Have you learned to read the tape yet? Take the first step
and memorize key price levels on your favorite stock charts.
Then watch the ticker or LII screen closely when price
approaches these critical points. Price action zones trigger
both volatility and volume. Observe how the tape reacts and see
if you can predict key reversals before the crowd does.
Traders can now access four levels of ticker tape information.
In the past, professionals relied on the manual ticker, an early
version of the scrolling CNBC display. Real time services then
introduced single-issue Level 1 packages that updated the inside
bid/ask. As processing power grew, vendors added historical time
and sales grids that featured all trading activity in a
spreadsheet format. Recently, Level 2 NASDAQ has revolutionized
trade information with a complex display of the key players that
make a market in each stock.
Always look outside the tape flow before execution. Time of day,
market sentiment, characteristics of a particular stock and
chart support/resistance affect the importance of tape
transaction signals. Keep in mind that all skilled tape reading
relies on one key mechanism to locate profitable signals: market
makers and specialists use their knowledge of the order book to
move their markets in whatever direction yields the greatest
volume. They will routinely manipulate trader emotions against
the order flow to shake them out of their positions.
Market players keep one eye on their markets and the other on
external conditions that affect prices. Quiet times (lunch
hours, holidays) offer prime conditions to gun key support and
trigger common stop locations. And during long periods of little
interest, price can reach important levels on very little
volume. At these times, insiders will test the breakout waters
to see how much new trading interest they can generate.
Although each issue has its own personality, most emotional
market behavior unfolds in a straightforward manner. Price will
respond with sharp movement in the direction of the impulse but
then pause and test demand with short pullbacks. These
countertrend movements highlight the real challenge for tape
readers. Volume can dry up at any moment and for no apparent
reason, trapping one side in a sudden reversal.
|Level II Screen: More
information does not necessarily improve trading
results. NASDAQ Level II provides detailed data on
market makers and the depth of their markets.
Unfortunately such information may focus the trader on
the process rather than the result. The final resolution
of this price competition often triggers more valuable
signals for profitable execution.