Tape Reading Trading Strategy

Tape Reading is an old but effective price and volume analysis technique. Its relevance and what Tape Reading Strategy means will be covered here. We shall also discuss how to use this strategy to optimize your trading.

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What is the Tape Reading trading strategy?

The two essential factors of any trading are Price and Volume. They are analyzed in the Tape Reading strategy for each stock. It represents the number and the type of trades currently traded in the market, along with its buying and selling price. 

A few market analysts and traders call it Time and Sales or Level II. Let us understand what all information is available on the Time and Sales Window.

The Time and Sales Window shows the trade’s time, price, size, and condition. Depending on the trading platform, you may get more information, but these are the fundamental four. The Time and Sales window allows you to accurately decide when to enter or exit a trade.

During active trading, Tape Reading becomes a key indicator. But the tape is specific to every situation, unlike the other indicators, which have oversold or overbought levels. 

The tape is most important when validating breakouts and supply versus demand at critical price points. Day traders usually rely on Tape Reading for building their strategies upon intraday trading information.

Note! Tape reading was the backbone of great results for some of the most prominent traders, including Jesse Livermore, who is considered to be the father of momentum trading.

Before we go into the dynamics and how and why of Tape Reading, let us first briefly know about the history of Tape Reading.

Tape Reading history

Zero-to-one concept of trade growth

It is considered an old term amongst the new computer-literate and high-speed data analysts and traders of the modern world. It was in the late 1860s that traders started using ticker tapes. These tapes were used for transmitting trading information. Edward A. Calahan, an employee at the American Telegraph Company, is considered the father of Tape Reading.

Within a decade, the tape reading technique became mainstream. In 1869 Thomas Edison developed the first stock ticker. The ticker tape primarily had intraday information such as the ticker symbol, the price, and the volume. Well over a century till the 1960s, when the markets became electronic, Tape Reading dominated the transmission mode of passing trading information.

With the advent of electronic communication networks (ECNs) in the 1970s, computers influenced traders to lose interest in reading the tape. However, Tape Reading still exists and is helpful for a few day traders. Through the effective use of technology, it has been framed into an Electronic Order Book.

Purpose of Tape Reading in trading

Now that you have an insight into Tape Reading, let’s see why and who should use this trading strategy. 

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Tape Reading provides a clear understanding of the market environment and the behavior of the participant traders. Day traders can choose between using the charting technique or tape reading. A fair number of day traders still prefer to use the latter. However, the fast-paced, computer-based charting coupled with indicators, signals, and overlays fascinates modern-day traders.

The advantage of Tape Reading for day trading is the access to real-time intraday data. This becomes critical for short-term price forecasts. It can help as a trend-leading indicator. Tape Reading can enhance efficiency when used with other long-term trading strategies. Confirming or rejecting theories on an intraday basis also becomes an essential tool for long-term trading strategy.

One of the reasons why some advanced traders also use tape reading is because of its ability to highlight unfair trading practices. It enables spotting price manipulation, trade speculations, and others, often applied by high-frequency trading companies and algorithmic traders.

The biggest drawback of these being old and slow has been overcome with the development of digital order books. Previously, the data was only limited to primary and current, but now varied fields and the ability to use data for non-executed orders have been added. This data enables a check on speculation.

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Thus, it would be safe to assume that the tape reading is still relevant and practical if used in collaboration with modern-day tools and techniques.

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Optimizing trading through Tape Reading

The Time and Sales information gives us the trade timestamp, the price levels, the trading volume for the particular asset, and the probable bid or offer which can be placed.

Modern trading platforms also provide us with data about non-executed trades. You can see them in the digital order book. This enables the traders to understand the financial markets and the market structure of the price action. Traders nowadays use this information to formulate their trading strategy.

Note! Tape Reading requires an intrinsic understanding and experience of trading. The decisions can’t be solely based on these.

Using Tape Reading to enhance your trading

Every stock tends to trade and behave differently. You must understand how the olden-day traders used to read these tapes effectively.

Experience in trading has been accumulated over the years by millions of traders. No matter how modern and complex software becomes, the human mind and behavior patterns remain key. A few quick marks that you should focus on are listed below:

  • Identifying Support and Resistance Levels 

They remain essential for all price actions. As a trader, look for large limit Up/Down orders in the order book for an asset you are interested in. Their presence may indicate strong resistance/support at specific levels. Almost all modern-day trading platforms allow you to integrate these directly into your trading algorithm.

  • Ride the Wave 

It is another important facet to be learned from old traders. Wait for the immediate chaos in the market during the early hours of the day. Read and wait to see the mood and the direction of the market. Use that market sentiment to your advantage.

  • Avoid leaving a profitable positioning prematurely

The market has multiple movements, including sideways, momentum reversal, trend slow-downs, etc. Your skill in identifying when to keep your position open and when to close will define your achievements. 

Now, look at one of the famous traders and his opinion about Tape Reading.

Jesse Livermore’s Tape Reading rules

Even though the markets have changed and technology has evolved, not covering Jesse Livermore’s Tape Reading Rules here would be unfair. 

Livermore advocated and used the following fundamental rules:

  • The first rule is about the breakout. As per him, it must always be above the average volume of traded shares.
  • The pullback lasts, on average, for 3 days or 3 weeks. After that, you must expect increased shares being traded and prices to follow the trend.
  • The stock price should continue in the direction of the breakout for several days.
  • Buying pullbacks is a natural by-product of the new stock maturing. The number of traded shares will start declining.

Note! To better understand how to use the Tape Reader in trading, read The Playbook: An Inside Look at How to Think Like a Professional Trader by Mike Bellafiore.

Frequently Asked Questions (FAQs)

Let’s look at other questions traders are asking about Tape Reading.

What is Tape Reading in trading?

What is the best timeframe for your trading?

Tape Reading is a strategy based on the analysis of Price and Volume in a trade. It researches the mood of the market to make profitable trades.

What mechanism is used by tape readers to make decisions?

The trade volume and price movement are a few parameters used by the tape readers. Based on this data, trading decisions like trade entry points, holding or selling, etc. These show the market trend.

Are there any specific tools used for Tape Reading?

There are several tools available for Tape Reading today. Some of them, like tick charts and time and sales data, are frequently used by traders for making trading decisions.

Is Tape Reading relevant today?

Yes, it is relevant today. Although the methodology used for trading with tapes and its name has been changed to Electronic Order Book, it still holds its value.

Is Tape Reading useful for short-term trading?

Tape Reading has always been to gauge the prevalent market trend and make quick decisions. Hence, it is helpful in short-term trading.

Is there any difference between Tape Reading and other strategies?

In Tape Reading, the immediate flow of the market is used for making decisions, whereas the other trading strategies rely solely on technical analysis.

Are there any risks involved while using the Tape Reading strategy?

The idea behind using tape reading is making quick decisions, and thus it is rendered as a high-risk trading strategy. The market is always volatile, and there are chances of an incorrect reading of trends. Therefore, it is recommended that decisions should not solely be based on Tape Reading. 

Do you think it is easy to learn Tape Reading? 

Tape Reading is an extensive process that involves dedicated screen monitoring. Theoretically, one can learn from various books, courses, and articles. But making decisions based on tape reading requires experience. Thanks to the demo accounts offered by various trading platforms, it can be practiced without the risk of losing funds.

Should Tape Reading be used in stand-alone mode?

No, Tape Reading was used solely when the other options were unavailable. There are a plethora of trading strategies giving a comprehensive view of the market today. Together in conduction with these, tape reading can prove to be fruitful. 

What is the reason behind the achievements of erstwhile tape readers?

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The hallmarks of successful tape readers have been fast and accurate understanding and analysis of data. Previously, they stuck to the plan and were able to manage significant risks.

The bottom line

The relevance of Tape Reading has not been lost, and only the methodology and usage of technology have enhanced. A compelling mix of Tape Reading and modern-day indicators, charts, signals, etc., is essential to getting favorable trading results. Thus, one must hone the skills of reading tapes and understanding the stock price relationship under different scenarios. Remember, the risk of losing funds will always be there, but with experience and learning, one can reduce it considerably. 

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