\*(If you would like to read my previous posts, f o l l o w m e!)\*
Welcome to post #16.
In the last one I told you that Level 2 is kind of a superpower. It allows you to view the huge orders in the dark before the price even arrives.
However, there is a dark side to it. The experts, the showmen, and the traders are aware you're gazing at that screen. And they use it to play mind games with you.
A very illegal manipulation technique known as Spoofing. And despite the SEC's efforts to ban it, it simply occurs daily in the penny stock world.
Let me put a picture before you.
Suppose you paid $2.00 per share for a stock. It's doing great. It's grinding up to $2.20, $2.30. You are feeling good. You come to a Level 2 screen where you can find out what is waiting.
Now, all of a sudden, at $2.35, a big, huge, monstrous red order emerges from the screen. There are 1000000 shares for sale.
So the novice finds himself or herself in a quandary: what now? They panic.
They see that big wall of inventory and they say, "Oh my god, a whale is about to come dumping on us, the stock is about to tank, I need to get out now!
So the novice panics and sells at $2.30 to cash in their miniscule gains and get out of the game. Hundreds of other newbies roll that same, and they all panic-sell at the same time. All of this selling actually makes the stock go down to $2.15.
Then magically... something else happens.
That massive 1,000,000 share sell order at $2.35? It simply disappears! Poof. Gone.
It was never real.
The "whale" never intended to sell those shares. They simply displayed that huge order on the screen in an attempt to make you feel frightened to sell your shares. Why? Actually, they wanted to buy more stock, but the whale wanted it at a lower price!
They put you off your balance and lowered the price to $2.15, so you were led to believe that they were buying at a steep loss, but they were not.They scared you into selling, so they could buy all of your stock at a huge discount.
Boom. Stolen.
They do the exact same thing in reverse, too. They will make a huge fake buy order below the market price, to fool the newbies into believing that, "wow, there's lots of support! Better buy now!"\* The second the beginners buy, the fake wall will vanish and the stock will plunge.
So, how can you beat a totally bogus screen?
You observe the orders and their behavior. If a big order is there but it sort of vanishes whenever the price nears the 5 cent mark… it's a spoof. They're afraid that it won't be fulfilled. It is simply a matter of getting the sheep together.
Real orders are not afraid.
So far, we've discussed only benefiting from a rising stock price. A buy low sell high mentality. However, there's an army of traders that make money when these trash companies drop to zero.
In post #17, we will be taking the curtain down on \*\*Short Selling\*\*.