TAPE READING
Part 1
I'd like to talk about Tape Reading as our preferred method to read the market. I assume you went through the free workbook for trialers so I won't be repeating what is said there. Tape reading is a widely used term, yet unfortunately it's being misused most of the time. Usually traders refer to it as to a simple watching of prints on Times Of Sales window trying to gauge something of the buys/sells ratio.
There is much more to tape reading than just that. In fact, this is one of the oldest methods of reading the market. Its very name appeals to the times when quotes were sent by teletype. Charting was really cumbersome back then.Great traders were using tape to analyze what's going on. While looking for patterns, they were noticing certain recurrences and interpreting them. We want to restore the real meaning of this term and renew the past significance of this powerful method of reading.
Later the computer age gave traders ability to apply complicated indicators. It became real easy to add to the screen plenty of studies and indicators. As with anything, the apparent advantages of this situation also has its shortcomings.
Complicated indicators tend to cloud the picture making your perception over-formalized. These kind of indicators work like an interpreter between you and market. Something is getting translated and something is getting distorted or lost. I happened to watch some of the Hollywood movies in
Russian first. Years later, I could watch them again in the original English version. It's amazing how much was lost with translation. I could still follow the plot but the depth of my understanding was very different. Fine details that really made the difference were lost completely.
Tape reading deals with price and volume directly, analyzing the very roots of any indicator. Let's look deeper into what price and volume mean. The price of the stock at any given moment is what the last print shows. The
print shows when there is an agreement on price and a disagreement on value between two parts.
Let me explain it. It takes two sides to agree that a given price is good for both the buyer and the seller. They disagree on value, which means one of them wants to buy and another wants to sell. The market gravitates to the point where these agreements on price and disagreements on value become equal. This is where the market establishes balance and waits for new flow of emotions that would upset the balance again to set the market on another move.
This leads us to the idea of the path of least resistance. This is exactly what tape reading deals with.
The major assumption that tape reading is based on is that there are two major forces dealing in market. Those are Smart money and the Public. Tape Reading is the art and science of figuring out which part does what in order
to join guess who :)
Some more of major ideas:
Smart money tries to act as inconspicuous as possible.
When Smart money let its action be seen it's time to exit, the game is over.
The public's action is easy to see because it's unmasked and violent.
The public is usually the last to know and to act.
The ability to distinguish who is doing what is where volume comes into play. It is possible to make buying quiet and inconspicuous by keeping the volume low. If you see a volume explosion, you can assume public has discovered the stock. There is one more side to it. In order to buy quietly, smart money has to the limit price movement too. That's why when stock is being accumulated by smart money, it happens with many pullbacks as they often go to the offer in order to offset the movement. They do this in order
to not let the stock go out of sight on their own buying. If big institutional traders want to accumulate 500K shares, most likely they will buy 800K and sell 300K, switching from one side to another.
Every principle of tape reading describes a certain combination of price and volume action, assigning some meaning to each.
There are a couple questions that are usually asked that I want to answer right away.
Does tape reading show exact turning points?
Yes and no. Yes it does in a way that it allows you to read players' emotions to certain a extent. Think of turning points in this fashion. A stock turns where beliefs change. Pivotal points or points of market balance are points where the ratio of buyers and sellers changes. Watching tape
action, comparing it to principles you saw in the workbook you can identify these stages. By using Level 2 to finesse your observations you can find your entry (exit) point.
No it does not in a sense that there is no exact flag or arrow on the tape that would signal the turning point. Tape reading (and trading as whole) is not exact science. It's a mix of science and art. Just think of how beautiful this mix is. You have some absolutely objective data but you don't have an objective way to analyze it that would give you an exact answer. You apply your personality but you have to adjust it so that some parts of your personality will get blocked. You have to be confident while at the same
time ready to admit mistake. There is certain data but there are no certain outcomes.
cont'd... |
