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Tape Reading Trading Strategies - Price Action Trading Strategies

Tape Reading Tells

Experienced tape readers keep a collection of key observations tucked away in their brains, so they can act quickly whenever the tape cycles into analogous price action. This hodgepodge of personal trading signals, setups and key tells can yield quick profits because the data comes through personal experience, instead of reading a book or attending a seminar. Mr. Market plays a constant game of misdirection, but our accumulated tape knowledge lets us see through the veil and decipher key elements of the daily grind. Let’s look at the most potent of these small portents of market direction.

Globex Futures – Look at pre-market index futures and see where they’re trading, relative to their day-session 15-minute 50-period moving averages. Expect a positive opening for stocks when index price sits on top of the average, and a negative opening when it lies below. If the SP-500 is above but the Nasdaq-100 is below, look for intraday rotation from tech and small caps, into the blue chips. Flip over this outlook when Nasdaq-100 is above and SP-500 is below. On those days in particular, watch for speculative four letter stocks to take over the leadership mantle.

Advancers/Decliners – Market breadth and up/down volume offer valuable data on hidden strength or weakness. Buy midday pullbacks when breadth shows greater than one thousand advancing to declining issues. Sell midday bounces when breadth shows less than minus one thousand advancing to declining issues. Up to down volume in both exchanges greater than four to one points to a trend day that favors the dominating side of the market. Assume there will be no intraday turnarounds when you see this type of price action. Instead, stop fighting the tape and focus intraday capital on 60-minute range breakouts or breakdowns that follow the prevailing trend.

Buy/Sell Flow – The NYSE TICK exposes the peaks and valleys of intraday swing cycles. Look for large-scale reversals after the TICK hits an extreme reading, like plus or minus 1400, for the third time in a single session. Use smaller TICK extremes to pinpoint intraday swings that will carry price they other way in a 60 to 90-minute cycle.

 

Tape Reading Strategy Chart

The experienced tape reader can decipher telltale action that’s overlooked by the crowd. For example, a slow creep rally into a resistance level that’s held back price for three to five sessions is an early signal for a breakout. Brandywine Reality Trust spikes into at 8.34 and pulls back. The stock reverses four times at that level in the next two days and then begins a slow and persistent uptick that gathers steam on the afternoon of August 3rd. Momentum escalates the next morning, triggering a vertical breakout.

 Stealth Breakouts – Watch for a breakout or breakdown when intraday price creeps toward a support or resistance level that it’s failed to exceed multiple times in the last three to five sessions. This slow crawl will print a series of small bars, with no pullbacks on the 15-minute chart. Look for these issues to hit the contested level and then expand quickly through the barrier. Why does this type of price action predict a big rally or selloff? It’s a common scenario in which big players have entered the market and are accumulating or dumping shares under the radar, trying not to attract attention. They push prices slowly by hitting the spread with small shares at regular intervals, while supporting their positions with decent size on the other side of the market. Momentum eventually gathers steam and the stock cuts through support or resistance, like butter.

Historic Price Levels – Stocks respond to every high or low on the chart, no matter how old or far away. Take profits and cut losses into big prints from prior years because they can easily stop a strong trend, dead in its tracks. However, be patient because price often goes vertical into these magic numbers, yielding windfall gains. Highs and lows set into place five or ten years ago become excellent pivot points for new entries as well.

Algorithm Games – Stalk liquid stocks you want to buy on the pullback. Then watch as program algorithms take price down and down and down. Sit back and wait for the selloff to cut through short-term support. That happens because the eggheads writing these programs know the charts better than many traders, and want to shake out poorly placed stops. Finally, wait for the bottom to drop out and then look for the bid to stretch 20, 30 or 40 cents below the last print, while the ask hardly moves. That predicts the selling frenzy is nearly over and positions can be taken for a rebound. You now have to hit the asking price, even though it’s much higher than the low printed by the falling bid.

Finally, here’s an observation that will add considerable power to your tape reading expertise. Look for price action to cycle through three distinct phases when it moves into a key position, just above resistance or just below support. Like so many elements of market dynamics, these interrelated impulses track the action-reaction-resolution cycle, discussed in Chapter 1.

 

  • Euphoria driven by the breakout or breakdown.
  • Fear triggered by a fade against the breakout or breakdown.
  • Intensified euphoria or fear that confirms the breakout, breakdown, pattern failure.

 

Most traders focus their full attention on the excitement of the breakout or breakdown, jumping in when the ticker tape bursts with buying or selling activity. Of course, as I’ve argued throughout this text, this is a great way to lose money. In contrast, tape readers step back and examine the quality of this three-prong conflict, which ultimately tells them whether the embryonic move is bonafide, or a nasty trap waiting to be sprung.

By Alan Farley

 

Tape Reading 101

Tape Reading is one of the oldest methods of how to interpret market price movements. Like any other methods applied by traders, it is intended to show "what's behind the ticker". There is no ticker tape itself anymore. It has been replaced by a scrolling Times Of Sales Window and Electronic Price Tickers. But the term, and more importantly, the principles are still the same and as useful as ever. They are based on aspects that never change. These are human psychology and major accumulation/distribution rules.

 

Risk disclaimer:

U.S. Government Required Disclaimer - Commodity Futures Trading Commission. Trading financial instruments of any kind including options, futures and securities have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the options, futures and stock markets. Don't trade with money you can't afford to lose. This training website is neither a solicitation nor an offer to Buy/Sell options, futures or securities. No representation is being made that any information you receive will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. Please use common sense. This site and all contents are for educational and research purposes only. Please get the advice of a competent financial advisor before investing your money in any financial instrument.

EARNINGS DISCLAIMER: EVERY EFFORT HAS BEEN MADE TO ACCURATELY REPRESENT THIS PRODUCT AND ITS POTENTIAL. THERE IS NO GUARANTEE THAT YOU WILL EARN ANY MONEY USING THE TECHNIQUES AND IDEAS OR SOFTWARE PROVIDED WITH THIS WEBSITE. EXAMPLES IN THIS PAGE ARE NOT TO BE INTERPRETED AS A PROMISE OR GUARANTEE OF EARNINGS.

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