•  Tape Reading is the study of raw price action as it comes across your time & sales window, and is considered by most to be the 'purest form of the market.'
•  The term tape comes from ticker tape; print out by the ticker tape machines available since 1870s which reports the latest trade/bid/ask update information.

How it's used:

•  Predict short term price changes by examining price and volume information as it comes across the ticker tape.
•  Most effectively used at potential turning points in the market to gauge overall market sentiment and help determine the future direction of price.
•  Traders use this to see confirmation of a potential trade set-up, or a heads-up that a set-up should be avoided.
•  Also used as an indicator of when momentum has dried up, signaling a trader to take profits or to limit his/her risk on a position.

Benefit to the trader:

•  Filter out the highest percentage set-ups
•  Confidence in your entries
•  Know when to exit a trade
•  Maximize profits on each trade
•  Limit the risk on each trade

What to watch:

•  Speed of the orders
•  Size of the orders
•  Order Condition

Learning to read the tape is a vital part to becoming a successful trader in the long term, and understanding how to learn this skill can be difficult if you don't know what to look for.

Learning to read the tape is as easy as 1-2-3!

First, know what you're looking for...

Find a pivot point

A pivot point is nothing more than a specific price level for the market you are trading, and we will use this price point as a reference.

The most common pivot points for this would be the open, high or low of day, and previous close levels. We use these specific levels in the market to watch how price action reacts in and around these areas.

If we see that price action shows bullish patterns around the high of day, that will tell us we should expect to see the market try to rally through the highs of the day. In other words, this tells us the overall market sentiment at these levels.

Reaction to Price Moves

Successful traders always trade the reaction, rather than the move, and reading the tape allows them to really tune-into what really drives these moves.

For example, if price is trading in a specific sideways trading range and then breaks out of this to the up-side, the experienced trader knows to stay away from getting involved on the initial move up, but rather pays close attention to how the tape reacts to this move.

Using simple price patterns at these extremes, the trader can get a better feel for the sentiment in the market, and make educated trading decisions based on this reaction to the increase in price.

Conviction in the market

Are buyers met with equal amount of sellers?

Are the sellers having a hard time keeping up with the buy orders?

Is price forcefully moving through levels of support or resistance?

Is price flirting with support and resistance levels, only to be swatted back and forth like a paper napkin?