Bob G's excellent post
Subject: From the Trading Desk
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To: steve goldman (1483 )
From: Robert Graham Monday, Nov 3 1997 1:33PM EST
Reply #1488 of 1502
[Tape Reading Post]
I will continue with my series of posts about tape reading until there are some poeple here who speak up in a negative way to my efforts. As you can see, I will prefix my posts about tape reading in order to warn those not interested in my efforts in order for them to skip this type of post. I will be posting a fairly accurate facsimile of what the author has written in his book and leave out the details that I do not believe applies to this discussion on tape reading. I will also be occassionally making some adjustments to the text in order to place it in a form more suitable to our purposes on this thread. I hope to be as accurate as possible in doing this. But if any of you understand to the contrary of what I post here, please so not hesitate to speak up.
In the previous post, I started off by covered how the author of the book on tape reading "Tape Reading and Market Tactics" has described the various kinds of people comprising the purchasers and seller of stocks. The author goes on to say that the important point to remember here is that all of these people are just human beings, just like you and I. Some are more experienced in the stock market than we are, many are less. Some are conservative, many are pure gamblers. [Editor's Note: I suspect many who think they are investors actually are the gamblers due to their lack of understanding and experience in the stock market. It is just that they do not know what they are not aware of. No wonder they lose their money and leave in disgust.] Nevertheless, with the exception of those who purchase stock for income, each person is interested in the same thing as you and I are: the profit to be realized deom the transaction. We are motivated by the same desires and are effected, to varying degrees, by the same emotions. In short, we are all human beings trying to make money by exersizing our speculative, intuitive judgement ni order to make our capital funds work for us at an exorbitant rate of return.
The important point to make here is that the tape is simply a record of human nature passing in review. At the same time, it is important to understand that we must dismiss from our minds all other facts. In other words, precious few know, or can hope to know *who* is buying and selling. We hear that "so-and-so is buying". However, he may be selling through another broker. If he wants us to know he is buying, we should approach thisi with a high degree of skeptacism. If he buys and sells, the record of his transactions will be on the tape. We must make our interpetations from the record. [Editor's Note: what some tape readers apparently do when they receive one of these "tips" is to go to the tape to check its validity]. It is futile to conjecture on who is doing the buying and the selling. The solution to the problem of speculation is to judge and forsee what the other fellow is doing.
The "insiders" on stock transations have the greatest advantage over us in the *minor* fluctuations. There is little use in trying to make money consistently by attempting to "second guess" these minor fluctuations. [Editor's Note: It appears that the goal of many traders is not to second guess these minor fluctuations but to "jump on" the intraday swings that these minor fluctuations can facilitate].
The tape only reveals the *results* of the buyers' and sellers' transactions in stocks. Large buying and selling interests are not interested in us as individuals, but are interested in us collectively. These operators can tell from the action in a stock they are following what the public is doing, and makek his decisions accordingls. So it is important to understand that market action provides a two-way window on the activities of its participants which both the operators (insiders) use and we the speculators use. So the problem becomes by the action reported on the tape the future movements of these two composite groupd of human beings: the buyer, made up of all buyers, and the seller, made up of all sellers. the price tells us what the buyer is willing to pay for the stock and what the seller is willing too take for his shares. The volume tells us how much the buyer is able and willing to spend in backing up his judgement and how many shares the seller is willing to let go at the price offered.
It is important here to point out a useful way in looking at the transactions that show up on the tape. Instead of looking at them as just "points" a stock moved up and down, look at them in terms of dollar values. For instance, if you see a 5,000 share transaction for a company at $170, then this means that some buyer was willing to back up his judgement to the tune of $850,000, and some seller was willing to part with their shares for that amount of money. This is a sizable and visible peice of business that was transacted.
Now, the mose important thing to understand about tape reading is that tape interpetation depends upon the consideration of the action of the *volume*. It is not price action, but volume -- the amount of money, the supply and demand -- which best tells the story. For example, it makes a great difference whether the buyer is willing to pay $15,000 for 100 shares of a company's stock, or $150,000 for 1,000 shares. The demand is greater in the latter case, as is the supply. Do not forget that every purchase of a share of stock also means a sale. The tape reader's job is to determine the ballance of supply and demand: whether demand is greater than supply, in which case the price advances, or the reverse. Also, it is important to understand that tape reading skills only come from experienced gained from that actual reading of the tape. However, the novice tape reader can more more quickly through their learning curve if some of the principle are understood up front.
The General Principles of Tape Reading:
1. Increasing volume during an advance, with intervening pauses or setbacks occurring on light volume. This is indicative of the underlying demand being greater than the supply which favors a resumption of the advance.
2. Increased volume at the top of a rally or of an advance lasting for some time with no appreciable gains in prices -- an active churning of stock transactions without progress. This is indicative of a turning point. [Editor's Note: this is called the "distribution" phase of the stocks where the "smart" money (professional) is selling to the not-so-smart money (ameteur)].
3. A struggling advance when the stock creeps upward on light volume and "dies" at the top. This indicates a lack of demand (few buying orders), and whereas selling orders likewise are light, this action frequently marks a "roundig over" turn which may be followed by increased volume on the down side when the sellers see they cannot hope for much higher prices at that time. These struggling trends are subject to sudden reversals, particularily when they have endured for a period of time.
The above types of actions are present, but in a reversed sequence, in declining markets.
Any observations, corrections, or general comments to what I have sketched out above?
Bob Graham |
