Tale of the Tape
It's time for a rude awakening. The years you spent studying technical analysis may not make you a good trader, and all that hard work may not yield a decent return. So what did you miss when learning to play the game? You forgot to master the art of tape reading.
Let's be fair. Traders get a lot of mileage by studying the charts. But to carry your game further and trade like a pro, you have no choice but to master the ticker tape. And it's not easy, because there's no definitive book or formula on the subject. The reason is sobering: Reading the tape must be learned through personal experience and long observation. Accomplished tape readers spend hours staring at the numbers and watching the tempo of the market day.
Price and Volume
Follow the numbers and see how your knowledge grows. You'll access a market pulse hidden to other traders. To get you started on this long and winding road, here are a few tricks to the secrets of the tape.
Let's start with something simple. Price and volume give tape-readers 90% of the information they need to trade the market. To tap into this vast wealth, study the tape with one eye on the clock. Swings and reversals tend to occur in predictable cycles. For example, watch for the "three-bar reversal" at about 11 minutes into the new session. Follow the tape in whatever direction price moves at the open, and see how momentum fades at the critical time. Then jump in and execute a trade to take advantage of the reversing tape.
Here's a tape trick to get a read on the crowd's excitement level. Place a 65-day average volume next to your real-time daily volume for your favorite stocks. Those trading through their averages flag impending breakouts and breakdowns. This side-by-side analysis works best when a stock moves against the broader market. For example, it heads up on a down day and trades over 50% of the average in the first hour. You're getting a powerful clue it will lead the market, especially at broad turns.
Tape Reading Tricks
Epics are written about Nasdaq Level II. But the tale of the tape often gets lost in LII mumbo-jumbo. Many tape-readers use Level II as a contrary indicator. For example, execute trades against big size on Island ECN, and with small size on Redibook or Instinet. Another trick is to ignore the market makers and ECNs lined up on either side of the spread, and track only the depth of their interest (i.e., how far down the sell side, or up the buy side they stay in the market). Also see who moves in to fill the gap when the spread opens more than 10 to 12 cents. That's the side with the most motivation, and the one that will likely move price.
Market wizard Larry Pesavento points out a powerful tape-reading tool called the opening price principle. Through years of observation, he discovered how the opening serves as a pivot through an entire session. He instructs traders on how to read tape when price returns to retest the opening. Always keep the opening next to the current ticker. If price retraces to that level during the session, follow the tape to see how it reacts. Then use opening price breaks and reversals as trading signals.
It's 3 o'clock ... do you know where your stock is? Tape-readers pay close attention to the relationship of current price to the daily range. Real-time quotes refer to this ratio as the "percent in range." This simple number will track the progress of a long watch list in seconds. For example, there's an hour to go and the market is down. Most of your list is scraping the bottom third of the daily range. But one or two stocks pop "100%" on the "percent in range" quote. Those stocks are breaking to new highs, while the rest are doing nose dives. You've just uncovered the strongest names on your list, and the ones ready to make you money.