Reading the Tape - Part Three

And from Traders Log, Linda Raschke, a well-known and well respected educator on stock trading, offers this on the subject. Note that she mentions tape reading in the context of swing trading, not intra-day trading:

Tape Reading
by Linda Bradford Raschke

Sometimes it is nice to reexamine a simple concept when there appears to be overwhelming volatility in the markets. Mechanical systems and patterns are helpful and even necessary for the structure they impose in organizing data, but even Richard Dennis in his original course discussed ways to "anticipate" entry signals, exit trades early, and filter out "bad" trades.

Learn to follow the market's price action and read the signals it gives. This can become a strict discipline in itself and the result will be greater confidence that a trade is or is not working.

Tape Reading

"Trading technique is simply the ability, through study, observation, and experience, to recognize the signals in each of the several phases of market movement."
- George Douglas Taylor

Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind.

Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways. (Markets do not always have to be going somewhere!) It is also fairly easy to watch a price go up and then tell when it stops going up - even if it turns out to be only a momentary pause.

I've known hundreds of professional traders throughout my career. I don't want to disappoint you, but I know of only two who where able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA's who are running a money-management program with "OPM" - other people's money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment - even if just to move a stop up or down.

If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, "The only truth is the current PRICE." Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

Watching price action can actually be very confusing if you go about it like a ship without her sails up in an ocean squall. You will get tossed back and forth with no sense of direction and no sense of purpose. There are two main tricks to monitoring price action. The first is to watch the price relative to another "reference point." This is why many traders use a "pivot point" - and it works! It is the easiest way to tell if the market is moving closer to or further away from a particular point. This is also why it is often easier to get a "feel" for the market once you put a position on - your "reference" point tends to be your entry price.

Some reference points, such as a swing high or the day's opening price, will have much more significance than those points involving some type of calculation. (Some numbers might have special meaning for those who calculate them, and who am I to argue if they work.) I like to concentrate on pivot points that the whole market can see. To sum up so far, when watching price, we want to know the following: how fast, how far, and in which direction. It takes two points to measure these things. One will always be the current price, the other a pivot point.

* Do not watch price for the sake of watching price. Watch price with the intent to do something or to anticipate a certain response!