Tape
Reading
Have you learned how to read the tape yet? The best way to
begin your education is to pick some stocks and memorize key levels on the price chart.
Then watch the ticker until some quirks in behavior start to appear. Pay extra attention
when price enters action zones, i.e. areas surrounding important support
levels. Observe how the tape reacts and see if you can predict key reversals in your head.
Traders can now access four levels of ticker tape
information. In the past, professionals relied on the manual ticker, an early version of
what CNBC now flashes across the bottom of the screen. Real time services then introduced
single issue Level 1 displays showing the inside bid/ask. As processing power grew,
vendors added historical time and sales grids featuring all trading activity
in a spreadsheet format. Recently, Level 2 NASDAQ has revolutionized trade information by
featuring all the players making a market in a stock at the same time.
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 observation to locate profitable signals: insiders
consistently move their markets in whatever direction yields the greatest volume.
At the most basic level, they manipulate trader emotions against the flow of orders coming
in the door.
Stock insiders keep one eye on their market and the other
on external conditions that affect prices. They use their knowledge of the order book to
bend the tape towards volume in an effort to trigger execution. Quiet times (lunch hour,
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 to 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.
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 presents more valuable
signals for profitable execution.
