Warrior Trading Blog

Spotting Breakouts With Level 2

Level 2

What’s up everyone. All right, so during this episode I’m going to break down for you one of the tricks that I use in spotting breakouts with Level 2. Now this trick is based on using level two and seeing both big buyers and big sellers in terms of understanding where you’ve got points of resistance and where, if you break that point, you’re likely to see a really big breakout.

Breakouts with Level 2

Learning to read level two is like learning to read a second language. It’s the language of the financial markets and it takes time to become fluent. I’m fluent in technical analysis and in reading level two and I want to share with you some of the tips and tricks that I use on a daily basis that it’s easy to take for granted because at this point they kind of come so naturally. It’s like I’m seeing two plus two and you naturally know that that’s four. That for me… Reading level two has become that second nature.

To help slow down and get you to the place where it becomes second nature, we’re going to examine a trade that I took today that ended up being about a $1000 of profit on a perfect breakout using this little trick. Now if you guys want to learn more about the tips and tricks that I use for reading level two and also for technical analysis, I want you to register for Day Trading 101. It’s a free webinar. The link is right down there below and everyone who registers and attends will get a free copy of my bestselling book. You’ll learn a little bit more about the setups that I trade because it kind of goes hand in hand, both with the reason that level two is important and the current chart pattern. That’ll make more sense as we get into this video. Let’s get into it and when we come back, when we come to the end, I’ll give you another reminder to register for Day Trading 101. All right, let’s do it.

All right, so let’s start breaking down this example of one of the little tricks that I use to help predict breakouts. Now we’re going to look at the stock INPX. It’s up 35% at the time that I’m watching it right here. As you can see, this is the chart on the right hand side of the screen. What we have here is a stock that has already made a pretty big move. It was already up 35%. It then pulled back and it started to squeeze back up to what you can see here, is a little bit of a resistance point. Now when it came up to this level earlier this morning, it was this time right here, whatever that is, 9:50 or so, it actually hit $4.95 and that’s when we first saw this big seller. This big seller is about 22,000 shares. As the stock came back up right here on this candle, we saw again that same 22,000 share seller and now it has come back up a third time to that level.

On the one minute chart we have clear technical resistance at this level of $4.95. I’ll show you the chart as it is right now in a moment. Basically what we have is this sort of cup formation where the stock squeezes up, pulls back, pops up, pulls back, comes up, double top, resistance at 95 and then it pulls back for a second, goes sideways, and then right here, as it’s coming in, I’m going to look for it to break this level.

How do I predict the breakout? Well, on this stock, I see the seller right here at $4.95. What I know about these stocks, and this is a part of learning the language of reading level two, is that when you have a big seller as we have here at $4.95, a lot of times if you’re shorting the stock, where would you set your stop? If you’re short, you’d probably say, “Well I’ll just hold this as long as $4.95 doesn’t break.” Because this is resistance. Not only is it technical resistance on the chart because it’s a double top, it’s also resistance in the form of a really large seller. When I see that large seller as a short seller, I would say my stop is going to be about $4.95. As a buyer, I’m going to think that if that breaks, if we see this go from $4.95 and all of a sudden it breaks the $4.96, it’s going to be breaking through this critical resistance level.

Sometimes when you have a big seller that’s holding things up, a lot of traders will wait for that seller to clear out before getting in. You don’t usually want to buy at 93 right before a 22,000 share seller. It’s like, well I’m buying right below resistance. I’d rather see that resistance level starting to get knocked down. I’m going to play this video and I’m going to pause it a couple times. This is live trading. I’m watching right here and I’ve got my hand, my mouse, is on the buy button with an order at $4.96 cents for 3,000 shares. This is a limit order. I’m stipulating how much I’m willing to pay. I would not do this type of trade with a market order because when it snaps through this level, when it breaks, it’s going to break really fast. If my market order was slow to execute, I could end up getting filled at the top of the breakout, which could be significantly higher than where I want to be getting in.

Let’s watch this. 22, and see how it’s starting to come down. Let’s just back that up for one second. All right, so we’ll back this up here. The stock is squeezing up. We’re seeing lots of green on the time and sales. 22, 21, the green is right here. This green is every individual order as it’s going through. More green. Now it’s 14,000 shares and this is where I’m going to press the buy button. I just bought. I click the buy button twice and then I press it a third time and then I press it a fourth time. I actually tried to buy 12,000 shares of this stock. I wanted to get in at $4.95 because I believed that if $4.95 broke, we would get a quick break over five and a squeeze up maybe 510, 515, maybe 525.

Let’s back this up again. All right, so we’re right here. I’ve got my hand on the buy button, the order is at 96. Green, lots of green, lots of buyers. Reading the time and sales and the level two, they go hand in hand. This is of course the level two on the left and this is the time in sales on the right. In fact, with Lightspeed they’re built into the same window. We’ve got 94 and I know that seller’s going to be there at 95 and now I want to see that seller get taken down. I want to see it go 22, 21, 20, 19, 18, 17, 16, 15, and as it starts to show that it’s getting knocked down, I’m going to press the buy button. Now if I was short, I would also press the buy button and it would be to cover my position because I’d be thinking, “Uh oh, it looks like this thing is going to rip.” Long traders and short sellers are both pressing the buy button at the same moment and look what happens. Look at that. Just like that, we got the breakout. Now I’ve already sold 3,000 shares just like that. As quickly as you can type, you can be buying or selling shares.

So here we go. Let’s do it again. There’s the order coming in. There’s the breakout. I break. It breaks through five, and I haven’t put out the order to to sell yet. I’m going to do that in one second as it breaks through five. Right here I just put out an order. It’s going to be at the bid. $5.13. I sold half and I sold another half at $5.11. I sold a little bit more. Now it’s going to come back down. It’s going to probably test this 95 spot. It’s often that they break through, come back and test a level before ripping higher. Now this stock will end up ripping higher. We’ll see if it pops back up here. I still have 850 shares at 95. 97, there’s $5.02, $5.05, $5.08, $5.10.

Now let’s look at the chart on this. This ended up breaking five right here. I’ll full screen this. It broke that level. It was right here that it broke. It was on this candle that you just saw me buy. It pops up to $5.17. It then dropped back down. It hit $4.93. It popped back up, dropped back down, popped back up, dropped back down. Choppy, choppy, comes back down to the nine moving average, this gray line, and then right here it comes back up and it’s going to blast through $5.10, $5.15 and rip all the way up here to $5.44. Then it’s going to do a one minute pullback and squeeze up to a high of $5.89.

Those trades are all fine. They’re not as much of a study on reading level two. This was really the study on level two. That seller that was sitting there at $4.95. We’ll watch that one more time. $4.95 ,you see the seller. There we go. 22, anytime I see a seller like this, doesn’t matter if it’s 70,000 shares, if it’s 50,000, if it’s 30,000, 20,000. Less than 20,000 I don’t usually put as much emphasis on. Certainly 500 shares or 1,000, is irrelevant, but 15,000 and up starts to become more significant. Above 100,000 is a huge seller. I’ll just wait on that. I won’t be buying when it goes from 100 to 98. I’ll be buying more when it’s gone from 100 to 90, 80, 70, 60, 50, 40, and then right when it’s about at 30, that’s when I would jump in.

I want to get in right before it snaps through a level. Sometimes they’ll start to get eaten up, which is what we would say, buyers are eating up that block of seller. Then there’s not enough buyers and then it falls back down. Then you got to wait and it comes back up. The risk there is that you’ve just bought it at the high. You’ve bought it at a really high level.

All right, so let’s watch this. There we go. 16, 14, 13, and just like that, it rips through five, all the way up to $5.17. That might be a market order. Someone covering a short position or buying long and just there, in a period of moments, thanks to reading level two, you were able to capitalize on that breakout.

My approach on these is generally to take profit through the breakout. Sometimes I’ll hold the whole thing. It depends on how much it moves. That was a pretty nice move up to 17. I was in with 6,000 shares. I wanted to take some profit off the table. Of course, I’d be willing to add back, but it did end up retracing a little bit too much here, back down below five, which is not perfect. I mean it recovered but it wasn’t picture perfect.

All right, so again, those of you guys that are watching this, if you have any questions, please leave them right down below in the comment section and if you want to learn more about reading level two, risk management, chart stock selection and these chart patterns, the first pullback, and things like that, make sure you’re registered to my next live webinar. You’ll see the link right down there, probably right over there, to register right there, something like that.

All right, enjoy and I’ll see you guys soon. Bye everyone.

 

2 Comments

  • Chad Black

    February 10, 2020 at 4:36 pm

    Ross, you are the coolest dude, thanks for all you give. You are a great teacher and mentor to so many.

  • JB

    February 10, 2020 at 10:55 pm

    When a stock breaks out that fast and you have multiple buy orders in (I think you purchased 3k shares 4x for a total for 12k shares), how do you sell the shares before the stock starts going down? In this example, it went down fairly fast. Thanks!

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