Reading the Tape - Part Two

From SMB Capital, I got this:

"In a recent blog Dr. Steenbarger talked about a vital skill for the intraday trader, reading the tape. Dr. Steenbarger, aka the godfather of modern trading psychology, wrote: “My experience is that an understanding of (and ability to read) order flow is one important factor that separates the older, successful generation of daytraders from the newbies who only know simple chart patterns and indicator readings.” I am one from this older generation of intraday traders. And I thought this old-timer could share his thoughts on reading the tape and how it impacts the developing intraday trader.

In the past I have disappointingly heard developing traders state,”I am just going to focus on the charts going forward. I can’t read the tape.” I have heard this uttered on numerous occasions. Not one of these individuals became successful traders.

Recently, our newest class has moved from the first part of our training to the second part, Trader Development. After the Close we answered their questions and discussed what was important on Day 6 of their live trading career. (Oh to be young again. What was I doing on Day 6 of my trading career?) And one of our promising traders discussed a trailing stop for a MS trade today. Trailing stop? My impression was this talented new trader had trouble reading the tape so was experimenting with these trailing stops to minimize this weakness. This is not the right approach. I counseled to continue working on the skill of reading the tape and to sell the stock on the offer when the tape showed weakness. And I did so because this is what an older generation intraday trader, like myself, does.

And I offered an analogy about not learning how to read the tape. To me not learning this skill is like a basketball player not working on their free throws. This athlete just decides to keep clanging their free throws and give up some easy points. This same new trader offered a better analogy. (Hey we hire smart new traders. Obviously this analogy was much better than mine. In the future I will take creative license to just use his idea as my own. After all what is the point of being a partner if you can’t steal the analogies from your trainees.) Back to this better analogy from the youngster who just started trading. Not developing this skill is like the amateur golfer hitting only irons during his round because he never learns to hit driver.
I like that.
Still not convinced? Let’s bring is some famous market players for further persuasion.
Exhibit A: Steve Cohen of SAC Capital: “…everything I do today has its roots in those early tape-reading experiences.”
Exhibit B: Jesse Livermore: ”A battle goes on in the stock market and the tape is your telescope. You can depend upon it seven out of ten cases.”
Exhibit C: Linda Rascheke: “If you can learn to follow the price action, you will be two steps ahead of the game….”
Exhibit D: Paul Tudor Jones: “…..at the end of the day, I am a slave to the tape and proud of it.”

So learn to read the tape. It will help you become a consistently profitable trader. It will give you an edge over other intraday traders."