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Tale of the
Tape
| It's time for a rude awakening. The years you spent
studying technical analysis may not make you a good
trader, and all that hard work may not yield a decent
return. So what did you miss when learning to play the
game? You forgot to master the art of tape reading.
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Let's be fair. Traders get a lot of mileage by studying
the charts. But to carry your game further and trade
like a pro, you have no choice but to master the ticker
tape. And it's not easy, because there's no definitive
book or formula on the subject. The reason is sobering:
Reading the tape must be learned through personal
experience and long observation. Accomplished tape
readers spend hours staring at the numbers and watching
the tempo of the market day. |
Price and Volume
Follow the numbers and see how your knowledge grows.
You'll access a market pulse hidden to other traders. To
get you started on this long and winding road, here are
a few tricks to the secrets of the tape. |
Let's start with something simple. Price and volume give
tape-readers 90% of the information they need to trade
the market. To tap into this vast wealth, study the tape
with one eye on the clock. Swings and reversals tend to
occur in predictable cycles. For example, watch for the
"three-bar reversal" at about 11 minutes into the new
session. Follow the tape in whatever direction price
moves at the open, and see how momentum fades at the
critical time. Then jump in and execute a trade to take
advantage of the reversing tape.
Here's a tape trick to get a read on the crowd's
excitement level. Place a 65-day average volume next to
your real-time daily volume for your favorite stocks.
Those trading through their averages flag impending
breakouts and breakdowns. This side-by-side analysis
works best when a stock moves against the broader
market. For example, it heads up on a down day and
trades over 50% of the average in the first hour. You're
getting a powerful clue it will lead the market,
especially at broad turns.
Tape Reading Tricks
Epics are written about Nasdaq Level II. But the tale of
the tape often gets lost in LII mumbo-jumbo. Many
tape-readers use Level II as a contrary indicator. For
example, execute trades against big size on Island ECN,
and with small size on Redibook or Instinet. Another
trick is to ignore the market makers and ECNs lined up
on either side of the spread, and track only the depth
of their interest (i.e., how far down the sell side, or
up the buy side they stay in the market). Also see who
moves in to fill the gap when the spread opens more than
10 to 12 cents. That's the side with the most
motivation, and the one that will likely move price.
Market wizard Larry Pesavento points out a powerful
tape-reading tool called the opening price principle.
Through years of observation, he discovered how the
opening serves as a pivot through an entire session. He
instructs traders on how to read tape when price returns
to retest the opening. Always keep the opening next to
the current ticker. If price retraces to that level
during the session, follow the tape to see how it
reacts. Then use opening price breaks and reversals as
trading signals.
It's 3 o'clock ... do you know where your stock is?
Tape-readers pay close attention to the relationship of
current price to the daily range. Real-time quotes refer
to this ratio as the "percent in range." This simple
number will track the progress of a long watch list in
seconds. For example, there's an hour to go and the
market is down. Most of your list is scraping the bottom
third of the daily range. But one or two stocks pop
"100%" on the "percent in range" quote. Those stocks are
breaking to new highs, while the rest are doing nose
dives. You've just uncovered the strongest names on your
list, and the ones ready to make you money.
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