in the current market. As mentioned, stocks are considered low-float if they only have around 10 to 20 million shares.

Here are some of the popular low-float stocks available in the market today:

AMCON Distributing Co.

The AMCON Distributing Company is a renowned wholesale distributor throughout the United States. This distributing company is known to distribute over 17,000 products. The company’s products in circulation range from cigarettes and beer to health, beauty, and even frozen products.

As of this writing, AMCON Distributing Company has a public float of around 169,518. Around 0.91% of their overall float is shorted or acquired by institutional traders.

J.W. Mays Inc.

J.W. Mays Inc. is a known real estate firm based in New York. Historically, the company started as a women’s clothing store with nine locations spread throughout New York.
However, the company faced numerous financial setbacks and eventually shifted its focus to commercial real estate. The company owner leases their current properties to retail, restaurant, and other commercial owners.

As of writing, J.W. Mays Inc. has a public float of 518,479 shares, and around 0.55% of its overall float is distributed to institutional traders and internal investors.

HTG Molecular Diagnostics Inc.

HTG Molecular Diagnostics Inc. is an Arizona-based medical equipment provider specializing in RNA platform technologies. The company is renowned for providing comprehensive and accurate medical analysis and its innovative products, such as the Gene Transcription Profiling Panels.

As of this writing, HTG Molecular Diagnostics Inc. has a public float of around 877,495 shares, and approximately 14.41% of its overall float is shorted to internal investors.

Seaboard Corp.

The Seaboard Corporation is a well-known multinational agricultural and transportation company based in the United States.

The company is renowned for producing and distributing pork and providing ocean transportation. Seaboard Corp. is known for sugar and grain production, electricity generation, and commodity merchandising in the international market.

As of this writing, Seaboard Corporation has released a public float of around 256,718 shares, the second highest on this list. The company also provided about 0.56% of its total float to its institutional traders.

Finding Hidden Opportunities With Scanz Pro Scanner

Many people easily dismiss low-float stocks due to the risks associated with them, but if you know how to assess the current market conditions and look for opportunities properly, low-float stocks can be a great way to make money quickly.

With Scanz Pro Scanner, you can effortlessly search for these hidden gems in the stock market. This platform allows you to find low float stocks with ease. The Scanz Pro Scanner features multiple filters to help you narrow your search using the most critical metrics.

You can conveniently customize the scan criteria to look for the low-float stocks that match your trading strategies. This way, you can be sure you are investing in the right stocks and not wasting time searching through a long list of options.

The Scanz Pro Scanner contains numerous features that make trading stocks less daunting and more rewarding. Take our seven-day 100% free trial and see how it can simplify and maximize your trading experience.

Stock Market News

Every seasoned investor knows that media news can have an outsized impact on stock prices. The headline effect, as it is known, can affect a single company receiving media attention, an entire sector, or even the entire market in the case of national or global news. News can work as both a positive and a negative – it can send a stock’s price spiraling, or it can launch a wave of buying.

However, most days the news cycle churns with little effect on the stock market. So what news tends to drive prices and what news is filtered out as noise? Learning what types of news is important to pay attention to when trading is a critical skill for success.

Gauging the Impact of News

Not all news is significant to stock prices, although it can be hard to tell exactly what news will affect prices. The most important question to consider is whether the news materially changes the value of a company, a sector, or the market as a whole. To merit this, the news should have a significant impact on the future outlook of the stock.

Note also that news is most important to the market when it first hits – some news is restated in multiple press releases, released in multiple stages, or released in pieces as more information is available. Typically, only the first release of the news will impact the market, although additional details that relate to a company’s value can have further impact.

Important Types of News

Broader Market News

News of a national or global nature can impact the entire stock market, causing major indexes like the Dow Jones Industrial Average or S&P 500 to experience a small but significant jump. News such as the release of job growth numbers in the US or the declaration of tariffs between countries are examples of news that tends to buoy or drop the entire market.

Sector News

In some cases, news can affect a specific sector of the overall market, such as retail, food, or technology. For example, a nationwide E. coli outbreak can have ramifications across the food and restaurant sectors of the market since consumers are less likely to eat out in general, not just at the restaurants associated with the outbreak. In this case, while the company around which the news centers is likely to experience the largest change in stock price, the sector as a whole can be expected to mirror the change to a lesser extreme.

Acquisitions & Mergers

Acquisitions and mergers are not always significant news, but when they involve two large companies they can shake up the markets. Typically, news of acquisitions and mergers – or even rumors about their possibility – will cause changes in the stock prices of the companies involved. In some cases, acquisitions and mergers can also affect the stock of direct competitors of the companies involved.

Deal News

News of deals and partnerships – or deals being called off – can make big waves in the market since deals can offer the promise of future developments and profits. Depending on the deal, either one or more of the partners may exhibit a rise in stock price immediately following the news. At the same time, be cautious when interpreting and trading on deal announcements – companies will often announce deals as public relations fluff to keep themselves in the news. These announcements are less likely to signal a fundamental shift in the value of a company.

Product Launches

Product launch announcements can create a lot of hype that is often reflected in stock prices, although the excitement can often wear off quickly and bring stock prices back down to pre-announcement levels. Examples of product launches that cause a shake-up in stock prices are when Apple announces a new iPhone model or when Amazon announced its intention to enter the healthcare space.

Lawsuits & Company Issues

Lawsuits and company issues are typically negative news that can elicit a fast and often sustained stock price drop. These types of issues are not simply lawsuits by investors or individuals against a company; instead, they are issues on the scale of Chipotle experiencing a nationwide E. coli outbreak or Equifax’s data breach and the subsequent Congressional investigation. These issues cause significant public backlash that darkens the companies’ future outlooks.

Earnings Reports

Earnings reports, which are released quarterly by all publicly traded companies, are common instigators of sudden stock price changes. Typically, whether prices rise of fall following release of an earnings report depends on whether the company’s earnings and revenue beat the consensus predictions of Wall Street analysts. However, changes in the company’s outlook following the earnings report can also impact stock price movement.

Offerings

Offerings occur when a company, typically a small-cap company, offers additional shares out to the market for public investors at a discounted price. This is almost always considered bad news and results in a price drop since offerings dilute the value of existing shares and undercut shareholders.

Conclusion

News, ranging all the way from company-specific announcements to national and global events, can be an important external driver of the stock market. Successful traders need to be able to gauge the importance and relevance of any piece of news to companies that they trade and make decisions based on the buying and selling action that follows.

Investors and traders tend to make their decisions based on two schools of thought within securities finance: fundamental analysis and technical analysis. Boiled down to it’s simplest, fundamental analysis deals with the value of a company/security, and the many facets that come with it. Technical analysis, on the other hand, doesn’t deal with any tangible fundamental data, rather, it deals with market data like historical prices. The two schools of thought also diverge when it comes to time frame, technical analysis often focuses on the shorter term, while fundamental analysis generally focuses on a much longer term view.

Within fundamental analysis, there are two main schools of thought: value and growth.

Value Investing

Value investors look for companies trading below their long term average valuation metrics, like low price-to-earnings ratios relative to the company’s industry. They look for good companies that will last many market cycles trading at “inexpensive” levels. Value investors, at their core, are deeply contrarian, they buy assets out of favor with the market hoping the market eventually comes to their senses. They tend to have a longer timeframe than the average investor, hoping to own a stock until given a reason not to, they’d prefer to hold a stock forever if they could.

A key difference between value investing and other investment strategies is the lack of faith in projections. They put little importance on a company’s growth projections, they prefer to view companies as they are today, putting little to no premium on the company for optimistic projections.

Value investors tend to look at risk differently than the rest of the securities industry. They generally don’t use risk parameters like Modern Portfolio Theory often employed by large institutions, nor do they favor a wide diversification of assets, preferring to instead focus their capital on a select few high conviction investments.

The industries value investors choose to invest in are usually age-old industries with easy to understand business models and solid financials. Generally, they avoid “the next big thing,” as these companies seldom have a sustainable business model, with their investors instead betting on the company’s and industry’s growth figuring out the financial incompatibilities along the way. For example, Warren Buffett famously avoided the dot-com bubble of the late 1990s because he didn’t understand the industry, choosing to stick to the industries he knew best, like food & beverage and insurance.

Within the value investing world, there’s a number of thought leaders with divergent views on minor factors but, they tend to mostly agree philosophically. Some high profile value investors are Warren Buffett, Charlie Munger, Seth Klarman, Ben Graham, and David Dodd.

Key texts to read if interested in value philosophy are:

• The Intelligent Investor by Benjamin Graham
• Security Analysis by Benjamin Graham and David Dodd
• The Warren Buffett Way by Robert Hagstrom
• Margin of Safety by Seth Klarman

Growth Investing

Growth investors, on the other hand, discount traditional value investment principles. Rather than looking for “inexpensive” stocks, most stocks they buy are trading at high valuations. In contrast to value investors, they place little importance on the the company’s valuation and financials today, effectively placing a bet that the company will grow exponentially.

Growth investors have their own metrics they pay attention to. The same way P/E ratio is the stereotypical ratio used by value investors, earnings growth is the most important metric to growth investors. They like to see an upward trend of improving earnings, in addition to stronger forward earnings projections.

Growth investors tend to take the view that if a company is trading below their industry P/E average, it’s because the market doesn’t believe the company’s earnings are worth the industry average, and that they may be on the decline. Growth investors don’t believe in “inexpensive” stocks. They view valuation ratios like P/E and price-to-book as a measure of how much the market is willing to pay for that company. In their eyes, companies with higher readings of these metrics are higher quality companies that are more likely to grow and outperform the market.

Some popular growth investors are Philip A. Fisher, William J. O’Neil, and Peter Lynch. Key texts about growth investing are:

• Common Stocks and Uncommon Profits by Philip A. Fisher
• How to Make Money in Stocks by William J. O’Neil
• One Up On Wall Street by Peter Lynch
• Beat The Street by Peter Lynch

Top-Down vs. Bottom-Up

In addition to the vast array of fundamental investment strategies (most falling into the growth or value camp in some way), there are different orders in which to approach markets. Some investors choose to start at the top, looking at the economy and broad stock market, gradually moving down, while others start from individual stocks and move up from there.

Top-Down Approach

A top down approach, often referred to as a “30,000 foot view” is starting by looking at the most broad aspects of the markets. This generally involves by beginning with identifying which position the economy is in the business cycle, which stock market stage we are in, macro factors that could lead to a bubble or a crash, which sectors are expanding and which are contracting, things of that nature. Once the investor has formed a view on the economy/broad market, they will then move down a step to narrow their choice of investments. For example, if one examined the current market climate and observed massive risk in student loans and pensions, they could choose industries safe-guarded from these crises. Conversely, they could choose to short industries most affected by it.

The main factor differentiating top-down from bottom-up is the lack of bias towards any specific security. They form a broad view on the market and choose appropriate securities to express that view.

Bottom-Up Approach

Bottom-up analysis involves starting from a specific stock/security and analyzing the fundamentals of it before even looking at it’s industry, sector, or market climate. Often times, macro factors like the broad market and the stock’s sector are but an afterthought to the bottom-up investor. This approach is generally favored by value investors like Warren Buffett. The rationale is that a great company will perform well regardless if it’s industry or the market is on a decline. Bottom-up investors generally have a longer time horizon than top-down investors, as well as a more focused basket of stocks that they choose to get a deep understanding of, in contrast to top-down investors who regard individual companies as less important and would prefer to use companies to expose their portfolio to certain industries/sectors.

You can look at top-down investing as a macroeconomic approach, and bottom-up investing as a microeconomic approach.

Using Fundamentals in Trading

The prevailing view is that fundamentals only have utility in longer term investing. This is partly true, as fundamentals rarely change over short time periods, and are usually priced into the stock shortly after becoming public information. For this reason, most traders are encouraged to ignore a stock’s fundamentals when trading it, which I believe is a mistake.

Fundamentals, on any time frame, have an influence on how a stock is traded. It stands to reason that a stock with great growth and margins in a strong, growing industry would be coveted by the investing public, while a contracting, capital-intensive company in a dying industry would be a candidate for short sellers.

Even on a micro time frame like a 5 minute chart, there are still investors making decisions about the stock, which the fundamentals strongly influence.

Shareholder Sentiment

In addition to fundamentals being key to theorizing how new participants in the stock may behave, it also gives you insight on the sentiment of the current shareholders. Shareholders in a growing company with great financials are probably feeling more bullish with each passing day, while shareholders in a failing company may just be looking for the best price to sell at, with no intention to hold long term.

A new high in a growing company that has been producing above-market returns for their shareholders will have drastically different psychological effects on its shareholders than a new high in a failing company. While the new high for the growing company may give the shareholders confidence to add to their positions, the new high for the failing company may spur strong selling from unhappy shareholders who are just happy to get out at a decent price. This is how you can use fundamentals to predict support and resistance levels.

This concept is similar to gauging the sentiment of shareholders in technical analysis. Technicians often theorize that resistance in a downtrending stock is stronger than in an uptrending stock. The positions of the shareholders in the downtrending stock have likely been in the red for a while, and the resistance point looks like a good price to get out of the stock. One can use the fundamentals of a company to predict this sort of reaction before visible price levels form.

Getting an Edge in Breakout Trading

In addition to gauging shareholder sentiment, knowing the fundamentals of a stock can help forecast the probability of a breakout trade’s success.

Like mentioned earlier, the psychology of a breakout differs from stock to stock. Even in an uptrending stock, one cannot be sure of the long term shareholder’s psychology. Because most long term investors use fundamental analysis, if an uptrending stock has weak fundamentals, shareholders may view a new high as a good point to sell their shares. For this reason, knowing key fundamental data points will give you a huge edge over most technical breakout traders.

Using a simple growth stock filter like William O’Neil’s CANSLIM when trading breakouts can not only improve your probability, but it can also put you aboard some of the strongest runaway trends the market has to offer. By putting both technicals and fundamentals in your favor, you can reduce the amount of “fakeouts” you trade.

Here is an overview of O’Neil’s CANSLIM model:

• C: Current quarterly earnings per share (EPS)
• A: Annual earnings trending over five years
• N: New highs in stock, new products in company’s pipeline, or a new business model
• S: Supply and Demand (stock buybacks, low float)
• L: Leader in it’s industry
• I: Institutional sponsorship
• M: Market direction (S&P, Dow, NASDAQ in uptrends)

Boiled down to it’s simplest, CANSLIM looks for a stock with an upwards earning trend that is a leader in it’s industry. Once a stock fulfilling these parameters hits a new high, it’s a candidate for a breakout trade.

Data Points to Look At

In addition to looking at a model like CANSLIM, there are a few individual data points that are vital to the trader seeking to use fundamentals to improve the probabilities of his short term trades.

Earnings Per Share (EPS)

Earnings are the most important factor of a stock price, and they drive the stock market. The term “earnings” refer to the net income of a company, or the amount of after-tax, after-operations, total profit a company earns.

Imagine running a small business, what do you care more about, how much you produce in sales, or how much money you can actually take home at the end of the day, after costs like taxes, operations, and paying your employees?

Operating Margins

A company’s operating margins tells you how much revenue it actually gets to keep, after operations and costs.

For example, McDonalds (MCD) had operating margins of 31% for the fiscal year of 2016, meaning for every dollar in sales, they made 31 cents of profits.

Operating margins give you insight into a company’s efficiency. Companies with very low margins are capital-intensive, meaning they require a lot of capital only to produce minimal profits. Additionally, companies with low margins are a few bad deals away from not being profitable at all, as increased costs may erode the small profits the company is currently producing.

While it is great to look for a company with excellent margins, the most important aspect for traders when observing margins is the trend. Regardless if the company’s margins are 4%, or 40%, the key to a stock price increase is improving margins. A stock with poor, but improving margins will likely perform better than the stock with great, but deteriorating margins.

Price to Earnings Ratio (P/E)

Price to earnings ratio is the most popular valuation measure used by investors. It is found by dividing the stock price by it’s earnings per share (EPS).

Old school value investors used P/E to determine whether a stock is “inexpensive.” While this may be fruitful for the long term investor, it serves little to the shorter term trader. Instead, a trader should look at a stock’s P/E as a sentiment indicator.

• A high P/E ratio indicates the market is bullish on the stock’s future earnings. The market predicts the earnings will grow.
  • A bearish report on the earnings guidance (company’s forecasted earnings) will drastically affect the stock price, as investors are paying a high P/E in anticipation of improving earnings.
• A low P/E ratio indicates the market is bearish on the stock’s future earnings. Depending on how low the P/E ratio is, the market may be pricing in a decline or stagnation in future earnings.
  • A bullish report on earnings guidance can bring this stock back into growth territory, and the market may be ready to pay higher multiple.

Take note of the cumulative P/E ratio of the stock market when evaluating the P/E of a stock. The market’s P/E can act as a reference point as to whether a P/E is “cheap” or “expensive”

Summary

Fundamental analysis is a widely encompassing field, including the most traditional of investment strategy to the most complicated quantitative models. Classifying fundamental analysis philosophy as either value-focused or growth-focused is an over-simplification but, one will find that the vast majority of investment strategies fall into these two camps in one way or another. The key difference is viewing a company as it is today, versus viewing a company as what it can be tomorrow.

A working knowledge of fundamental analysis is important, even for the shortest term of traders. It may seem ridiculous for an order flow scalper to spend any time on fundamental analysis but it can give one context as to how a stock may react to an earnings play or breaking news.

This article doesn’t begin to scratch the surface of fundamental analysis. The trader/investor who take this field of analysis seriously has an array of fields to research including corporate finance, business strategy, macroeconomics, investment banking, and various others.

What is extended hours trading?

Extended hours trading are time intervals outside of regular trading hours where trading still takes place. Volume is usually inconsequential and the vast majority of time, nothing of significance takes place. They’re simply available for convenience and the ability to react when that rare catalyst strikes.

Although conventional wisdom tells you that the stock market opens at 9:30 AM EST, you can actually trade as early as 6 AM. Though, many retail brokers only allow pre-market trading starting at 7 or 8 AM. After market hours starts as soon as the market closes at 4 PM, and goes until 8 PM. Again, many brokers cut off their extended hours at around 6:30 PM. It varies from broker to broker, so make sure you consult with your broker if you plan to trade during these hours.

Why does extended hours trading exist?

Extended hours trading became a necessity as financial markets became globalized and the world became more interconnected. The rest of the world does not live on United States Eastern Time and a lot happens outside of regular market hours. Extended hours give traders a chance to react to these events in real time.

The main benefit of extended trading hours is the fact that earnings reports and calls are done during pre-market and after hours trading. Extended hours gives traders a chance to speculate on earnings in real time, and even trade in reaction to statements made by executives on the earnings call.

Trading during extended hours

There was a time, not so long ago, that extended hours trading was restricted to all but institutional investors and a select few high net worth investors. The advent of electronic trading has granted the opportunity to all investors to trade during extended hours, for better or worse.

That being said, to this day it is still a very difficult endeavor and advised against save for specific situations. Here are a few reasons it’s not recommended that you trade during extended hours:

Limited quote choice

Most retail brokers do not allow you to interact with the same liquidity that you do during regular trading hours. Typically, they will route it through their in-house market maker, or have a very select few ECNs. You may have seen this in action if you had an order sitting on the book after-hours and saw multiple orders executed at worse prices than yours, yet your order is still untouched.

No liquidity

Liquidity is perhaps the most important aspect to trading. You can have billions in unrealized profits but if there’s nobody to take the other side of your trade, you may as well have nothing. Unless there is a catalyst like earnings or breaking news, most stocks trade very thinly during extended hours and you can’t quickly move in and out of them.

No price movement

During the average stock’s extended hours session, the price trades in an extremely narrow range with no real direction to the price movement. Generally, the best that one can hope for is a scalp, which is like betting three for a possibility of one. Factoring in transaction costs and the illiquidity of extended hours trading, attempting to scalp is a negative expectancy game.

Huge spreads

Nowadays, save for micro and small cap stocks, most spreads are a penny wide. We’ve gotten so greedy with these liquid markets that we think paying the bid/ask spread isn’t a thing to fret about. That is, until you look at extended hours quotes. Welcome back, 50 cent spreads.

It’s not the highest and best use of your capital

It’s amazing how some traders are willing to use so much of their capital for such small returns in shoddy trade ideas. Just wait until tomorrow, there will be thousands of highly liquid stocks with directional price movement. Why mess around with illiquid, range-bound stocks? Insisting on trading in illiquid extended hours markets is akin to a trader being emotionally attached to trading the stock of his favorite company.

With that being said, sometimes there is legitimate reason to trade during extended hours if the proper precautions are taken. There are various situations that would lead to an extended hours catalyst. Here is an outline of the most typical:

Earnings reports

By far the most common, almost every stock market earnings report takes place during extended hours. These reports often lead to extreme volatility as they are viewed by many as somewhat binary in nature. “Good or bad” is the prevailing question. Statements by the company’s executives during the call are being received as bullish for some, bearish for others. Earnings are a favorite for sentiment traders.

Acquisition announcement

When a company announces a deal to acquire another company, any stocks involved in the deal are going to see considerable activity. An example is Intel’s acquisition of Mobileye. It was announced in pre-market, and the stock jumped from the 40s to the 60s.

Rumors

A rumor in the higher end of the financial media holds a lot of weight. An article in the Motley Fool means little, but when CNBC and Bloomberg are talking about it, price will react accordingly. Rumors are regularly announced during extended hours. Consider the situation with the stock of TV subscription service Starz, and their extended hours acquisition rumor.

Breaking news

Whether a fund manager like Bill Ackman or Jim Chanos is announcing their next big short, or a company’s CEO is arrested, all types of crazy things happen during extended hours.

Gap ups

During pre-market, there are always stocks gapping up and this is a part of many traders’ strategies. If you have a robust gap trading system, then it would be appropriate to trade gaps during extended hours. However, if this is not your bread and butter, steer clear.

Here are a few best practices if you decide to take extended hours trades:

Catalysts

Never trade during extended hours unless there is a catalyst justifying so. Even if the stock is moving, if you don’t know why, stay away from it. Whether its earnings, news, or Jim Cramer pumping the stock on Mad Money, know why you are trading the stock. From a day trading perspective, this is unusual, as day traders generally know little about the stocks they trade. Extended hours is a different beast altogether.

There must be liquidity

You must be able to swiftly trade in and out of the market without considerable slippage. If this is not achievable, stay away.

Scale in

If you are taking a day trade during extended hours, consider scaling into your position. Imagine extended hours trading as walking on a slightly frozen lake in early March, and regular hours trading as walking on a professional ice hockey rink. At any given time, the ice can crack, and it’s better to have one leg on land when that happens.

Adding/scaling into a position

If you are accumulating or adding to a position for a longer term swing trade, extended hours orders are okay. Try to resist the temptation to move your order around. Set an order and forget about it. The choppiness of extended hours will lead you to buying at an unreasonable price if you chase.

Conclusion

Consider that there’s a reason most traders and institutions stay away from extended hours trading. Remember to always stay in your lane. Generally, it simply is not worth your time or capital to trade during extended hours. However, it is worth it to train and study for those moments when it is, because the gains can be enormous, and because not studying and being disciplined will lead to enormous losses during extended hours trading.

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Often times, it’s the little life lessons that have the biggest impact. A simple piece of advice from a friend or family member can have a stronger impact than ten self-help books combined. It’s a lot easier to apply a concept such as “treat others how you’d like to be treated,” than it is to memorize a book on ethics. In order for advice to be beneficial, it needs to be actionable and memorable. The same logic applies to day trading lessons.

Trading is complicated enough as is. You can read a stack of books on trading theory, watch countless YouTube videos, and enroll in premium courses only to find out that nothing is having an effect on your bottom line.

You’ll hear many successful traders attribute their success to a single “aha moment” or words of advice they received from other traders. It’s a lot easier to absorb and apply these “micro-lessons” than it is to take action on a book full of theory. In the spirit of keeping things simple, let’s get right to it.

This post is an ode to simplicity. Hopefully, a few of these ideas will stick!

Here are 25 simple trading lessons that all traders should commit to memory.

1.    Learn First, Trade Second

New traders are always excited to jump into action. When you’re putting your hard earned money on the line, it’s important to make sure you’re equipped with a strong foundation. Learn the ins and outs of the market and test yourself with paper trading before entering the big leagues

2.    Create Trading Rules

Trading rules help you simplify your approach to trading and keep yourself inline. Create trading rules that help you decide which type of trades to pursue and which type of trades to avoid.

3.    Follow Your Trading Rules

Creating your trading rules is the first step; following them is the second step. This seems obvious, but this is where many traders get in trouble. Create rules and follow them.

4.    Become Self-Sufficient

Many new traders come to the market looking for mentorship and guidance. It’s okay to learn from others but your ultimate goal should be self-sufficiency. Make sure your daily actions are in line with this goal.

5.    Keep it Simple

Simplification is a powerful tool for traders. Being able to take complex data and simplify is a skill that will pay dividends for years to come. Focus on keeping things simple in all aspects of trading. This may include your charts, the setups you look for, and the tools you use.

6.    Focus on Efficiency

Efficiency and simplicity go hand in hand in the stock market. Efficiency means you are making the most of your time spent so you can be as productive as possible. If you’re staring at the screens eight hours a day to make $50 in profits, you may not be operating as efficiently as possible.

7.    Limit Losses

Nobody likes losing. Unfortunately, losing is a part of life and a part of trading. The best traders take their losses and move on. If you keep your losses manageable, you can come away with lessons that will help you improve as a trader. If you let your losses grow, you risk taking yourself out of the game.

8.    Learn from Losses

Losses are the cost of doing business as a trader. Fortunately, like any business expense, losses provide something in return. Use your losses as lessons to help you create new trading rules and improve your strategy.

9.    Stick to a Niche

Here’s a little secret: no one has mastered the entire market. Successful traders find areas of strength and capitalize on them. Instead of trying to catch every trade, focus on developing a niche and honing in on it.

10. Don’t Get Greedy

Greed is one of the most detrimental emotions in trading (consider it a deadly sin). Like many emotions, greed can cause you to act irrationally. This may cause you to take inflated position sizes or turn a winning trade into a loser. Let your strategy and trade plan guide you and avoid getting greedy.

11. Get Used to Doing Nothing

“Do nothing? What kind of advice as this?”

As counterintuitive as it may seem, sometimes doing nothing is the most strategic move. Day traders are hunting for prime trading setups. If there the setups don’t show, there’s no reason to pull the trigger. Get comfortable with the fact that you may not trade for hours or days at a time.

12. Be Prepared

If you want to make it as a trader, get used to planning everything. You need to come to the market with a game plan every single day. While you cannot account for everything, a proactive approach beats a reactive approach in most cases.

13. Be Patient

Coming to the market prepared is the first step. The next step is remaining patient as you wait for your setups to pan out. Be patient when waiting for setups to form and planning your entries and exits. This will allow you to become a more disciplines (and, ultimately, profitable) trader.

14. Have Realistic Expectations

You’ve probably seen a variety of advertisements for gurus who claim you can make thousands of dollars trading a couple hours a day.

Spoiler alert: it’s not going to happen.

Trading requires hard work and practice. If you come to the market expecting to make millions, you’re going to be disappointed. Set realistic goals and focus on growing at your own pace.

15. Small Wins Add Up

Trading is a strategic long-term game. Like most sports games, it’s the little wins that add up over time. The majority of points scored in most basketball come from 2-point shots. The same strategy should be applied to trading.

Let your wins add up instead of trying to sink a half-court shot.

16. Make Sure You’re Properly Equipped

There are “tools of the trade” in every profession. Make sure you show up to work properly equipped. Traders need access to the right brokers, platforms, and data if they want to be successful.

17. Don’t Trade Under Duress

The “mental game” is a big part of trading. If you’re not in the right frame of mind, consider avoiding the markets. Trading under periods of stress can cause you to make irrational decisions that can cost you in the long run.

18. Avoid Vengeance Trading

There is only one good reason to place a trade: you see a setup and you have a plan. You should never trade because you need money or want to avenge a loss. Many traders get into trouble because they try to make back what they lost on a previous trade. This can cause you to ignore your core strategy and make poor decisions.

19. Assess Your Own Behavior

You’re your own boss as a day trader. Consequently, you may need to play the role of the “boss” from time to time. Analyze your own behaviors and trading patterns and look for areas of improvement. If you’re honest with yourself, this type of introspection and self-awareness can take your trading to the next level.

20. Ignore Hype and Cynicism

Your trades should be based on your plan and your plan alone. It’s easy to get wrapped up in what other people are saying on Twitter, message boards, and CNBC. The fact is, no one has 100% certainty in the markets and if you plan properly, your hypothesis is as valid as any other.

21. Plan for Success

A trade doesn’t end up in the win column until the profits are realized. It’s important to have a game plan for how you will exit trades when they go in your favor. Know when you will take profits and why. This will help you avoid getting greedy and ruining an otherwise successful trade.

22. Plan for Failure

Losses happen. You can’t control a stock’s price action but you can control your own actions. Have a plan for how you will react if a trade goes against you. There are ways to take losses gracefully and there are ways to turn them into disasters. Strive for the former of the two.

23. Adapt

Trading is one of the few activities where you can never reach a pinnacle. There’s a theoretically infinite amount of money that can be made in the market, therefore there’s always room for improvement. Adapt and evolve. Focus on becoming a better trader every day. If market conditions change, adapt. If your strategy isn’t delivering the results you want, evolve.

24. Trading is Not Gambling

This should go without say, however there are still a lot of people out there who believe trading is gambling. They think the market is rigged against them and day traders are as fanatical as gamblers.

When done right, trading is not gambling. That said, it’s your role as a trader to differentiate the two. Do your research, create well-rounded plans, and identify setups with high probabilities for success.

25. Have Fun

As cheesy as it may sound, having fun is conducive to your success as a trader. The leaders in any field actually enjoy their work. You won’t become a top mathematician if you hate math, you won’t become a leading scientist if you despise science, and you won’t become a successful trader unless you enjoy yourself.

Enjoy the ups and downs of the journey, keep your eyes on the prize, and stay persistent.

As a day trader, it’s important to understand basic market principles before attempting to develop a profitable trading strategy. Knowing how the market operates can help demystify the elusive world of day trading and allow you to create strategic trading plans.

While there are a few basic prerequisites to day trading, the first thing you’ll need to know is what causes a stock price to move up and down. After all, the main job of a day trader is to formulate hypotheses about whether a stock will increase or decrease in price. In order to make these predictions, you’ll need to understand what causes price movement.

Let’s get to it.

What Causes a Stock Price to Go Up or Down?

There are plenty of different factors that can affect a stock’s share price, however all of these factors operate around the same basic economic principle: supply and demand. “Supply” represents sellers and “demand” represents buyers.

• When a stock’s supply (sellers) is greater than its demand (buyers), the stock price will go down.
• When a stock’s demand (buyers) is great than its supply (sellers), the stock price will go up. 

The influence of supply and demand is ubiquitous. In fact, our lives are affected by supply and demand principles on a daily basis. Here’s an example:

If Apple creates 1000 iPhones (supply) to sell for $400 each but only 500 people (demand) want to buy iPhones for $400, what is Apple going to do? If you guessed that Apple would have to lower the price of their iPhones, you’d be correct. Contrarily, if 2000 people were willing to pay $400, Apple may be able to increase the price.

The same logic holds true in the stock market. If everyone wants to buy AAPL stock at $140, the price will continue to increase until an equilibrium price (supply=demand) is reached. Of course, supply and demand levels are always fluctuating; therefore stock prices are as well.

Measuring Supply and Demand

We know how supply and demand levels affect a stock’s price, but how do we measure these levels?

First things first, we can analyze a stock chart.

A downtrend suggests that supply levels exceed demand levels, whereas an uptrend suggests that demand levels exceed supply levels.

Here’s an example:

Stock charts are helpful for gauging supply and demand, but they only show historical data. While historical data can be great for making longer-term market predictions, day traders generally require access to real-time information. This is where level 2 screens come in.

Introduction to Level 2 Screens

A level 2 screen is a real-time supply and demand table that provides traders with insights about buying and selling activity.

Level 2 Screens are split into two tables. The left table represents the buyers (demand) and the right table represents the sellers (supply).

Both of these tables have rows comprised of the following elements:

• Market Maker – The market makers are the parties responsible for fulfilling trades. For example, when you enter an order to buy a stock at a specific price, it is sent to a market maker who fulfills the order on your behalf and provides you with your shares.
• Price – The price represents what a buyer is willing to pay (the “Bid”) or what a seller is willing to sell for (the “ask”).
• Quantity – Quantity represents the size (or volume) of the order.

Some Level 2 providers (such as EquityFeed) will also add a Price column to reflect the time of the order.

Level 2 screens add a new layer of depth to your market analysis by allowing you to see the orders placed by other traders. Think of level 2 screens as a marketplace of buyers and sellers. Whenever a buyer and seller agree on a price, a trade is executed. Sometimes, this can happen in a fraction of a second and other times it can take much longer.

Using Level 2 Screens for Day Trading

Level 2 screens are designed to help traders gauge supply and demand levels so that they can make better predictions about future price movement. Level 2 screens also shine light on trading activity from retail and institutional traders.

It’s important to remember that not every buy/sell order is significant. You do not want to stare at a level 2 screen and try to make sense of every trade. You’re not trying to uncover some secret conspiracy or put together a sophisticated formula for measuring trading activity. You are simply trying to get a basic understanding of the market place so you can predict future price movement.

Supply and Demand

Start by gauging supply/demand levels. For example, if you see 5 sellers looking to unload 1,000 shares each at $5 and 1 buyer looking to buy 100 shares for $5, you can assume that the stock price is going to drop because the supply overwhelmingly exceeds the demand. If these sellers want to unload all of their shares, they’ll have to drop their ask prices to meet the bids of other buyers.

Block Trades

You’ll also want to look out for abnormal trading activity. For example, let’s assume a stock generally trades in order sizes of $2000-$5000. If you see a buy or sell order for $100,000, you can assume there is some unusual interest in a stock (i.e. institutional buying/selling or dilution) and plan accordingly. These types orders are referred to as “block orders” and they can have an impact on trading activity. For example, if a stock is trading at $4.80/share with $2,000,000 dollar volume on the day and there is a $500,000 sell order at $5, you can assume that it may be difficult for the stock to break above $5 with ease.

Other Considerations

Mastering level 2 screens takes time and we will go over more advanced topics at a later point. Here are a few things to look out for:

Hidden Size

We’ve discussed how level 2 can help you gauge supply and demand, however you don’t always have access to all of the data. Market makers can use “hidden size” to unload a larger order without scaring the markets. For example, let’s say a market maker wants to unload 100,000 shares of a stock. They know that placing a 100,000 sell order may scare away some traders, so they may break that down into 10 separate 10,000 share orders. This means, traders will only see 10,000-share sell orders when there are really 100,000 shares for sale (meaning that price point may be a resistance level).

Controlling Market Makers

It can be helpful to pay attention to which market makers are dominant in a stock. This can be particularly helpful when analyzing the level 2 screens of illiquid stocks. For example, if the market maker VFIN is one of the biggest sellers of a stock every day, a trader may not want to initiate a swing trade until VFIN is finished unloading shares.

Direct Routing

Most discount brokers will automatically route your order to a market maker or ECN of their choosing. While many traders are okay with this, some traders prefer to choose the route of their orders. This can allow for faster executions and better entries/exits. For example, if you see that the market maker NITE is selling 1,000 shares of a stock at $1.10/share, you may want to route your order directly to this market maker to get a faster execution.

If you would like to choose your order routes, you will need to work with a direct access broker.

Adding/Removing Liquidity

Liquidity refers to the ease with which a stock can be bought or sold. For example, a penny stock with less than $1,000,000 volume would be considered illiquid whereas a NASDAQ with $20,000,000 volume would be considered liquid.

When you buy on the ask or sell on the bid, you are removing liquidity. When you place buy orders below the current bid or sell orders above the current bid, you are adding liquidity. Many brokers will provide rebates to traders who add liquidity. While this shouldn’t drastically affect your trading strategy, you should still be aware of this.

Level 2 “Games”

When it comes to level 2, the old adage, “don’t believe everything you see” holds true. An order isn’t “real” until it is executed. Market makers (and other traders) can play games in attempts to influence the markets. For example, a market maker may show a 500,000 share sell order to scare buyers and entice short sellers. Once the price drops, the market maker may remove that order and start buying shares at a cheaper price.

Once again, you don’t want to overanalyze level 2 screens, but it’s important to get a basic understanding of how they work.

Wrapping it Up

Level 2 screens are a great tool for gauging supply and demand and developing a better understanding of daily trading activity. When analyzed properly, they can help traders better predict the markets. Level 2 screens are best used alongside your other trading tools (such as charts) to gain deeper insights.

How do you use level 2 screens in your trading? Share in the comments!

Day traders are unique individuals. Similar to entrepreneurs, traders work obsessively to master their craft. We’ll stay up late, wake up early, and repeat the process the next day – all in efforts of living an extraordinary life that most can only dream of. There is a saying that, “Entrepreneurship means living a few years of your life like most people won’t so that you can spend the rest of your life like most people can’t.” The same is true for trading.

Thriving in the world of day trading requires ambition, hard work, and persistence. The road to day trading success is paved with blood, sweat, and tears (okay, maybe not blood). Whether you are just getting started or you’ve been on your journey for a while now, you’ve probably discovered that day trading is not easy. You’re putting your hard earned money on the line and facing new challenges daily. That said, every challenge you conquer takes you one step closer to your ultimate goal.

Small behavioral changes can have profound impacts. Your goal is to minimize losses and maximize profits in order to increase your net profitability.

Here are some tips:

1. Avoid Overtrading

Traders are ambitious, sometimes too much so. Many traders feel the need to always be doing something. It’s important to remember that trading requires patience, and the quality of your trades is far more important than the quantity.

The Pareto Principle states that, “80% of the effects come from 20% of the causes.” In trading terms, this would translate to, “80% of your profits will come from 20% of your trades.”

Before you got into stock trading, I’m guessing you didn’t think too much about the mechanics of how stocks are bought and sold.

And if you did, chances are you stopped short in the face of the complexity of the situation – refusing to contemplate the intricacies of what happens behind the scenes every time you hit the “Buy” or “Sell” button on your brokerage platform.

Well, let’s get one thing straight right now… if you want to be as successful as possible at this stock trading gig, you’ve got to know the ins and outs of how this whole system works. And the good news is, it doesn’t have to be as complicated as it may seem.

Today, I’m throwing back the curtain on one of trading’s most mysterious players – the market maker. I want you to get to know who market makers are and how they work, as their presence and the functions they perform have a direct impact on how your future trades are carried out.

How Trades are Executed

One of the first things you need to know is that trades can be executed in a number of different ways.

Say you want to buy 1,000 shares of Company A. Another trader – Trader B – located somewhere in the world, wants to sell 1,000 shares of Company A. Your order is filled from his shares by your brokerage firm, resulting in a neat and clean transaction for both parties.

But now, let’s say that there is no Trader B. You still want to buy those 1,000 shares, so do you have to sit around and wait for somebody new to place a sell order?

Not necessarily.

This is where a group of traders known as “market makers” come into play.

The Role of the Market Maker

A market maker (MM) is a trader whose job is to provide liquidity and set buy and sell prices based on stocks that they either hold in their inventory or that they “make a market in.”

Market makers work with firms that are registered with FINRA, and they typically receive orders electronically (or over the phone for the dinosaurs).

On average, you’ll see between 4-40 market makers for a given stock, depending on its average daily trading volume. MM’s set their own buy and sell prices, but once these prices are set, they’re typically obligated to buy or sell at least 1,000 shares at their advertised price (though these minimum quote requirements can change based on price level).

Combined with restrictions that require market makers to offer customers the best buy and sell prices, this prevents price gouging and excess volatility by maintaining a fair and reasonable two-sided market.

The Concept of “Order Flow”

This may surprise you but most brokerage firms – traditional and online – don’t actually buy or sell your stock themselves.

To keep costs down, a lot of online brokers will “sell” their orders (essentially, their clients’ buy and sell orders) to market makers. Hence, the MM is getting the brokers’ “order flow”.

Essentially, this market maker pays your brokerage firm to get your order. This is known as payment for order flow.

The brokerages sometimes even make deals to send the bulk of their order flow to a specific MM. The market maker NITE mastered the order flow practice in the early 2000’s (when online & electronic trading began to explode) to become the most important MM on the block.

So why does the MM buy orders from the broker?

The answer: So that they can get a boatload of retail orders (including yours and mine) and make money off of the spreads. You see, market makers see it as worthwhile to pay your online broker to get your stock orders because they believe that profiting from the spread will far exceed their payment for order flow.

At the very least, you should be able to know who your broker is selling its orders to, right? Well you can. They must inform you on your trade slips and in the agreement you sign when opening your account. So take a minute to find out this interesting detail, it might make you say hmmmm or aha!

How Do Market Makers Make Money?

Understanding the role market makers play is best achieved by looking at an example of how they actually make money. Essentially, as mentioned above, the market maker hopes to make money on what’s called the “spread” – which is the difference between the Bid and the Ask (the word “Offer” is often used instead of Ask – hence the Bid and Offer).

So, let’s say you’re ready to buy a stock…

The stock is quoted with a $25 bid and $26 ask.

You want to buy the 500 shares at $26, where it’s being “offered” (Ask).

If there is no actual seller to directly match up with your buy order then the market maker will sell you 500 shares at $26, whether he owns the stock in his inventory or not.

Now, if he doesn’t own the stock in his inventory, he’ll have to go back and buy it in the market in order to cover the shares he sold you. This is called being short the stock to retail (where you are the retail buyer).

He’ll put in a bid at $25.01 and see if someone hits it or sells him stock at that level.

When someone does, he’ll make 99 cents on the stock he just sold you at $26, since he’s buying back at $25.01.

Basically, he makes $0.99 x 500 shares, for a total profit of $495.

The reverse applies if you were looking to sell 500 shares at $25.

In this case, the market maker buys 500 shares from you at $25, then turns around and tries to sell it on the Ask at $26, or even lower – say $25.99 – so he’ll be the “Best Ask.”

When the next buy order comes in at $25.99, he’ll make the same $495 on that trade.

That may sound like too small a profit to be worth all of that trouble, but remember that a market maker might carry out this kind of transaction a few thousand times a day.

In that light, it’s easy to see why these jobs are some of the most coveted at small and large firms. In fact, at big firms like Knight Capital Markets (NITE) that compete for order flow from the big brokerage houses, top MM traders can earn as much as seven figures a month!

Sounds Like A Great Job, Huh?

At this point, it probably sounds pretty tempting to set your sights on a market maker position, but remember that it’s not even close to as easy as it sounds. The market maker is at risk all the time. He could fill an order, only to have the price move against him – wiping out his profits entirely. If that happens often enough, he’ll lose his seat at the firm.

On the flip side, if he attempts to minimize this risk and “play it safe”, he’ll most likely be penalized in a different way. If the firm sees that a market maker isn’t willing to take on risk in a particular stock, the stock will be taken away from him and given to someone else on the floor who’s prepared to be more aggressive.

Ultimately, market making requires managing an extraordinary number of variables all at once. Market makers maintain a “list” of stocks they provide liquidity in, which could include 300 or more different ticker symbols (companies). Not only do they have to know where their Bids and Asks are at all times, they have to know whether they’re long or short, what size position they hold and how these positions affect their net capital.

Imagine having to do all that for 300+ stocks at the same time every second of the trading day. My head spins just thinking about it!

The Take-away

Market making firms are a crucial piece of the trading puzzle. They often get a bad rap (sometimes deservedly) but without them we’d be sitting around and waiting…and waiting…and waiting for our orders to get filled.

Don’t obsess over figuring out what everything they do means. Learn to recognize the activities of market makers and the impact they have on the market in general.

Market makers are a tricky concept, so it’s common to have questions about how they work and how they make money.

In a future post I’ll go into some greater detail of specific things you can look for in the Level 2 window (MM order book) that can “tip you off” to the potential direction the stock may move in.

If there’s anything else you’d like to know about these important market figures, leave a question below in the comments section for more information!