Read The Tape, Improve Your Trading
The Tape-Reading Edge
by Thomas Carr, Ph.D.
Tape-reading skills are a product of your intuition. Here's how you can sharpen your intuitive power into a tremendous profit-making talent.
First, it must be said that tape-reading is a kind of luxury, at least these days. It is not necessary to tape-read to be a successful trader; tape-reading simply gives you an extra edge -- an edge that takes your trading to the next stage of excellence. Sound tape-reading skills are essential for getting the best possible entry, holding onto winning trades beyond your profit target, and are sometimes responsible for keeping you out of bad trades altogether.
WHAT IS TAPE-READING?
Tape-reading gets its name from the old "ticker tape" machine that used to feed stock quotes to brokers before the advent of computers and LED displays. A small, glass-enclosed printing press would spit out a continuous paper ribbon, on which would be typed order size and price quotes as trades were executed.
Fortunately, we no longer have to crowd around the ticker waiting anxiously for the tape to give us a quote on the stock we are interested in. We simply type the symbol into our computerized, electronic charting system and we are given a trade-by-trade, streaming "tape" of the action in real time.
If you read through the great stories in Jack Schwager's Market Wizards volumes, you will find a theme running throughout the 60-odd biographies collected there: tape-reading. Besides having nerves of steel, most of the world's greatest traders are also great tape-readers. Many began their careers trading "nothing but the tape."
Floor traders live and die by the tape. They don't have the luxury of sitting quietly in front of a computer analyzing charts. They can only trade the ebb and flow of orders as they occur in the pits. It is a "chicken or the egg" phenomenon, because floor traders, with their frequent in-and-out scalping techniques, create the very tape they are trading. Other than rumors and news flashes that filter past their trading stations, they have nothing else to go on but the tape.
FIGURE 1: TIME & SALES OF QLOGIC. Color changes, size changes, and speed changes can all indicate the order flow of a stock. This example displays a neutral market.
Excerpted from an article originally published in the July 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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