Trading in its purists form: Tape Reading
“Whenever I read the tape by the light of experience I made money” as Edwin Lefevre wrote of Jesse Livermore in Reminiscences of a stock operator published 1923.
Before the days of computers, “flag and pennants” charts, brokers calling their clients with a “hot tip”, successful traders were reading the tape. Tape reading is trading in its purest form. Through the years the stock market has evolved. The market has seen such changes from fractions to decimals, from a specialist to a hybrid electronic, from all equities short exempt from the uptick rule etc. There remains one constant consistent way of successfully trading, Tape Reading! For over 100 years, tape reading has proven to be one of the most consistent methods of profitability for traders. In 1915 c. tape reading helped the infamous trader Jesse Livermore amasse his fortune. * (footnote Rem. Of stock operator)
To understand tape reading one must understand the fundamentals that make up the New York Stock Exchange. The NYSE trades in a continuous auction format, one that is driven higher by aggressive buyers or forced lower by aggressive selling pressure. The tape is comprised of several integral variables. The variablesare: Last Price , Last Price Size, Net Change, Bid, Ask, Bid Size , Ask Size, High, low and Volume (Pic 1) From reading the tape the trader is able to see many things, among them are the amount of stock willing to be purchased at the highest price and the amount of stock willing to be sold at the lowest price, hence the inside market. By reading the tape proficiently the trader gives himself a front row seat to watch and be involved in the auction of that equity. This will enable him to effectively detect the aggressive buyers or sellers and take positions accordingly. In addition, every successful trader knows that one must acquire a “good feel” of the market in order to be successful. Tape reading is the best way to hone that feel down to perfection. By constantly monitoring price movement of the S&P futures relative to the equities your tape reading there is no greater way to obtain an excellent feel of your stock and the market, enabling you to take calculated positions.
Tape reading is really the meat and potatoes of trading because it is taking the market and stripping away all the trickery and randomness of flashing numbers and getting down to the bare bones of what the market is, an auction.
Many things occur on the tape that one can not be seen from simply reading a chart. For instance, if stock XYZ shows 1700 shares to sell at $25.25 and one trade of exactly 1700 shares trade at that price ,then XYZ shows 2100 shares to sell at a higher price $25.29 and one trade of exactly 2100 shares trade at that price , then XYZ shows 1300 to sell at a higher price $25.33 and one trade of exactly 1300 shares trade there . Those trades are what are known as perfect prints, one trade for the exact amount of stock shown. This says to the tape reader that there is an aggressive buyer around and this could demand a large long position. Unfortunately, this would all be missed on a chart, all the chart would depict is XYZ methodically moved up 8 cents.
When you break the trade down it first happens on the tape then our computers display a graphical depiction of that trade almost instantly giving us what we know as the chart. Never forget that the tape exists with out charts, but charts do not exist without tape. For the record I have the utmost respect for the chartist, actually I know many chartists whom I consider to be some of the best traders on the street. It’s just not my game! Like anything in life, learning how to read the tape requires lots of focus, time and dedication. If you’re in it for a quick buck, I would not recommend tape reading. If you want to make a career out of trading, I recommend tape reading.
