Tape Reading

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Tape Reading
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Tape reading is a method of forecasting, from what appears on the tape now, what is likely to appear in the future. The key is to observe the tape at certain price levels. It may be at a breakout point, support, or resistance levels or psychological numbers. What important in reading the tape is how many shares are being traded at a given moment. Large share awith price moving up would mean heavy buying and there is a good chance the stock may move up. Using the tape allows you to gauge players psychology and imbalances in supply and demand. Simply put, tape reading is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are neglected by the large interests[1].

The advantages of reading the tape are that it brings consistency to your trading, it is a leading indicator, you are able to see buyers or sellers in real time, it minimizes your trading risk. Finally, reading the tape is about analysis the bid, offer, size, volume, and prints. With reading the tape you will be able to determine where the stock is going to move 90% of the time[2].

Tape Readers

Tape Reader is a trader who reads the tape in order to observe stock price volume reports and then uses the information to make trading decisions. Long practice will make the Tape Reader proficient in forecasting stock market events.

Tape reading can add firepower to longer-term market strategies. The basics of tape reading can be learned in a few minutes, but the practice takes a lifetime to master, for some reasons. First, the market is enormously complex, requiring many years of observation to understand how individual parts affect the whole. Second, macro forces that move world markets change over time, with quantitative easing controlling one cycle, while a housing bubble keeps markets afloat in another cycle. Third, and most importantly, the market structure has changed dramatically over the years, forcing tape readers to continuously learn new skill sets[3].

The tools of reading the tape

To use Tape Reading, we need two tools. They must be made available through the trading platform that we use. It is primarily a quotation window (called level II) and a transaction window (called time and sales).

Level 2 is an invaluable and very practical tool that informs us whether a given financial instrument is dominated by supply or demand in a given period. The correct use of the Tape Reading method is somewhat reminiscent of the technical analysis of stock market graphs. While in the latter the investor or analyst searches for data on stock market formations, in the case of reading the tape, he seeks to capture the differences between demand and supply, and also find the “setups". These are repetitive plays that, from a perspective of the moment, can be a guide for the investor in which instrument money should be invested[4].

Tape transformation

Tape reading is an old investment strategy used by day traders to trade. Based on the tape, speculators analysed the value by focusing their attention mainly on four aspects[5]:

  • price
  • volume
  • type of transactions (buy/sell market)
  • speed of their conclusion

Based on these four factors, traders were able to determine the current trend on the instrument and find a convenient place to take positions. So where did the name come from? It comes from a device used to transmit the abovementioned information, called ticker tape, or stock ticker. This machine used telegraph lines to transfer data on listed companies. This information was printed on a narrow white tape and that's why the name for this market analysis technique came from. Finally, it is worth adding that the abovementioned device was used for more than a hundred years – between 1870 and 1970.

Technical progress has made the tape in the above form replaced by this electronic in a much more transparent form. It is worth remembering, however, that during this period it was the only form of information about price movements on certain stock market values. Currently, the tape in electronic form is used by a small group of individual investors, because what seems to be quite logical, it has been displaced from circulation by well-known and well-liked by everyone – charts. Despite the fact that it is still an extremely useful tool, only a few choose to include it in their investment arsenal. The vast majority of professionals use tape in everyday trading[6].

Footnotes

  1. R. Wyckoff 2006, s. 10
  2. N. B. Humphrey 2016, part 2-3
  3. R. Wyckoff 2006, s. 10-15
  4. R. Wyckoff 2006, chapter 2,3
  5. N. B. Humphrey 2016, part 2-3
  6. D. W. Gann 1996, chapter 1

References

Author: Anna Marczyk