A Cheap Alternative to Level2

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Whilst chatting away with Ian Smith (@GrindertraderUK) at the Master Investor Show, somehow we got onto the subject of Level2 and Ian casually slipped into the conversation something along the lines of saying Level2 only gives you pretty much the same timing information that you can get by reading small timeframe Candlesticks - I got the impression 15 minute or 30 minute Candles would do the trick.

The beauty of this is that Level2 can be pretty expensive and also very complicated to understand - whereas you can get short timeframe Candlestick Charts for free (this might be as part of your Broker Platform or perhaps you can find this on a free Charting Website - I looked on http://www.ADVFN.com and I have been able to get as little as 5 minute Candles for free) and because Candles are ‘fractal’ in nature, they work the same on any Timeframe - a Hammer is a Hammer whether it is 15 minutes, 1 day or 1 month - it’s just that on the shorter timeframes they are less predictive - this is why 15 or 30 minutes might be the best timeframes to use.

Here is a ScreenShot from ADVFN.com showing 15 minute Candles for ARM that I generated quickly as an example:

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Just to give an idea of how it might work in practice, on the above Chart there are 2 Reversal Signals that I spotted very quickly. Firstly if you look at about 14.30 (2.30pm) you should see a big Green Up Candle - and note how this ‘engulfs’ the Red Candle just before - and clearly this was a ‘Bullish Engulfing Candle’ as the Price rose afterwards. Secondly, if you look at about 16.00 (4pm) then you should see a ‘Shooting Star’ kind of Doji which was then followed by a Doji Candle at 16.15 (4.15pm) - this is probably indicating a fall is likely.

You will need to experiment and find a suitable timeframe for your needs - I think Ian told me that he uses 5 minute Candles sometimes and switches to 10 minutes, 15 minutes and 30 minutes etc. - the point is that it should just fine tune any Intraday Buys or Sells and is a shed load cheaper than Level 2 !!

This could have considerable value for me. At present, when I have a Trade to execute, the usual sequence of events is that I have decided the night before that I want to Buy or Sell a particular Stock, and then on the following morning I tend to execute it pretty early on - often around 9am when the Market has been open for a while and the crazy wide spreads of first thing have calmed down. I tend to do the Trades straightaway because I usually have other things I want (or have) to do during the day and I do not want to be looking at my Screen all day and trying to ‘time’ the Trade - it is all too stressful and irritating.

On days when I do not have much else on to distract me, I could use the Candlesticks on perhaps a 15 or 30 minute interval to enable me to ‘read’ what is happening with the Intraday Price moves and perhaps enable me to get a lower Price when Buying or a higher Price when Selling. I suspect that 30 minutes will suffice but it might be that this is too ‘slow’ and I would be better off using 15 minutes - I would guess that much shorter than this will be far too ‘noisy’ and unpredictable.

In addition, if the Charting Package allows, it might be possible to use other simple Overlays like MACD, RSI, etc. But as usual, I wouldn’t get carried away down this track - KISS (Keep It Simple Stockshifter).

I do not know enough about Level2 to understand if this is a perfect replacement for Level2 or not - I suspect that regular users of Level2 are able to discern certain timing signals from Volumes being transacted and the Orders stacking up in the System, however, it would probably help with Intraday timing nonetheless.

Anyway, it is an interesting idea and I will try and give it a go in coming Weeks - thanks Ian.

Regards, WD.

PS. If you are struggling with the concept of Candlestick Charting, then get a copy of ‘Candlestick Charting for Dummies’ from Wheelie’s Bookshop - it is easy enough to understand and it's cheap as chips.