Tape Reading, reading from the tape, it’s one of daytrading strategies, which deepening can help in maximization of your profits and to reduce losses. It is trading strategy, which is well-suited in day trading investments on the stock markets.
It is worth to emphasize that reading from the tape enables to capture specific setups (systems, which it is possible to compare to the formation from technical analysis) up to trading, both long and short positions. Analysis of the tape is also useful in the decision making to close the position earlier (than e.g. it would result from technical analysis).
On which markets it is possible to use Tape Reading?
Tape reading is possible on markets, which provide so-called market depth. Market depth shows what orders are on the value, at what prices and in what sizes of position.
If you are new to trading, start with reading this article “ECN in Time and Sales window“.
The best examples are stock exchanges, where using reading from the tape is possible. The largest stock exchanges in the world are US NASDAQ and NYSE. And similar to them are European stock exchanges: NYSE Euronext, LSE or German XETRA.
What tools are used in Tape Reading?
In order to use Tape Reading, the trading platform must provide tools used in this strategy: window of quotings (so-called Level II) and transaction window (so-called Time and Sales).
Time and Sales – transaction window
Transaction window, i.e. so-called Time and Sales Window, called by traders a tape or pass, is a basic sources of information about concluded transactions on the market.
Amongst information concerning individual transactions we will read:
size of orders
on which ECN was concluded transaction
Below I present the transaction window:
Level II – market depth
Market depth, i.e. so-called Level II, informs us about the prevalence of demand and supply on a given instrument. Analysis of appearing orders enables to support the investment decision. The study of placed orders on Level II window enables to search for repeating setups. It is possible to compare it to finding formation of technical analysis on the graph; in the same way we seek repetitions on Level II window, which in a determined period had appropriate effectiveness of profits.
Below I present the market depth:
What information can be read from the market?
Taking into account the data, which it is possible to read from tools mentioned above, the foundation of decision making is based on a price and volume of the transaction. These two factors, combined with determination of the probability level of determined setup recurrence, enables to effectively increase the number of successful transactions. And the effectiveness of transaction decides about your success on the market.
Traders focus on analysis of tools mentioned above in terms of evaluation:
Size of orders
Prices of placed orders
Spread, and consequently the risk with entering positions
Execution of orders
Size of executed orders
Time of placing orders
Analysis of above factors, allows for proper selection of companies in terms of opening the position. An aim is to reduce the risk only to those companies, where specific strategy that uses tape reading is most likely to occur, with limited risk associated with opening the position.
Summary about tape reading
As in all trading strategies, also in tape reading, the basic features are most important for trader, i.e. patience and consequence. Waiting for a specific play on the market often is gripping, which may constitute a problem for active traders, who hate situations when don’t have opened position on the market. This leads to situation, when trader tries to warn building setup, so he enters the market in a bad moment or the entry turns out to be completely bad (because of final setup use). In every strategy, it is necessary to act very precisely and scrupulously. It is no different in Tape Reading.
Reading from the tape in quite strong harmonizes with using basic formations of the technical analysis, i.e. supports and oppositions in connection with volume rate. Most of information, which result from analysis of the tape, it is possible to relate to analysis of supports and oppositions on the graph; however they allow with prejudice to find these levels, before it will occur on the graph. Peculiarly, this regards lower intervals: 1, 3 or 5 minute candles.
Analyzing the tape in the initial period of this method can be quite frustrating. Transactions on US stock exchanges, where tape reading is the most effective (due to the level of liquidity and the number of companies listed on US stock exchanges) are concluded very quickly. Compared with the Polish stock exchange, often it is possible to be under the impression that these transactions are carried out as an accelerated video cassettes. This fact, in the first period of behavior analysis may discourage. However, it is necessary to remember that in every profession, a time and practice are needed in order to draw conclusions and to make quick decisions based on what can be seen and read from the tape.
In the next section of articles, I will present ways to using Level II and TAS during trading on stock exchanges. There will be also described ways of reading the information from the market.
Check my trading videos about tape reading
On my youtube channel – PolishDayTrader you can find videos in which I discuss tape reading in my day trading session.