Tape Reading 101 Introduction

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Introduction    

What  is  tape  reading?   Tape  reading  is  the  art  of  studying  pure  price  action  in  real-­‐time,  based  on  the  data  fields  in  the   Level   II   box.   Using   the   tape   you   are   able   to   gauge   player’s   psychology   and   imbalances   in   supply   and   demand   to   formulate   trades.   Tape   reading   is   a   leading   indicator   because   it   analyzes   current:  bids,  offers,  and  volume  transacted  at  a  given  price  (collectively  known  as  “order  flow”)   as  they  happen,  unlike  charts  and  studies,  which  are  derivatives  calculated  from  order  flow  data   and   displayed   after   the   fact.       Bids,   Offers,   and   actual   transactions   are   what   happen   NOW.     Charts,  MACD,  RSI,  are  created  later.    They  are  the  history  of  price  action.     Because  you  see  the  characteristics  of  buying  and  selling  as  it  happens,  developing  this  skill  will   improve   your   entries   and   exits,   minimizing   your   risk   and   maximizing   your   reward   by   allowing   you   to   catch   larger   moves   using   smaller   stops.   Tape   reading   is   a   tool   that   will   put   you   ahead   of   many  other  traders  who  think  technical  analysis  is  the  only  skill  they  should  know,  giving    you   access  to  more  plays  that  charts  simply  don’t  show  you.  With  tape  reading  you  will  be  able  to   determine  where  the  stock  is  going  to  move  70%  of  the  time.     Why  is  tape  reading  important?   Because   it   gives   you   an   edge,   an   additional   tool   to   improve   your   entries,   exits,   and   trade   management.       Back   before   charts   were   actively   used,   most   intraday   traders   would   trade   by   using   their   skills   of   reading   the   tape,   and   reading   the   tape   only.   There   were   no   charts   or   indicators   for   them   to   use.     The   last   thing   tape   reading   gives   you   an   edge   to   combat   the   algorithms  and  HFTs  prevalent  in  today's  trading  environment.     What  can  you  see  on  the  tape  that  you  can’t  see  on  the  charts?     Bar/Candlestick  charts  depict  a  range  of  price  action  defined  by  the  open  price,  range,  and  close   price,   over   a   specific   interval   of   time,   or   in   the   case   of   tick   charts   the   price   action   over   a   specified   number   of   transactions.   What   the   individual   bars   don't   tell   you   is   how   bids   and   offers   acted  at  a  given  price,  or  the  specific  volume  transacted  at  a  price,  within  the  time-­‐frame  (or   transaction  count  in  the  case  of  tick  charts)  of  the  individual  bar.  By  reading  the  tape  you  can   see  the  active  buyers  and  sellers  and  see  what  levels  they  are  participating  at  by  watching  the   supply   and   demand   they   seek.     You   can   follow   a   certain   buyer   and   recognize   the   pattern   in   which  he  is  accumulating  the  stock.  The  same  goes  for  sellers.  With  tape  reading  you  can  feel   how  the  market  is  taking  your  orders  and  have  a  sense  as  to  whether  a  certain  stock  is  weak  or  

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Tape  Reading  101      

 

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strong.   For   example:   if   a   stock   looks   weak   on   the   chart   but   it   is   very   difficult   for   your   bid   to   get   hit  then  that  is  a  clue  that  there  is  not  that  much  selling  happening,  so  the  stock  might  not  be   that   weak   after   all…   but   more   on   this   later.   Finally,   charts   are   showing   you   past   data...   granted   charts  are  valuable,  but  when  you  mix  tape  reading  and  technical  analysis  you  will  have  an  edge   many  intraday  traders  do  not  possess.   How  tape  reading  is  an  art  and  not  a  science       Tape  reading  is  not  a  science.  It  is  not  like  learning  how  to  do  an  experiment,  and  then  being   able  to  repeat  the  experiment  with  success  ad  infinitum.    Because  trading  is  a  probability  driven   activity,  and  different  stocks  have  different  “personalities,”  tape  reading  is  something  you  learn   over  long  periods  of  observation  and  personal  experience.    The  more  you  watch  the  tape,  the   more  you  will  be  able  to  identify  certain  patterns.  The  basics  of  tape  reading  are  very  simple,   but  after  you  understand  the  foundation  of  tape  reading  you  will  only  get  better  over  time.   How  does  tape  reading  affect  efficiency  with  entries  and  exits?    We  defined  the  difference  between  the  tape  and  charts  in  an  earlier  question.    The  granularity   of  real-­‐time  data  on  the  tape,  because  it  allows  you  to  analyze  “intra”  bar  data.  It  also  allows   you  to  choose  entries  and  exits,  with  finer  granularity.    You  don't  have  to  wait  until  the  next  bar   on  the  chart  to  make  a  decision,  which  could  both  reduce  your  profit  potential  and  increase   your  stop  risk.    Here  is  an  example  of  using  the  tape  to  get  long  at  a  great  entry:  

 

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In  this  chart,  you  can  see  that  GMCR  gapped  up  big  on  news  over  the  weekend.  By  using  just   the  charts,  your  entry  would  have  been  long  at  $34.15  when  it  broke  the  high  or  even  $33.96   when  it  broke  the  mini  range.    By  using  the  tape  to  find  an  entry  you  would  have  noticed  there   was  a  held  bid  and  accumulation  around  the  $33.50  level.  You  could  have  gone  long  at  $33.51   with  a  stop  at  $33.44  (or  when  the  bid  dropped  and  offer  held  below  50c).  That  would  have   been  a  great  entry  and  tighter  risk  using  the  tape  instead  of  getting  long  at  $34.15  or  $33.96   risking  about  50  cents.  Also,  your  risk  reward  ratio  is  heavily  skewed  in  your  favor  using  the   tape.   How  does  tape  reading  lower  risk?    A  good  example  is  the  one  above  on  GMCR.  By  using  the  tape  you  can  spot  accumulation  (held   bids)  or  distribution  (held  offers)  and  go  long  (just  above  a  held  bid)  or  go  short  (just  under  a   held  offer),  using  a  break  of  the  held  level  as  your  stop.    If  you  are  looking  to  buy  in  an  uptrend,   or  add  to  your  position,  but  do  not  want  to  chase  you  can  look  for  a  held  bid  to  get  in,  and  the   subsequent  failure  of  the  held  bid  to  get  out,  keeping  you  from  taking  on  unnecessary  risk.   Below  is  an  example  of  lowering  your  risk  while  finding  great  entries  and  exits:  

  ASTM  was  in  play  after  a  trading  halt,  and  subsequent  re-­‐opening,  moving  down  sharply,  we   don’t  usually  play  stocks  that  are/were  halted  but  this  presented  a  great  risk  reward  situation   to  enter  a  trade.  Although  ASTM  is  a  cheap  stock  (we  don’t  usually  trade  sub  $10  stocks  either)   there  was  a  great  opportunity  to  trade  it.  ASTM  opened  up  after  the  halt  and  dropped  sharply.       We  looked  for  a  great  entry  to  short  while  keeping  our  risk  low.  ASTM  bounced  and  started  to   hold  an  offer  around  $3.60.  Also,  when  the  offer  was  being  held  another  big  offer  showed  up.   CONFIDENTIAL:  BIDHITTER  HOLDINGS,  LLC  

Tape  Reading  101      

 

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You  can't  see  that  on  the  chart,  but  you  can,  if  you  know  what  you  are  looking  for,  see  it  on  the   tape.  We  got  short  and  waited  for  the  offer  to  get  filled  to  get  out.  Our  risk  was  about  3c  if  we   saw  the  order  decrement  quickly  we  would  have  hit  it  also  and  not  waited  for  it  to  get  filled.   Some  of  the  order  got  filled  but  not  quickly  then  the  stock  dropped.  The  stock  kept  dropping   and  the  offer  kept  stepping  lower.  Finally  the  remainder  of  the  order  was  filled  around  $3.15   where  we  exited.  Not  a  bad  trade  risking  a  few  pennies  to  make  about  45  cents.    How  does  skill  at  tape  reading  improve  understanding  chart  patterns?   Tape  reading  will  improve  your  understanding  chart  patterns  because  you  will  be  able  to  see   the  supply  and  demand  dynamic  in  real  time.  A  prime  example  of  this  is  GMCR  from  above.   GMCR  showed  some  technical  support  and  you  saw  there  was  accumulation  on  the  tape,  a   great  set  up  to  get  long  while  keeping  your  risk  tight.  Also,  with  tape  reading  if  a  stock  reaches  a   significant  long  term  technical  level  you  can  spot  on  the  tape  how  it’s  reacting  to  it  and  play  it   from  there,  all  by  seeing  what  the  buyers  and  sellers  are  doing  real  time.    How  do  you  improve  tape  reading  skills?   Improving  your  tape  reading  skills  will  take  time.  You  will  only  get  better  by  watching  the  tape.   You  will  understand  and  see  more  things  on  the  tape  3  months  from  now  than  you  will  see   today.  To  help  accelerate  the  learning  curve  you  can  watch  video  recording  of  your  trades  or   watch  video  tape  from  the  Bidhitter.com  library  of  trading  tapes.    It  is  easier  to  spot  something   on  the  tape  when  you  are  not  in  a  trade  and  the  market  is  closed.  As  I  said  before,  the  best   thing  to  do  to  speed  up  the  improvement  process  is  to  screen  record  your  trades,  and  then   review  them  after  the  close  when  you  are  not  under  the  stress  of  the  trading  market,  and  to  tap   into  the  Bidhitter.com  video  library  of  recordings.   Trading  the  open  with  only  reading  the  tape   Trading  the  open  with  just  charts  is  difficult  because  actionable  levels  for  the  day  have  yet  to  be   defined.  Granted,  you  have  previous  technical  levels  from  other  days  and  time-­‐frames  but  your   edge  on  the  open  will  most  likely  be  on  the  tape.  Intraday  traders  make  most  of  their  money  on   the  open  and  the  close  because  those  are  the  times  when  the  market  and  individual  stocks   move  the  most  and  have  the  most  volume  during  the  day.     By  knowing  the  Market  Maker  box  you  can  find  key  levels,  almost  predicting  where  the  chart   will  go,  and  find  good  entries  for  longer-­‐term  trades.   With  the  Market  Maker  box  you  will  be  able  to  find  key  levels  where  significant  volume  has   been  done  and  trade  off    those  levels  while  keep  your  risk  tight.  If  a  certain  level  has  done  a   significant  amount  of  volume  and  doesn’t  break  it,  then  you  have  spotted  a  great  entry  to  trade  

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with  a  core  while  scalping  around  it  to  lower  your  risk  and  make  some  quick  chops  when  you   spot  them  on  the  tape.                                              

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