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Tape Reading

 

by Linda Bradford Raschke

 

Sometimes it is nice to reexamine a simple concept when there appears to be overwhelming volatility in the markets. Mechanical systems and patterns are helpful and even necessary for the structure they impose in organizing data, but even Richard Dennis in his original course discussed ways to "anticipate" entry signals, exit trades early, and filter out "bad" trades.

 

Learn to follow the market's price action and read the signals it gives. This can become a strict discipline in itself and the result will be greater confidence that a trade is or is not working.

 

 

 

Tape Reading

"Trading technique is simply the ability, through study, observation, and experience, to recognize the signals in each of the several phases of market movement."

-
George Douglas Taylor

Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind.

 

Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways. (Markets do not always have to be going somewhere!) It is also fairly easy to watch a price go up and then tell when it stops going up - even if it turns out to be only a momentary pause.

 

I've known hundreds of professional traders throughout my career. I don't want to disappoint you, but I know of only two who where able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA's who are running a money-management program with "OPM" - other people's money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment - even if just to move a stop up or down.

 

If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, "The only truth is the current PRICE." Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

 

Watching price action can actually be very confusing if you go about it like a ship without her sails up in an ocean squall. You will get tossed back and forth with no sense of direction and no sense of purpose. There are two main tricks to monitoring price action. The first is to watch the price relative to another "reference point." This is why many traders use a "pivot point" - and it works! It is the easiest way to tell if the market is moving closer to or further away from a particular point. This is also why it is often easier to get a "feel" for the market once you put a position on - your "reference" point tends to be your entry price.

 

Some reference points, such as a swing high or the day's opening price, will have much more significance than those points involving some type of calculation. (Some numbers might have special meaning for those who calculate them, and who am I to argue if they work.) I like to concentrate on pivot points that the whole market can see. To sum up so far, when watching price, we want to know the following: how fast, how far, and in which direction. It takes two points to measure these things. One will always be the current price, the other a pivot point.

 

* Do not watch price for the sake of watching price. Watch price with the intent to do something or to anticipate a certain response!

"The study of responses ... is an almost unerring guide to the technical position of the market."

-
Rollo Tape (Richard Wyckoff), 1910

The second main trick to monitoring price action is to watch for the market's response to a particular condition ... in other words, anticipating a particular behavior. For example, if the market has been at a very low volatility point and just begins breaking out of it's particular trading range, one might anticipate that the price would begin to accelerate in an impulsive manner and not run into immediate resistance. Or, on a directional play, if the price is moving in an impulsive manner in a trending market and then pauses to catch its breath on a mild reaction, one would expect it then to continue on in the direction of the trend. When there is a particular behavior to anticipate, it is easier to watch the price to see if it acts according to one's expectations.

 

Is the market failing to break on bad news? Is it finding support after a series of advances? Does it run into an invisible overhead wall and sharply back off, implying strong resistance? These are market responses to certain conditions. Tape reading is like playing a tennis game and watching to see how your opponent hits the ball back.

 

Part of studying price behavior and gaining experience as a trader is gradually learning what actions to anticipate. Then you must learn what the market's most probable response or outcome should be. It will always be easier to anticipate an event or response which happens 70% of the time than to be looking for that which happens only 30% of the time.

However, it can also be a profitable strategy to recognize when a given signal or expected response is failing. Sometimes a failed signal can be more profitable than the normal expected response. For example, a classic failed response might be a scenario wherein price was consolidating in a pattern of higher lows and lower highs - a classic triangle pattern. One would expect a breakout from a chart formation to have some follow-through. However, if price only penetrates the lows by a small amount and then turns upward, picking up volume and momentum as it goes, and comes out the upside, a very significant reversal has probably occurred and there may be much more price advance to unfold.

 

One last trick to watching price action is to learn to think in terms of "handles," or levels. Think of the S&P's as reaching for the "1110" handle, or the "low 1060's" as a level. Each ten points is a defined level. Use big round numbers as reference points for levels. It doesn't mean that you are placing orders at those numbers. It is just a simple way of organizing data that professional traders practice subconsciously.

 

Pivot Points

 

An astute trader will always have the previous day's close in his head. He also knows the previous day's high and low (prices he would have liked to have bought and sold but probably didn't). He also knows the opening price, for that tells if the buyers or sellers are in control for the day.

 

The previous day's high and low and today's open have very strong psychological implications and are the most important "pivot points" to recognize. By concentrating on price action near these points, we can eliminate much of the hard work in tape reading. Many times the market will let us know right away if this is going to be an area of support or resistance.

 

The previous day's high and low tend to overlap in congestion areas. Look to exit profitable trades immediately at these points in sideways markets. In trending markets, the price will run through these points a bit before pausing. When the market is strongly trending, the opening price becomes the most important.

 

If we are watching a high, low, or opening price as a pivot point, we are watching to see whether there is any impulsive price action as the market approaches the point or moves further away from it. What is "impulsive action?" I like to call it a "whoosh." The market moves rapidly as if just coming to life for the first time. It is usually a series of ticks in one direction without a tick in the opposite direction. The market is tipping its hand. A sequence like this tends to consolidate or pause a bit before being followed by more impulsive action. This is quite easy to see in a market like the S&P's if you look on a short-term time frame. If we quantify these "whooshes," which we can do in several ways, we will see that the market tends to have continuation moves at least 2/3's of the time. Not bad for arriving at a "positive expectation" simply by following price action.

 

In conclusion, tape reading is not watching every trade that passes by (a monotonous task) but rather keeping an eye out for unusual impulsive action, unusual volume, or just observing the way the price trades at significant levels. Each price swing has forecasting value as to what the next most immediate move should be. We then follow the price action to see if that move plays out.

 

Tape reading is at the heart of swing trading. When looking for short-term moves, price-based derivative indicators will be too late to be of value. Ultimately, traders should feel a great sense of freedom when they can rely on simple charts to formulate a game plan or a conceptual roadmap in their heads - and the movement on the tape to tell them their game plan is correct.

 

Article contributed by Linda Bradford Raschke from https://www.lbrgroup.com

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Excellent article! I'm now going to read up on all real tape reading posts here to get a better idea how it works. But this article is very concise and to the point, very informative.

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Quote:

Successful tape reading is a study of force; it requires ability to judge which side has the greatest pulling power and one must have the courage to go with that side. There are critical points which occur in each swing, just as in the life of a business or of an individual. At these junctures it seems as though a feather's weight on either side would determine the immediate critical trend. Any one who can spot these points has much to win and little to lose, for he can always play with a stop placed close behind the turning point or "point of resistance". . This study of ‘responses’ to stimulation or outside influences on stocks is one of the most valuable in the Tape Reader's education. It is an almost unerring guide to the technical position of the market. Of course, all responses are not so clearly defined.

It is a matter of indifference to the Tape Reader as to who or what produces these tests, or critical periods. They constantly appear and disappear; he must make his diagnosis and act accordingly. If a stock is being manipulated higher, the movement will seldom be continued unless other stocks follow and support the advance. Barring certain specific developments affecting a stock, the other issues should be watched to see whether large operators are unloading on the strong spots. Should a stock fail to break on bad news, it means that insiders have anticipated the decline and stand ready to buy.

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What is Tape Reading?

 

This question may be best answered by first deciding what it is not.

 

Tape Reading is not merely looking at the tape to determine how prices are running.

 

It is not reading the news and then buying or selling "if the stock acts right."

It is not trading on tips, opinions, or information.

It is not buying "because they look strong," or selling "because they look weak."

It is not trading on chart indications or by other mechanical methods.

It is not "buying on dips and selling on peaks."

 

Nor is it any of the hundred other foolish things practiced by the millions of people without method, planning or strategy.

 

It seems to us, based on our experience, that Tape Reading is the defined science of determining from the tape the immediate trend of prices. It is a method of forecasting, from what appears on the tape now in the moment, what is likely to appear in the immediate future. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are being neglected by the large investors.

The Tape Reader aims to make deductions from each succeeding transaction - every shift of the market kaleidoscope, to grasp a new situation, force it, lightning-like, through the weighing machine of the mind, and to reach a decision which can be acted upon with coolness and precision. It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all.

A trader is like the manager of a department store; into his office are submitted hundreds of reports of sales made by the various departments. He notes the general trend of business - whether demand is heavy or light throughout the store, but lends special attention to the products in which demand is abnormally strong or weak.

 

When he finds it difficult to keep his shelves full in a certain department or of a certain product, he instructs his buyers accordingly, and they increase their buying orders for that product; when certain products do not move he knows there is little demand (or a market) for them, therefore, he lowers his prices (seeking a market) to induce more purchases by his customers.

 

The Tape Reader, from his perch at the ticker, enjoys a bird's eye view of the whole field. When serious weakness develops in any quarter, he is quick to note the changes taking place, weigh them and act accordingly.

 

Another advantage in favour of the Tape Reader: The tape tells the news minutes, hours and days before the newspapers, and before it can become current gossip. Everything from a foreign war to the elimination of a dividend; from a Supreme Court decision to the ravages of the boll-weevil is reflected primarily upon the tape.

 

The insider who knows a dividend is to be jumped from 6 per cent to 10 per cent shows his hand on the tape when he starts to accumulate the stock, and the investor with 100 shares to sell makes his fractional impress upon its market price.

 

The market is like a slowly revolving wheel. Whether the wheel will continue to revolve in the same direction, stand still or reverse depends entirely upon the forces which come in contact with its hub and tread. Even when the contact is broken, and nothing remains to affect its course, the wheel retains a certain impulse from the most recent dominating force, and revolves until it comes to a standstill or is subjected to other influences.

 

Richard D Wyckoff

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These posts should be copied here since they are particularly germane:

 

. . . it doesn't matter where you start with 'fast' tick charts, you are not really looking at candle patterns per se; you are just using it as a way of getting into the 'flow' of things. As you get flurries of activity at S/R levels, you can see 'walls' form and break. It’s a fairly intuitive thing. If price hits the wall and falls back, it leaves wicks (several). I use it more like a proxy for the tape than as a regular chart. On the whole, I use bars; it's just this visualisation helps to see price rejection. *snip*

 

7185d1214488403-reading-the-price-action-by-looking-es-09-08-26_06_2008-96-tick

 

Gotcha, I fully understand what you're saying. I use the same technique for entries / exits often. Something you hit on one of your charts is using volume on a tick chart, which in effect, shows order size for the tick bar.

 

I highlighted in your attachment significant volume bars that peak above the rest for the benefit of everyone else. Notice what happens to price action after a volume peak. Almost every micro-wave was identified extremely close to the high/low (within 1-2 bars and 1-2 ticks on the chart).

attachment.php?attachmentid=7187&stc=1&d=1214491237

 

I've used this for entries / exits for a while, and I think it's a very valuable tool on the micro scale (I wouldn't trade based only on these, but they help get a good price). *snip*

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Arethere any charts to give examples of the above posts re pivots and tape action please?

 

Today's activity on the NQ provides a good example of price action around a pivot.

 

First, price found support on the 23rd at a level which extends back to early December. After bouncing off, it found support there (27) again yesterday.

 

Second, you got your "whoosh" early this morning.

 

Third, price returned to what had been support and which might have become resistance and instead circled what became a pivot nearly all day, 7-8 points either side of it. As regards a high, low, or close, today's pivot is most closely aligned with yesterday's low.

 

 

attachment.php?attachmentid=9583&stc=1&d=1235765733

Image1.gif.a027f2973d004fc39bc2358c132f4423.gif

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i agree, great article for sure.

 

I use tape reading for my exits more than anything.

 

I find that volume (relative volume that is) is ideal for entries, but to see a winner about to turn against me i look at price action and the tape.

 

Rather than trying to watch all of the information as it speeds by on the tape, i blur my eyes and pay attention to the speed and frequency of it all.

 

I use Ninja, and they allow you to change the colors depending on the order itself, so you can color things accoridng to how they are executed, which will give you more of an idea of what is really going on.

 

TIP: stop watching the small details, blur your eyes and just watch the overall speed of it all and you will see the pattern of slow....to fast...to confused patterns, to trending patterns.

 

Hope it helps!

 

Mav

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I may be wrong but I don't believe it's a book at all. Whether Street Smarts has a section on tape reading I couldn't say its one of the few 'mainstream' books I don't have in my Library.

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    • I'm gonna pull a crazyCzarina and reply to a long dead post ... One sure thing about trading forums - The great questions never get an answer.  Ask  even the greatest posters a great question... silence, no nothin’, not even crickets.          First a few comments about Elliott Wave Wave Theory is a ‘science’ of socionomics.  Socionomics is about how societal ideas ‘ideally’ or typically unfold -  wave 1 is the early adapters, wave 3 is broad collective acceptance, wave 5 is continuing valuation narratives but with narrowing collective assessment of actual value... with all kinds of ‘ideal’ sub patterns... Socionomics starts with a simple observation: For lots of issues, how people FEEL influences how they will BEHAVE.  (Equally true = How people BEHAVE influences how they will FEEL... but that’s for another topic) Anyways... Elliott Wave theory is an attempt to apply socionomics  to trading   - and  yes analyst75 “theory” is the key word.  Imo, it’s a jump too far.   First, price is not a good metric for socionomics.... especially across decades when currencies are being viciously  'corrupted'.   And practically, socionomics does not transfer over to trading nearly to the degree Ellioticians would like.   It simply does not deliver enough of those ‘ideal’ sub patterns because  crowds of traders’ behaviors and ‘feelings’ about pricing are not sufficient equivalents of broader collective behaviors / socionomic waves... ESPECIALLY as time frames shorten... (ie waves may appear to ‘fractal’ down ... but they really don’t.)   If you’re going to use EW to trade, probably the most important point you can acknowledge is that 5 wave patterns are EXCEPTIONS to normal trading crowd behavior ie  the best thing a 5 wave pattern indicates is that corrective patterns will soon resume.  I’ve described it differently in other posts*  ... but basically, at any given point in time it is possible to reasonably project that ANY freakin wave ‘count’ / pattern will enfold.   It is just as reasonable to project that a nice 5 wave completion will go on to a nice 7 or 11 or 17 or whatever wave count as it is to project that the market will now have a ‘trend’ change.  At the end of any nice 3 wave corrective pattern, either projecting a huge 5 wave pattern unfolding in the other direction or projecting a long flat congestive pattern or another 3 wave correction pattern... or... all are equally reasonable.  Or, a pretty wave 1, 2, and 3 doesn’t not mean a pretty wave 5 will unfold.  Ie it’s just as reasonable to count it over and project that the next sequence will be corrective or a 5 wave impulsive move in the opposite direction. etc etc       ... to get back to the unanswered question - So what do you propose as an alternate? Long ago I read Hurst.  In a short section of his book he mentioned it.  It didn’t sink in.  Then one day it really hit me.  There is no Elliott wave sequence or any other ‘technical’ price pattern that cannot be better explained via ‘summation of cycles’ ...   * fun example can be seen by searching for 'trading chaos by bill williams' thread on t2w ... TL is so special we don't even allow links to other trading forums? ... other snarky EW comments at http://www.traderslaboratory.com/forums/topic/7555-do-you-use-the-elliott-wave-to-trade/page/2/?tab=comments#comment-146022      
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