What is it?
- 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?
Price patterns on the tape solidify conviction in the market and give the trader more confidence getting involved with the current short-term trend.
On the opposite side, conviction on the tape can also give the trader an indication that the current move has ended, and they need to be prepared to see a potential reversal
Second, use simple patterns to identify these opportunities
As traders we use predictable and dependable patterns on the tape to make educated trading decisions. These patterns are easy to see on your time & sales window if you know what to look for.
Use these simple patterns to develop your skills:
Pattern #1: The Lift-Off!
Characterized by a breakout of range-bound price action, this move up is quick, and on increasing volume, followed by a small pullback down, only to be taken up again by increased momentum on the buy-side.
In this example, you could use this pattern as confirmation for a LONG entry in the market, or as an indication that you should be covering a short position.
Pattern #2: Got-Ya!
Characterized by a sharp move out of its trading range, usually on low volume by small retail traders in the market, and is met with great resistance from larger-sized traders who quickly take advantage of this opportunity to get into the market at a great price, and the retail traders pay the premium on it.
In this example, this pattern shows little confirmation, which is an easy give-away for traders to stay away from the up-side b/c the buyers didn't bring enough conviction to the market and the sellers are ready to make them pay.
Don't get fooled into a long position on this, wait for the conviction to show you where to go, and in this example, you would want to short this jump up in price once you see the sellers take control.
Pattern #3: Confusion
The most common pattern we see, this pattern shows no concrete direction, no conviction, and no volume in any given direction. Traders who can see this pattern know to wait for more conviction in the price action as to where the market is headed.
In this example, the experienced trader waits patiently to see a pattern develop, knowing that this lack of conviction in the market increases the risk on a potential trade exponentially.
If you can't see a pattern on the tape it's most likely the confusion pattern, and in any case, you need to avoid it...
Third, use this knowledge to make educated trading decisions...
Professional traders use the tape to better-understand the overall sentiment in the market participants, and we use that knowledge to make educated trading decisions in our trading.
- Execute with Confidence:
- Reading the tape increases your confidence to pull the trigger on your trades by giving you the ability to know what the other traders are thinking.
- Wish you had the ability to speak with the other traders in the pit? You do when you read the tape!
- Know when to hold 'em, and when to fold'em:
- Know when to exit your position, or when to let it run using the information you gather from reading the tape.
- Using specific 'pivot points' as a reference, you will better understand what other traders are thinking as price moves in your direction, and you can use this information to know whether you need to exit your position or stick around for the ride!
- Ever wonder why you got stopped out of a trade?
- Ever wonder why you get some targets filled and some do not?
- The answer lies in the tape, and your ability to read and understand it.
- Using the tape, you'll know more about why a trade didn't work out, or why you barely missed a profit target, or even when to move that target closer to price to ensure you get filled.
- Remember, the markets are anything but random, and price always moves with purpose, it's your job to interpret the tape to understand why.