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    Lightbulb TAPE READING

    Tape Reading
    Posted By: Linda Bradford Raschke

    By Linda Bradford Raschke

    Sometimes it is nice to reexamine a simple concept when there appears to be overwhelming volatility in the markets. Mechanical systems and patterns are helpful and even necessary for the structure they impose in organizing data, but even Richard Dennis in his original course discussed ways to “anticipate” entry signals, exit trades early, and filter out “bad” trades.

    Learn to follow the market’s price action and read the signals it gives. This can become a strict discipline in itself and the result will be greater confidence that a trade is or is not working.

    Tape Reading

    “Trading technique is simply the ability, through study, observation, and experience, to recognize the signals in each of the several phases of market movement.”
    - George Douglas Taylor

    Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind.

    Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways. (Markets do not always have to be going somewhere!) It is also fairly easy to watch a price go up and then tell when it stops going up – even if it turns out to be only a momentary pause.

    I’ve known hundreds of professional traders throughout my career. I don’t want to disappoint you, but I know of only two who where able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA’s who are running a money-management program with “OPM” – other people’s money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment – even if just to move a stop up or down.

    If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, “The only truth is the current PRICE.” Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

    Watching price action can actually be very confusing if you go about it like a ship without her sails up in an ocean squall. You will get tossed back and forth with no sense of direction and no sense of purpose. There are two main tricks to monitoring price action. The first is to watch the price relative to another “reference point.” This is why many traders use a “pivot point” – and it works! It is the easiest way to tell if the market is moving closer to or further away from a particular point. This is also why it is often easier to get a “feel” for the market once you put a position on – your “reference” point tends to be your entry price.

    Some reference points, such as a swing high or the day’s opening price, will have much more significance than those points involving some type of calculation. (Some numbers might have special meaning for those who calculate them, and who am I to argue if they work.) I like to concentrate on pivot points that the whole market can see. To sum up so far, when watching price, we want to know the following: how fast, how far, and in which direction. It takes two points to measure these things. One will always be the current price, the other a pivot point.

    * Do not watch price for the sake of watching price. Watch price with the intent to do something or to anticipate a certain response!


    “The study of responses … is an almost unerring guide to the technical position of the market.”
    - Rollo Tape (Richard Wyckoff), 1910

    The second main trick to monitoring price action is to watch for the market’s response to a particular condition … in other words, anticipating a particular behavior. For example, if the market has been at a very low volatility point and just begins breaking out of it’s particular trading range, one might anticipate that the price would begin to accelerate in an impulsive manner and not run into immediate resistance. Or, on a directional play, if the price is moving in an impulsive manner in a trending market and then pauses to catch its breath on a mild reaction, one would expect it then to continue on in the direction of the trend. When there is a particular behavior to anticipate, it is easier to watch the price to see if it acts according to one’s expectations.

    Is the market failing to break on bad news? Is it finding support after a series of advances? Does it run into an invisible overhead wall and sharply back off, implying strong resistance? These are market responses to certain conditions. Tape reading is like playing a tennis game and watching to see how your opponent hits the ball back.

    Part of studying price behavior and gaining experience as a trader is gradually learning what actions to anticipate. Then you must learn what the market’s most probable response or outcome should be. It will always be easier to anticipate an event or response which happens 70% of the time than to be looking for that which happens only 30% of the time.

    However, it can also be a profitable strategy to recognize when a given signal or expected response is failing. Sometimes a failed signal can be more profitable than the normal expected response. For example, a classic failed response might be a scenario wherein price was consolidating in a pattern of higher lows and lower highs – a classic triangle pattern. One would expect a breakout from a chart formation to have some follow-through. However, if price only penetrates the lows by a small amount and then turns upward, picking up volume and momentum as it goes, and comes out the upside, a very significant reversal has probably occurred and there may be much more price advance to unfold.

    One last trick to watching price action is to learn to think in terms of “handles,” or levels. Think of the S&P’s as reaching for the “1110? handle, or the “low 1060’s” as a level. Each ten points is a defined level. Use big round numbers as reference points for levels. It doesn’t mean that you are placing orders at those numbers. It is just a simple way of organizing data that professional traders practice subconsciously.

    Pivot Points

    An astute trader will always have the previous day’s close in his head. He also knows the previous day’s high and low (prices he would have liked to have bought and sold but probably didn’t). He also knows the opening price, for that tells if the buyers or sellers are in control for the day.

    The previous day’s high and low and today’s open have very strong psychological implications and are the most important “pivot points” to recognize. By concentrating on price action near these points, we can eliminate much of the hard work in tape reading. Many times the market will let us know right away if this is going to be an area of support or resistance.

    The previous day’s high and low tend to overlap in congestion areas. Look to exit profitable trades immediately at these points in sideways markets. In trending markets, the price will run through these points a bit before pausing. When the market is strongly trending, the opening price becomes the most important.

    If we are watching a high, low, or opening price as a pivot point, we are watching to see whether there is any impulsive price action as the market approaches the point or moves further away from it. What is “impulsive action?” I like to call it a “whoosh.” The market moves rapidly as if just coming to life for the first time. It is usually a series of ticks in one direction without a tick in the opposite direction. The market is tipping its hand. A sequence like this tends to consolidate or pause a bit before being followed by more impulsive action. This is quite easy to see in a market like the S&P’s if you look on a short-term time frame. If we quantify these “whooshes,” which we can do in several ways, we will see that the market tends to have continuation moves at least 2/3’s of the time. Not bad for arriving at a “positive expectation” simply by following price action.

    In conclusion, tape reading is not watching every trade that passes by (a monotonous task) but rather keeping an eye out for unusual impulsive action, unusual volume, or just observing the way the price trades at significant levels. Each price swing has forecasting value as to what the next most immediate move should be. We then follow the price action to see if that move plays out.

    Tape reading is at the heart of swing trading. When looking for short-term moves, price-based derivative indicators will be too late to be of value. Ultimately, traders should feel a great sense of freedom when they can rely on simple charts to formulate a game plan or a conceptual roadmap in their heads – and the movement on the tape to tell them their game plan is correct.


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    » The Dual Reality
    » The RealityTrader Tape Reading Philosophy
    » The Reality Trader Tape Reading Method
    » Tape Reading 101
    » Mental State

    The Dual Reality

    Traders come to the marketplace with pre-conceived ideas about how and why the markets move. While some of these ideas are valid, most are based on untrue assumptions . Many of these assumptions are found within the un-moderated areas of bulletin boards and trading threads. Most of these assumptions, while seem logical and true, are simply dead wrong. This leads traders down a road of failure without offering a trader an explanation to why he was unable to make the trading plan work effectively. This early failure leads to disgust and negativity towards trading for living. Many turn this emotional state to blame of the market and its participants in a manner that the trader is not able to apply what happened in their trading plan to lead to a positive result. This lack of accountability moves traders away from profitability over the long term and does not give the trader a solid foundation to build his or her portfolio. All this stems from initial misinformation that was presented to a trader and accepted blindly.

    There is a true reality and a reality that traders create for themselves from such misinformation that is accepted blindly. Unfortunately, these two realities are never the same. However, the more a trader is a detached and objective observer rather than an opinionated and emotional follower, the closer his reality to real market reality becomes.

    The RealityTrader Tape Reading Philosophy

    This provides a solid foundation for a better possible outcome in his trading plan. Our philosophy is that the only reality of the market has to do with the price/volume action of a specific stock. All other factors are either hints or distortions. A seasoned trader distinguishes himself from a naive follower by his ability to see the true reality through all the curtains provided by those with less than adequate knowledge or misguided intentions. The stock market moves in its own manner. Stocks themselves move not because financial circumstances of the company dictate its direction. Otherwise, it would be too easy. Traders would simply buy what has strong fundamentals and sell what has weak fundamentals. Obviously this is not the case. Instead, interests of players in the stock and their emotions move the price. This philosophy can be confirmed by strong moves in stocks with questionable fundamentals. It can also be confirmed by a stock with great news that declines in price following the release.

    Please read this article to gain more perspective on this matter.
    Furthermore, we can not possibly know all the circumstances surrounding stock movements, all the shares accumulated or distributed, and what owners plan to do with them. They might want to sell for reasons that have nothing to do with current company situation. For instance, a fund needs free money for another operation and we see selling when nobody expected it by trading from straight fundamentals. That's why a seasoned trader will only look at what is going on in a stock, from a price/volume action view, in a form he chooses, that lets him be closer to reality. Our preferred way to read stock market is tape reading. This is also why only a detached and unemotional state of mind allows us to make our decisions objectively, with no emotions distorting the picture. The link from your mechanical approach to the enhancement of your mental approach will develop your winning and confident attitude each trading day. Reality defines what is happening before you as you read it. There are no predictions or false expectations for what a market or stock will do. There is just what you see that demands the response to enter and exit a trade with as much profit or as little loss as the trade allows. There is no ego to block that response nor is there a lack of accountability when the trade moves against you. Trading resides within you and develops from a reality learned.

    The RealityTrader Tape Reading Method

    RealityTrader uses the RT method to teach traders our unique approach to the market. It leads you through all the stages from the general outlook right down to the exact moment of responding to the trade and execution technique.

    Pure T&S/Level 2 reading is NOT Tape Reading

    Many new subscribers are confused about what Tape Reading is. Tape Reading to us goes into much deeper understandings of the information presented on a Time and Sales (T/S) screen. Simple staring at T&S/Level 2, trying to gauge the strength at this very moment leads to pure scalping for cents, while true tape reading is capable of much more. Principles of tape reading allow to distinguish the smart money action from that of the majority. Original tape readers of times of Jesse Livermore used those principles, and they work today just as fine. They are applicable in any time frame, and longer time frames would require looking at the chart, from intraday and higher depending of trader's objectives.

    Pure T&S/Level 2 reading narrows this method to very small time frame and tiny profit objectives. While this style is valid, this understanding is just too narrow and gives tape reading bad name among those that try to work for more than several cents.

    Please read this article to gain the right perspective on this matter.
    RT stands for Read and Trade.

    READ means two things:

    1. Forget the Aristotle logic, which in essence is trying to establish a firm link between a reason and an outcome. Obviously this does not work in the market. Learn to see what is hidden under the surface. Ignore what is being offered to you by those that want you to see things at face value. Look at what is shown to you as bait for you to go in a certain direction. Then ask who wants you there and for what reason.

    2. Learn to read what is really going on. We will provide you with the method to this reading. Being truly universal, this method will serve you no matter what kind of data presentation of choice you use: chart, technical analysis, particular set of technical indicators or something else. You will see how tape reading helps you to understand what the majority of market participants fails to comprehend. You will learn how to weigh market action in terms of price and volume. Then you will realize how to read the emotions that drive the market.

    TRADE means:

    1. Be in the right state of mind that successful trading requires. Be ready to execute your decision flawlessly, in an automated unemotional manner when the moment demands the response. Learn to control yourself and become the master of your emotions. Only when you are in full control of yourself will problems like keeping stops or hesitation to enter the trade cease to exist. From this, no external influences can impact your performance. We will train you to reach this wonderful inner state when trading becomes the source of joy as well as income.

    2. Learn to execute your trading decisions in a manner that maximizes the probability of your orders to get filled. It's really frustrating to see great opportunities pass by just because your execution skill was not refined enough to get the amount of shares desired or to route your sell order incorrectly. We will provide unique real-time execution classes that will put a solid foundation under your trading.

    When your training is done, R and T are being put together. That's when you become a RealityTrader. A RealityTrader is one that is able to see what lies beneath the surface and to execute his decisions without hesitation. They are traders that trade the reality of the market, not their opinion that is impacted by his position in the market or from a neighbor's hot stock tip. They are traders that trade what they see, not what they thinks. Reaching this state of trading is our ultimate desire for you and will make us most proud of the hard work devoted. We want traders who are in control.

    Read and Trade.
    Read the Tape and be Ready to Trade.
    Become RealityTrader

    Tape Reading 101

    Tape Reading is one of the oldest methods of market movement interpretation. Like any other methods applied by market players, it's intended to show "what's behind the ticker". There is no tape itself anymore. It has been replaced by a scrolling Times Of Sales Window and Electronic Tickers. But the term, and more importantly, the principles are alive and are as useful as ever. They are based on aspects that never change. These are human psychology and major accumulation/distribution rules.

    We prefer Tape Reading as our major method. There are plenty of technical indicators used by traders in different combinations. Many of them are very sophisticated and computers make it easy to watch them in real time. However, Tape Reading is a truly universal method that can be combined with any technical study, and we suggest it as a base for any other method traders like. Sophisticated indicators based on complicated calculations tend to somewhat mask the reality of a scenario happening. Tape Reading goes right to the roots of the stock’s action. This is necessary for newer traders.

    Like no other method, Tape Reading deals with reality itself allowing traders to see market moving forces in action and to judge which one prevails at that moment. It provides us with a look into what other players try to hide and then allows us to separate reality from our perception. The best example of this is as old as the Wall Street situation of “selling on news”. There are numerous examples of “XYZ is selling on such a great news.” Tape Reading shows why and how it happens. This tells you when you should expect non-conventional action on the stock and how to exploit it.

    Tape Reading deals with two major categories of market players. They are the Smart Money and the Public. You can replace these old terms with any pair you like (big guys and small time traders, insiders and online traders, institutions and retail traders, etc). However, the core of market events is the same. Tape Reading is a method of analyzing which side is doing what at that moment. Analysis is done by observing the only, and ultimately, truthful indicators of Price and Volume Action.

    Tape Reading does not always answer all our questions. In the stock market, nothing does. The stock market has no single ultimate answer. Otherwise this answer would already have been discovered and the market would have ceased to exist. There is no way price would ever change if traders knew the exact situation. Furthermore, any absolute method, once discovered by someone, could not be kept a secret for others. What Tape Reading does is:

    1. It puts probability on your side as it allows you to read the truth to the extent it can be read, putting as few "interpreters" between you and reality as possible.

    2. It allows you to develop a detached state of mind that a side observer possesses. The state of mind that traders want to experience is when they look at market action with no emotions, seeing clearly what happens. This is in direct conflict with cloudy judgement of emotionally involved traders with formed opinions that could be right or wrong, but in any case has nothing to do with reality.

    Mental State

    A positive mental state is an extremely important factor for successful trading. A trader's inner state of mind directly impacts his performance. In short-term trading, the right mindset plays an even bigger role. It ultimately defines whether a trader's technical knowledge and mechanical skills will lead to success. Almost all the top traders in this industry acknowledge the fact that the understanding of how the market functions is just a foundation for success. Self-control is what eventually makes a winner out of a trader.

    One of the most difficult shifts in thinking that a trader has to develop is the switch from “Prediction" to “Response". Instead of a trader always trying to predict or expect an event to happen, they simply respond to the event that is before them. The wrong assumption that is made by a trader is that he knows what the market will do at a certain moment. No one ever knows with 100% accuracy what will happen. The trader needs to shift his thinking in a manner that he will not try to predict, but rather respond, to whatever the market decides to do. This type of thinking requires that a trader develop a sense of absolute self-reliance. To achieve this state, a trader must take full responsibility for any outcome of his actions (or lack of actions). Any loss has to become a learning point. This is only possible if the trader is willing to take undivided responsibility.

    In order to read undistorted reality, the trader needs to read the market with no emotions, as a detached observer. It's not easy to get rid of emotions but it's doable. Accepting the fact that nobody can be always right, willingness to admit mistake fast and thinking of trading capital as of tool rather than money are some of steps in right direction. The trader can't progress unemotionally if every uptick puts him in a euphoric state and every downtick scares him. A trader that experiences strong emotions loses the ability to see the reality of the trade. From this, the trader goes from hope to fear. These emotions dictate his actions and leads to almost certain failure over time. A seasoned trader lets only one entity dictate his actions, the market. Self-confidence, self-reliance, cold blooded reading of reality and keeping emotions in check are the traits of successful trader. Our room provides a powerful educational program devoted to development of a correct state of mind that members can build their confidence upon everyday.

    Please read series of articles on trading psychology starting with Psychology 101
    Morning Preparation Guide

    Come to each day without preconceived ideas about what you think "should" happen.

    If you are watching stocks from the day before, determine support and resistance levels that you may be able to derive and "IF/THEN" scenario. If the stock holds "x" support, then I will enter long with a stop on the break of support.

    Determine market sentiment or pre-market mood, mainly using futures figures. However, do not feel that what the futures show, will be necessarily how the morning or afternoon trading session continues.

    Read news stories. Do not try to assess value to the news as we are not experts in this field. We are traders that are simply interested in possible interest derived from the news stories. Look for a gap up or down and volume. If stories are negative to an extreme, use caution as the stock may become dangerous for trading. When a stock receives interest shown in the gap or volume or both, place this stock on the Level 1 screen for monitoring.

    If you have access to a stock scanner or list of pre-market movers, place ones of interest onto your Level 1 screen for monitoring. Together with news stories, try to have 10 to 15 stocks during the pre-market session on the screen. Remember that you don’t need to try and monitor "all" the stocks with activity. Try to narrow your focus for the open.

    Near 9:00 EST, begin to take stocks from the Level 1 screen and place them on the Level 2 screen for risk evaluation. On the Level 2 screen, look for levels between prices to be tight, preferably 1/16 to 1/8. Also begin to look for larger sizes from participants at each level. Showing 100 shares each doesn’t show big sizes. Showing 500 to 1000 shares is better. The idea is to find stocks that will not be hard to execute and read when the market opens. Also, near 9:20 EST, stocks become more clear on risk evaluation.

    In the last 10 minutes of pre-market, narrow your focus for the open to 3 to 5 stocks. Place 3 to 5 stocks on a Level 2 screen that have moderate risk and looks readable from the open. During the last 10 minutes of the pre-market session, try to develop possible if/then scenarios on those stocks. If you do not have any developed for the open, wait for the stock to define a range and trade from that. Make sure volume is good enough and there is no risk for halt candidates. Often we see stocks gapping up or down excessively on no news. Use caution on these activity stocks as they are more apt to halt.

    Calm yourself. Prepare for the open with a clear mind and readiness to trade. Do not pressure yourself to trade however. Instead, let a trade setup occur and be ready to take it if it shows. Even if a ˝ hour goes by and you haven’t made a trade, do not feel like you need to force a trade. Many times I’ve waited hours for my first trade. Don’t feel as if you ‘have’ to trade. But be prepared to do so if a trade setup presents itself. Some use meditation, breathing techniques or other "tricks" to keep the clear mind for the open.


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    Here's a good thread on tape reading, with some illustrative videos:


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