Tape reading was a method used by traders to analyze the price and volume of a particular stock before switching to newer technology. The ticker symbol, price, and stock volume were transmitted over the telegraph line through the ticker band. Although the use of tape reading ceased in the 1960s, electronic traders are using a similar strategy and many conditions of the time are still widely used today. (Some of Tape Reading Trading Strategy discussed below in detail)
Modern tape reading
Reading a modern band means looking at an electronic orderbook to analyze in which direction stock prices can move. Contrary to stock tickers, these order books include orders that are not executed, providing excellent market details at any time.
For instance, a trader can look at the order book of a security and see that many exchanges have large sales restrictions at certain price levels. This could indicate that the stock will have considerable resistance at these levels. If there is an order limit greater than the current price, the opposite may be true, which can show strong support at a given price point and give traders confidence in the purchase, knowing that there is a lower price limit.
Many brokers provide access to these orders in a level II quote format.
In difficult cases, software vendors can use this information when building their trading algorithms.
Even if you like scalping, day trading or follow the trend, you will still need to learn to read tape trading. These marketing strategies can be used to shape your entry into the market or determine the best timing to enter the market.
We’ll start with a brief introduction to what tape reading is and how to read tape transactions, then we’ll finish by learning some very useful tape reading strategies.
How important is tape reading in the market today?
Tape readers have an advantage over chart traders because they can interpret real-time data, filter page volumes, and make very accurate predictions of short-term price movements. This almost legendary marketing feature has the added benefit of allowing fans to identify the leader and measure the emotional tensions of the participants as they retire after a day. Reading the tape can empower your long-term marketing strategy.
You can learn the basics of tape reading in minutes, but mastering the practice takes a lifetime for three reasons. First, the market is very complex and it takes years of observation to understand the impact of individual parts on the whole. Second, the macroeconomic forces that drive changes in global markets change over time. While quantitative easing dominates one cycle, the housing bubble keeps the market in another. Tape Reading Trading Strategy. Third, and most importantly, the market structure has changed dramatically over the years, forcing readers to constantly learn new skills.
Tape Reading, equally referred to as “Time and Sales” (or Level II), is the oldest trading strategy used to analyze stock prices and volume.
Look at the sales times and windows below.
What you see in the Time and Sales window above is a completed transaction. After the stock has been traded, you will see three things in the sales window:
- The price at which the transaction was made.
- Volume or volume of transactions.
- And trading hours.
Note: Orders are displayed for stocks, futures, commodities, indices, and any item on the stock exchange or futures.
Read the flow to see what’s going on behind the price chart. Most traders spend their time reading the price charts and seeing where the market is flowing. However, the chart can only show prices and transactions that have already occurred. In that sense, we are limited to the information that can be obtained from the technical analysis of the transaction.
To understand why prices really move, you need to read the stock market tickers.
Now let’s take a look at how to read the flow while shopping and highlight how useful it is.
Market structure revolution
With 50% of supply and demand spreading in the 1990s, tape leaders had to abandon simple tickers and focus on the market-deep screen, commonly known as Level II. This practice was initially profitable, as it accurately read supply and demand, and showed the ongoing orders of key players and which market makers led the security direction in this session.
Since 2001, the SEC’s standard day trading rules have been introduced, resulting in a capital outflow for the future of Globex’s CME Index. As a result, these tools have gained tremendous power while thousands of warrants have been transferred.
Many band readers have been paying attention to Tier II over the next few years and instead prefer to look into the future of the index for clues to the stock’s overall speed. Tier II adopted the SEC NMS regulations in 2007, losing more supporters. SEC NMS regulations have now opened the door to high-frequency trading (HFT) computers, dark pools and other algorithmic code, which account for more than 70% of the capital. Tape readers are adapting well to this electronic environment and are now monitoring more extensive market data than ever before.
Would you like to hear enough and become an experienced tape leader? Here are some tips and tricks to help you get started.
Start a premarket session and explore the future of the nightly index. Keeps the S&P 500 24 Hour Futures chart on screen at all times and focuses on the night level during standard US sessions. Find out if this index is ahead or behind the future of the Nasdaq 100 and/or US Treasures. Nasdaq’s leadership and trailing bonds represent a risk assumption that traders want more speculative instruments, while the S&P 500’s strong leadership and bonds often mean a shift in risk caused by adverse events in other global markets.
Think about the impact of the expected opening and how the gap will affect traders’ sentiment. Large gaps have become more common in recent years due to the increase in watch trading and require careful tactics to play well. Prepare by evaluating how the original print will interact with the night level. The difference between overnight highs or lows implies a break-even action that can lead to a quick reversal, while gaps between levels that haven’t been traded for days or weeks are more likely to change the trend over that period. A trend where most of the basic instruments are oriented in one direction.
How to do tape reading while trading?
Advances in technology today also limit orders for modern tape readers. This spell is an unfilled craft that remains on the order book. This provides a deeper knowledge of what is happening behind the price action strategy.
“Of course there are always reasons to hesitate, but the tape is not about why and why. This is not included in the description. For example, if you see a large order in the pipeline to buy at a fixed price, this could indicate that the price is supported and may go up bottom-up. Conversely, if the order book shows a volume order that is higher than the current price, it could indicate that the price can find resistance and sell.
Marketers such as large banks often place large orders that can affect future prices.
Here are some tips on how to read your feed as an expert.
- Tape Reading Tip No. 1: Filter by size. Compared to Livermore’s time, the belt is now going too fast and can be filled with small orders. To avoid this, you can filter the smallest and highest orders so that they appear in the Level II data window.
- Tape Reading Tip No. 2: Use a trading tape on the day of reading when it comes to price measurements. Professional traders use tape only as a verification tool for entry and exit.
Let’s highlight some of the reasons day trading bands can provide additional benefits.
Why use tape reading strategy in the stock market
Reading the tape can be very useful for daily traders looking to capture short-term movements. Tape reading can be viewed as one of the most effective indicators for active traders.
The second reason to use tape reading is to develop a good risk compensation strategy.
Third, the tape reading is a key trend indicator because it shows who buys and who sells.
Finally, Tier II is a window into what smart money which is the so-called whales do. In the end, the price ultimately decides to buy and sell smart money. Retailers have no purchasing power to change prices in any way, form or form.
Now we know it’s a bit more difficult to track the sales times and windows of the non-prescription market, the Forex market. However, we do not lose all hope because we can use cash flow index indicators to show the interaction of buying and selling smart money on different currency pairs.
You’ll get to the heart of the powerful tape reading strategy used by legendary trader Jesse Livermore.
Tape reading trading strategy
Now, before uncovering the rules of your trading strategy for tape reading, you need to lay the groundwork for reading your trading diary. For this, we’ll borrow idea from Mike Bellafiore’s Playbook.
Mike Bellafiore is the co-founder of his New York trading company, SMB Capital. Daily trading through tape reading is an important part of the decision-making process.
Here’s how to do tape reading trading, according to Mike Bellafiore:
Traders reading the flow should look for specific signals in their buy and sell orders. Best Tape Reading Trading Strategy. For instance, if you want to buy stocks, some of the following must go through the flow.
- Higher prices.
- Most crafts are made at ASK prices (traders buy from sellers).
- Large orders are displayed at ASK prices.
- Buyer BID holder.
- Go weak in the supply/demand (showing an imbalance between supply and demand).
- Cheat request (a trader places a bulk sales order at a certain price and when it gets close to that price, it withdraws without entering the market. This is a tactic that scares people. Stay away from the purchase).
- There are no downward ticks.
- Time and sales are accelerating, but prices remain the same.
Important Notice: You can use the same book to sell stock. We only use the flow after finding a potential trade setup. We want to make sure there is a good risk of getting rewarded for trading opportunities before we read the tape.
Let’s take a look at how cassette reading contributed to Jesse Livermore’s success. Jesse Livermore’s method of trading stocks relied heavily on tape reading.
However, reading the tapes was just some of his best trading strategies.
Now you can ask yourself.
What trading strategy did Jesse Livermore use?
Livermore loved to trade only stocks moving in a clear direction. So Livermore in this respect is more of a trend follower or swing trader.
Therefore, to identify and understand these trends, Livermore used the pivotal scoring system.
“Before you start trading, be patient until the market reaches a turning point; Jesse always made money from such activities.
The turning point in Livermore’s strategy was mainly due to high/low price fluctuations that strongly increased or sold the market.
View the table below:
During the time of Jesse Livermore, there was no chart of stock trading.
This famous stock trader followed the ticker tape and entered the stock price manually. So, when the pivot point on his watch list reached a key point, he immediately got on the ship.
Fortunately, we can use stock charts to identify these turning points.
The process of Livermore’s tape reading strategy is as follows:
Suppose the stock falls before the rally and the swing is low (pivot point). If the stock price cannot continue and the stock price returns to the lead point, Jesse Livermore uses the tape reading technique to trade in the position.
Look at the table below:
A bullish or bearish strategic move is evident at a turning point that represents a trading opportunity.
Here are the rules for reading Livermore Stock Exchange:
- Use tape to understand who dominates the market.
- Sell when the market breaks below the $1 (or $3) turning point.
- If the market is still above lead and charges $3, Livermore will buy the stock.
Another tape reading strategy used by Jesse Livermore is to trade stocks outside the trading range. Livermore wasn’t a fan of the stock cut strategy, but was looking for signs that stocks would start developing a new trend towards cuts.
Some of the tape reading rules (Tape Reading Trading Strategies) used by Jesse Livermore are:
- Stock exchange volumes above average should be accompanied by cuts.
- Stock prices will continue in the downward direction for several days.
- As the trend of a new stock unfolds, you should observe a natural (delayed) reaction with a decline in trading stocks.
- Downside should be on average 3 days and 3 weeks, after which you should observe trading stock growth and trend recovery.
See the table below.
The tape’s readers interpret complex background data throughout the market day to gain a clear trading advantage from the competition. With experience and skill, they respond to changes in the environment long before price fluctuations awaken a sleeping audience.
So, if you want to improve your tape reading skills, spend as much time as you can learn tape and see how the stock price reacts to different scenarios. Don’t delay just because it takes time to develop effective tape reading skills.
We use the stock market, read from the stock market, as an integrated tool for currency trading rather than an independent trading strategy. If you are a day trader or a scalar, reading the feed will give you more advantages than a trader near you.
Here is a summary of the Livermore tape reading trading strategy.
- Trade stocks only near critical turning points.
Use tape reading technology to determine when large orders will enter the market.
- Trade only in the direction of a general trend.
- Be patient and do not chase the market.
Let’s know how you get along in the comment session.
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