Tape Reading: How I Started Learning Tape

[Soultrader]

Thought it might be of interest to give a brief history of how I met the tape and fell in love with it. One book I owe to my first contact with the tape is Tape Reading and Market Tactics by Humphrey Neill. As a new trader this book was my bible in trading. I also studied the works of Jesse Livermore and Richard Wyckoff. What got me interested in tape was that all three traders had one thing in common. They were great tape readers. Back then.. the tape was the ticker tape. In Reminiscence Of A Stock Operator, Jesse Livermore learned to read tape at a young age working in a bucket shop. He would simply stare at price numbers and take notes. Eventually he started seeing patterns and support and resistance points off the tape. This gave him a tremendous edge as a trader.

The story of Jesse Livermore was a true inspiration for me. Tape reading books are very limited... but I went on a mission to learn everything I could about the tape. I then decided to program my brain to seek patterns in tape. I used a simple real-time bar chart with a time of sale only and stared at it for months after months. For the first month or two... I was completely clueless. I had no idea what the tape was telling me and I was completely conviced it was impossible to trade off the tape. At that time it was too fast to read and wondered how anyone can keep track with all those prints. By the third and fourth month I started seeing little clues in the tape. I started seeing big lots getting bought and then being sold a few ticks later. This was fascinating to me because I was now seeing other traders hand. For example, I would see a 100 lot bought at the ask and then sold 3 ticks later on the bid. I then assumed that this 100 lot trader might think he is wrong hence the reason for selling. I was amazed to see price reverse from this piece of information only. I then started following big lots. I assumed that these big traders knew what they were doing and decided that I can profit if I can simply follow their footsteps.

Within half a year, I was able to identify many different types of clues on the tape. I started focusing on tape to time my entries and exits. I also started seeing the personality of the market through tape and the trader pyschology off the tape. A mixture of green and red (bid and ask) on the tape indicated a lack of conviction which led to a choppy market. In a trending market, the tape showed more green or more red. I started paying attention to the flow of the tape as well. In a trend, the tape will roll fast. Once the tape starts to halt, the markets will usually halt or even reverse at times.

I then applied the famous Nicholas Darvas' box theory into tape reading. Sounds weird but the box theory is very similar to market profile with higher/lower value placements. The box theory simply shows how price will travel in a range or box... once it breaks, it will enter a new box or value area. What you dont want to see is for price to breakout of a box and then return into the previous box. With tape, I would look for price rejection or what some traders refer to as the "token". The token became the upper point in the box and the lower point in the box. This was strictly short term. (short term as in seconds) If the tape broke above the token, I did not want to see prints back in the previous bracket. This concept became a key element in my tape reading skills.

In 2006... I read John Carter's book, Mastering The Trade. I enjoyed it especially because I was a pivot point based trader. I decided to check out his website and took the free trial for a week. That was the first time I heard of Hubert Senters who was also a great tape reader. I had the opportunity to watch some of this tape reading videos. (they are great by the way) I applied some of his techniques into my tape reading skills such as: watching for a base and closer observation of the flow of the tape. I also got the idea of seperating the tape into two columns to filter out the small traders from big traders. (extremely useful in my opinion)

Its been over 3 years now since I started using tape. It took me a while to really understand it but I truly believe tape reading offers a tremendous edge in trading. Even in my 3rd year as a tape reader I have learned new things off the tape such as identifying false breakouts. I have also made it a habit to take mental snap shots of the tape and then recall if there were more buyers or sellers. This helps me understand supply vs demand, hence market direction.

Happy Trading

[wsam29]

I'll add my two cents to this post.

I picked up on price action by mistake on a tick by tick basis.

I first started as a "technical analysis" trader, based solely on price patterns, it works, dont get me wrong, but seeing small prints above or below support and resistance tells alot about what may happen. the guys in the grain pit love to take those stops out and go the other way (back in the days when grains were only pit traded) That is where I first noticed that "pattern" if you can call it one. I said to myself when the price fell below resistance, "you guys want to play, here I'll cover my long and go short now if that is what you guys want to do." and sure enough that trade turned out but I did not really understood what really happened.

So yeah, if you see it with your eyes on a consistant basis and there are no books mentioning these "patterns" believe it and just go with the flow. It takes some guts at first because paper trading does not facotr in the psychological part of trading, that is not simulated with fake money.

I'll tell you one thing for sure, your mind will be exhausted from tape reading by the end of the trading day so have balance in your life in some shape or form. And throw in a break or two, you're entitled to one, then again some "can" go all day without a break, "to each is their own" goes that saying.

[walterw]

I can understand what you mean Soul with this screentime on tape reading and that it pays back to do it... my experience is very similar but with a rare 3 Tick chart... this small timeframe allows you to "feel" the market at very key levels... I got good on feeling the velocity of this fast chart... and you can sense when the market is Stuck or when its flowing... some kind of tape reading on a chart... thought the information its obvious different but I am convinced that a succesfull trader comes out off feeling the market... and there are a series off tools that can let you "feel" the market... similar to pit sqwak audio.... any technical argument gets confirmed by this strong feeling of whats happening.... thougt its hard at the begining but it pays off later... cheers Walter.