TAPE READING
Part 2
Does tape reading always work?
You know the answer already. Nothing does! No one thing, no one indicator, no one TA study, pattern etc, nothing works ALWAYS. It puts probability on your side if you apply it right. The most important thing is that it brings
structure in what looks like chaos. It allows you to organize what you see, to find right shelter for each case. What happens if you identify the case in a wrong manner? Your stop is being hit. Is it failure of system? No! It's
a normal part of trading.
Before I go to questions, last one I want to comment on is why tape reading? Why not Fibonacci, or stochastic, or
Bollinger Bands?
The reason is that tape reading is a truly universal
method and very tolerant to any other. It puts a solid foundation under any system and can be used as a stand-alone system. It can be complemented by any kind of indicators and it will keep a trader "sane", in a sense that it will keep the link to reality when an indicator might cloud this link.
OK, let's see if there are any questions.
<RT Member> Do you use any other indicators in conjunction with TR?
<Threei> I personally - no. I use the Level 2 to confirm what tape says. Let me elaborate on it a little bit more. Everything I say about indicators and TA doesn't mean I am in any way against using them. They do work for those
who apply them right. I just offer tape reading as powerful way to see the reality, not just formalized info that doesn't really make sense for those who can't see where indicator roots from.
If you read Trading for a Living by A. Elder you could see that for every indicator he has an explanation about what psychological moves it's based on. That's what makes his book so popular and real good. It allows you to not lose the link between raw info and formalized info.
<RT Member> You said that Smart Money, wanting 500K of issue, will often go to the ask, could you explain that with a little more detail, how is it seen on L2
<Threei> When you watch Level 2 for a while for a given stock you usually are able to identify the buyer. After some stage of the movement you can see him all of a sudden on the ask with big size offered. It scares traders into
selling, stock makes several downticks, and he can continue his accumulation after stock has stabilized. Sometimes the buyer uses ECNs to do the trick. He might use several strategies. One of them is to show his identity in order
to control a trader's emotions appearing on different sides. You can see this reaction in chat rooms when traders buy because MONT at the bid and sell because MONT at the ask. Another one is to hide the identity as long as it's possible and mostly operate by ECNs staying away from inside market but taking SNet BROD orders. There are also combinations of above. Experienced traders for MM firms can control players emotions very well when they have a nice order, especially on an illiquid stock. It gives an advantage to those who learned how to read their manner to act. That's why illiquid stocks sometimes are easier to read than monsters like DELL, MSFT, INTC etc., where
too many interests are in combat.
<RT Member> When Smart buyer's order if filled....do we expect a release of the hold on price for appreciation and if so....can/how do we see that coming up
<Threei> When buying by Smart money is done, the next logical stage is mark up and distribution. It could be on a news release that triggers public interest or it could be a move by Smart money that makes the stock visible for the crowd such as a price spike or volume spike that attracts the interest. If you read the scenario "Slow accumulation" in the workbook for trialers, you can see how stages change and the last one is usually a big spike of volume and price. That's where Smart money scales out from the stock (distribution).
<RT Member> Just wanted to say that nearly all indicators are formulated from price
<RT Member> Is it not also true that Smart Money "plays" the market? I mean some days I see some huge volume of the "news" stock.
<Threei> I am not sure I understand the question. If you mean they manipulate the market - no, I can't agree. This is the game, or The Game, if you will :) Everyone has his interest and plays accordingly. If I misunderstood you, please elaborate.
<RT Member> Okay, No Threei, I was asking that aren't they also participating in the "news" event sometimes and are pretty "loud"? Just seems that the Institutions are Day Trading now more than ever... imo
Another question: Do you look at the Intra day chart at all? with the T & S?
<Threei> I got it. Yes, sometimes and last fall was great example of what you mean. Those incredible movements we saw on many stocks could not be supported by just individual traders. Apparently, many big boys participated in the momentum game. Also, keep in mind that to some degree, the field levels in a sense that the public has much broader access to the news and corporate events now. It leads to a situation where the smart money's advantage "to know first" becomes not that great as it used to be. Still, we can see that it's still a factor. Look at OMKT. That obviously had big boys bailing out with no slightest leak of info.
<Threei> On your second question. I use a chart only if I want to see what stock did before I started watching it, or if I didn't watch it for a while. As long as I monitor what it does, I know what happens without visual representation. It doesn't mean there is something wrong with charts, I am
just not visual type, probably - numbers work for me better.
<Chris> Can I add example Threei real fast?
<Threei> Sure go ahead Chris
<Chris> Assume that stock ABCD gets news. The range of the stock is seen on Level 1 or 2 screen. I want to bring up an intraday chart to see if the stock shows a spike/rapid decline already. This may be showing that maybe news already came out and the initial reaction was evident. From that point of knowing if fast price/volume spike was already made, I will continue to watch the tape itself for any lingering reactions.
<RT Member> Thanks Threei & Chris, thats what I was wondering! Thanks
<RT Member> What role should Naz futures play in tape reading for a stock?
<Threei> For me - just an indicator of general market mood. The negative/positive sentiment will affect any movement to some degree. There are stocks that usually follow futures and they can be tracked and played on futures movements. Usually those are market pilots. Please, read article on
market indicators let me show you the link
realitytrader.com NOTABLE SI ARTICLES there
is one of them named Indicator.
<RT Member> Threei mentioned in an SI thread that scalping was not suitable for beginners. Is that still the case?
<Threei> Well, scalping requires experience. It happens often too fast for a new trader to participate. Execution skill of a new trader is not suitable usually. They lack execution and not enough of an intuitive perception, which often works great for a scalper as it allows to react much faster than analyzing. So, yes, I still consider it to be a style for more skilled traders and when we alert a scalp trade, we try to do it on more safe stocks. By all means we assume that a trader read that article and understands all that is involved in scalping.
<Threei> At the same time, scalping is very very safe style of trading whenit's mastered since it gives you control as close to absolute as it gets in trading.
<RT Member> If it is ok I would like to suggest the following reading to complement today's class Tape Reading & Market Tactics by H.B. Neill, 1931.
<RT Member> I wasn't too sure I understood the comment about
disagreeing on the manifpualtion and not thinking hte MMs daytrade.
<Threei> They do daytrade . Manipulation is another topic. Let me address you for now to two articles
realitytrader.com
NOTABLE SI ARTICLES
MM discussions
Trading Credo
<RT Member> Perhaps a good definition of manipulation would be in order. Seems to me they manipulate as they daytrade - espicially the order flow MMs like NITE and SLKC
<Threei> Yes, I think we will touch manipulation topic deeper. I wouldn't consider it manipulation. They play the game. The game is about the fulfilling of your task and if it takes to hide their real intentions they do so. As long as the stock market exists, players hide their intentions,
mask them and fake them. The very word manipulation has a very dangerous implication for a trader's emotional context as it leads a trader to believe that there are forces out of his reach that affect his trading outcome. As
soon as trader assumed it, he stopped trading. He started gambling. If you can't control the link between your action and outcome, it's pure gambling.
<RT Member>So how would you actually define "manipulation?" or what would be an example or do you think there is nerver manipulation?
<Threei>Some group accumlating the shares and then spreading false rumors in order to propel the stock is manipulation. But MM flashing huge INCA bid, fishing for buyer is not manipulation, it's part of the game. I bought,
INCA disappeared, stock downticked, Who is sucker? :)
<Threei> Jesse Livermore said: There is actually just one major rule in speculation: Don't be a sucker.
<Threei> Let me site an example of manipulation I saw and actually got hit by. On KTEL in 1998. A brokerage downgrades it to SELL which is rare. In pre-market trading this brokerage shows ask 2 point below the close confirming by this that they are going with their recommendation. I short KTEL and see in shock that I was filled by this very brokerage. In an hour after opening, there is a new release from them. It read, "We review our opinion and changed it. KTEL is a strong buy."
It cost me about $11,000 that day and it would have cost me complete burning if I wouldn't have covered because this very day borrowed shares were called in. My buddy hasn't covered this day and the next day his broker called the
shares in. He thought he would just buy them. This wasn't the case. They said that the lender wants shares TODAY and if you just buy it, there is three day settlement period. He asked: "so, what do I do" They said: "Well, there are ways to get shares today but a seller will want a higher price to settle the trade." As a result, with the average price on his short was around $25 and stock trading around $35, he paid $48. I still don't know how legal it all was. I mean this way to call the shares in
<RT Member> I have been scared of shorting from the start. Now I'm terrified.
<Threei> Shorting is a valid way to trade but it certainly carries higher risk. By the way, there are indications that rules might get changed in the near future in such a way that shorting would become equal to long plays
risk wise. It's still in discussions. |
