Bid - Ask
| Interpreting the bid/ask spread requires different skill sets
than reading changing prices on the ticker tape. This poorly
understood supply/demand engine compresses and expands
constantly, responding to shifting market conditions. But most
spread movement reveals nothing more than pure noise and has
little directional value. While scalpers can use these frequent
choppy periods to grab quick profits, technical traders should
stand aside and wait. Directional signals will erupt from the
spread regularly and allow them more rewarding entries.
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Bid/ask is a highly efficient market distribution mechanism that
presents a constant moving target for traders. There are 6
components to predicting price from the spread: strong ask,
neutral ask, weak ask, strong bid, neutral bid and weak bid.
Follow the tape with a focus on these forces and you'll access
excellent short-term momentum data. When conditions create
volatility or imbalance, the spread widens and price tends to
surge farther on fewer shares. While this movement can be
nerve-wracking, it also provides most of the profit potential
the day trader is likely to encounter.
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| The electronic markets operate differently than the listed
exchanges. NASDAQ Level I shows only the best bid/ask underlying
their competitive market maker system while Level II lists all
the players chasing the inside price. A single specialist and
several third party exchanges direct all the action on the NYSE.
The size of available shares shown on the tape tends to be
accurate on the listed exchanges. But NASDAQ size remains highly
deceiving. While the drab 10x10 mystery lots of prior years are
gone, both execution and bid/ask displays are marred by exchange
rules designed to profit insiders and hurt both investors and
traders.
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Although the marketplace ultimately decides price direction,
specialists and market makers constantly use their inside
knowledge to trigger volume and profit their own accounts.
Specialists have the little black book that shows the location
and size of all stop orders. Market makers have a similar
advantage with Level III. In the absence of more pressing market
conditions, insiders will always push price in the direction
they expect the most volume or one that will set up their own
accounts for the most gain.
A quiet neutral, neutral-negative bid/ask or high volume, high
negative bid/ask can both provide favorable trading environments
for the short-term trader ready to go long. In neutral markets,
cash waits for opportunity and price can jump quickly when it
appears. And wide, highly negative bid/ask spreads in very
active markets often signal a short-term bottom and offer quick
bounce profits.
Serious traders also watch tick, breadth and index to predict
the impact of the ticker tape. Use these measures to locate
convergence-divergence with individual price action. For
example, index movement provides highly accurate prediction on
short-term direction for many individual stocks. Use them to
filter entries during corrections and to locate key reversal
zones. Avoid long positions when an underlying index violates
key support, even when the tape is improving.
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Tale of the Tape: Even with
the tremendous variety of available information,
watching price pulses on time and sales remains the
single most accurate method for short-term price
prediction. The emotions of fear and greed reveal
themselves more clearly in this rapid pulse than in any
other reading of the ticker tape. |
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