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TradingDay.com > Technical Analysis Tutorial

T e c h n i c a l   A n a l y s i s   T u t o r i a l
by Alan Farley

Tape Reading

Have you learned to read the tape yet? Take the first step and memorize key price levels on your favorite stock charts. Then watch the ticker or LII screen closely when price approaches these critical points. Price action zones trigger both volatility and volume. Observe how the tape reacts and see if you can predict key reversals before the crowd does.

Traders can now access four levels of ticker tape information. In the past, professionals relied on the manual ticker, an early version of the scrolling CNBC display. Real time services then introduced single-issue Level 1 packages that updated the inside bid/ask. As processing power grew, vendors added historical time and sales grids that featured all trading activity in a spreadsheet format. Recently, Level 2 NASDAQ has revolutionized trade information with a complex display of the key players that make a market in each stock.

Always look outside the tape flow before execution. Time of day, market sentiment, characteristics of a particular stock and chart support/resistance affect the importance of tape transaction signals. Keep in mind that all skilled tape reading relies on one key mechanism to locate profitable signals: market makers and specialists use their knowledge of the order book to move their markets in whatever direction yields the greatest volume. They will routinely manipulate trader emotions against the order flow to shake them out of their positions.

Market players keep one eye on their markets and the other on external conditions that affect prices. Quiet times (lunch hours, holidays) offer prime conditions to gun key support and trigger common stop locations. And during long periods of little interest, price can reach important levels on very little volume. At these times, insiders will test the breakout waters to see how much new trading interest they can generate.

Although each issue has its own personality, most emotional market behavior unfolds in a straightforward manner. Price will respond with sharp movement in the direction of the impulse but then pause and test demand with short pullbacks. These countertrend movements highlight the real challenge for tape readers. Volume can dry up at any moment and for no apparent reason, trapping one side in a sudden reversal.

Level II Screen: More information does not necessarily improve trading results. NASDAQ Level II provides detailed data on market makers and the depth of their markets. Unfortunately such information may focus the trader on the process rather than the result. The final resolution of this price competition often triggers more valuable signals for profitable execution.
 


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