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Tape Reading

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Well guys/girls,

I have started focusing my energies lately on intraday trading, as opposed to EOD trading (which is now pretty much sorted).

As I am still a beginner at intraday and will not claim to know what I am talking about, I thought I would post a few observations and let those experts rip me to shreds if need be to help my learning process. Firstly, I will post an article I just read by an expert herself (whom I really respect in this game) and then follow it up with my comments:

Tape Reading
by Linda Bradford Raschke

Sometimes it is nice to reexamine a simple concept when there appears to be overwhelming volatility in the markets. Mechanical systems and patterns are helpful and even necessary for the structure they impose in organizing data, but even Richard Dennis in his original course discussed ways to "anticipate" entry signals, exit trades early, and filter out "bad" trades.

Learn to follow the market's price action and read the signals it gives. This can become a strict discipline in itself and the result will be greater confidence that a trade is or is not working.

Tape Reading

"Trading technique is simply the ability, through study, observation, and experience, to recognize the signals in each of the several phases of market movement."
- George Douglas Taylor

Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind.

Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways. (Markets do not always have to be going somewhere!) It is also fairly easy to watch a price go up and then tell when it stops going up - even if it turns out to be only a momentary pause.

I've known hundreds of professional traders throughout my career. I don't want to disappoint you, but I know of only two who where able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA's who are running a money-management program with "OPM" - other people's money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment - even if just to move a stop up or down.

If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, "The only truth is the current PRICE." Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

Watching price action can actually be very confusing if you go about it like a ship without her sails up in an ocean squall. You will get tossed back and forth with no sense of direction and no sense of purpose. There are two main tricks to monitoring price action. The first is to watch the price relative to another "reference point." This is why many traders use a "pivot point" - and it works! It is the easiest way to tell if the market is moving closer to or further away from a particular point. This is also why it is often easier to get a "feel" for the market once you put a position on - your "reference" point tends to be your entry price.

Some reference points, such as a swing high or the day's opening price, will have much more significance than those points involving some type of calculation. (Some numbers might have special meaning for those who calculate them, and who am I to argue if they work.) I like to concentrate on pivot points that the whole market can see. To sum up so far, when watching price, we want to know the following: how fast, how far, and in which direction. It takes two points to measure these things. One will always be the current price, the other a pivot point.

* Do not watch price for the sake of watching price. Watch price with the intent to do something or to anticipate a certain response!

Responses

"The study of responses ... is an almost unerring guide to the technical position of the market."
- Rollo Tape (Richard Wyckoff), 1910

The second main trick to monitoring price action is to watch for the market's response to a particular condition ... in other words, anticipating a particular behavior. For example, if the market has been at a very low volatility point and just begins breaking out of it's particular trading range, one might anticipate that the price would begin to accelerate in an impulsive manner and not run into immediate resistance. Or, on a directional play, if the price is moving in an impulsive manner in a trending market and then pauses to catch its breath on a mild reaction, one would expect it then to continue on in the direction of the trend. When there is a particular behavior to anticipate, it is easier to watch the price to see if it acts according to one's expectations.

Is the market failing to break on bad news? Is it finding support after a series of advances? Does it run into an invisible overhead wall and sharply back off, implying strong resistance? These are market responses to certain conditions. Tape reading is like playing a tennis game and watching to see how your opponent hits the ball back.

Part of studying price behavior and gaining experience as a trader is gradually learning what actions to anticipate. Then you must learn what the market's most probable response or outcome should be. It will always be easier to anticipate an event or response which happens 70% of the time than to be looking for that which happens only 30% of the time.

However, it can also be a profitable strategy to recognize when a given signal or expected response is failing. Sometimes a failed signal can be more profitable than the normal expected response. For example, a classic failed response might be a scenario wherein price was consolidating in a pattern of higher lows and lower highs - a classic triangle pattern. One would expect a breakout from a chart formation to have some follow-through. However, if price only penetrates the lows by a small amount and then turns upward, picking up volume and momentum as it goes, and comes out the upside, a very significant reversal has probably occurred and there may be much more price advance to unfold.

One last trick to watching price action is to learn to think in terms of "handles," or levels. Think of the S&P's as reaching for the "1110" handle, or the "low 1060's" as a level. Each ten points is a defined level. Use big round numbers as reference points for levels. It doesn't mean that you are placing orders at those numbers. It is just a simple way of organizing data that professional traders practice subconsciously.

Pivot Points

An astute trader will always have the previous day's close in his head. He also knows the previous day's high and low (prices he would have liked to have bought and sold but probably didn't). He also knows the opening price, for that tells if the buyers or sellers are in control for the day.

The previous day's high and low and today's open have very strong psychological implications and are the most important "pivot points" to recognize. By concentrating on price action near these points, we can eliminate much of the hard work in tape reading. Many times the market will let us know right away if this is going to be an area of support or resistance.

The previous day's high and low tend to overlap in congestion areas. Look to exit profitable trades immediately at these points in sideways markets. In trending markets, the price will run through these points a bit before pausing. When the market is strongly trending, the opening price becomes the most important.

If we are watching a high, low, or opening price as a pivot point, we are watching to see whether there is any impulsive price action as the market approaches the point or moves further away from it. What is "impulsive action?" I like to call it a "whoosh." The market moves rapidly as if just coming to life for the first time. It is usually a series of ticks in one direction without a tick in the opposite direction. The market is tipping its hand. A sequence like this tends to consolidate or pause a bit before being followed by more impulsive action. This is quite easy to see in a market like the S&P's if you look on a short-term time frame. If we quantify these "whooshes," which we can do in several ways, we will see that the market tends to have continuation moves at least 2/3's of the time. Not bad for arriving at a "positive expectation" simply by following price action.

In conclusion, tape reading is not watching every trade that passes by (a monotonous task) but rather keeping an eye out for unusual impulsive action, unusual volume, or just observing the way the price trades at significant levels. Each price swing has forecasting value as to what the next most immediate move should be. We then follow the price action to see if that move plays out.

Tape reading is at the heart of swing trading. When looking for short-term moves, price-based derivative indicators will be too late to be of value. Ultimately, traders should feel a great sense of freedom when they can rely on simple charts to formulate a game plan or a conceptual roadmap in their heads - and the movement on the tape to tell them their game plan is correct.
 
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Ultimately, I believe the most important aspects are before open, defining your critical points (support/resistance/pivots etc). Then, as the day plays out, get a feel for whether or not the day is a choppy or trending day. Trending days, breakout plays are probably more appropriate, choppy days, fade plays at important points would be more useful. Knowing these important points as stated above, will actually give you some kind of area of which you can judge responses, simply watching price action unfold can be a waste of precious time.

But firstly you have to learn to read the tape to get a feel for what is happening at these important points. This is why I believe it is important to have a grasp of VSA (Volume Spread Analysis) and traditional chart patterns, along with a few important reversal candle signals/patterns.

In the DOM, you can see resistance and support points build up and how price reacts around these points and most importantly, what volume does around these points. By watching "time and sales" or what volume actually hits the market, you can get a feel for the head fake orders and those which are legit and actually hitting the market which will provide more of a clue as to whether the points 'should' be faded or treated as a breakout play.

It is also important to know when important news will be released, and see how price reacts around this. This is also stated in the article above very quickly.

Of course, in all of this process, you have to put price and volume into some kind of context, and know where you are in the overall picture of the chart. This should be done before open when you define your important points and by further noting trend strcuture (high highs, lower lows etc) as the day unfolds.

What to look for: Some points from an article pointed out to me by RobinHood (here from ASF):

http://newsletter.neoticker.com/2006/05/15/basic-tape-reading-the-importance-of-sub-minute-charts/

1. Do not look at the tape all the time, focus on the tape only when the market is closing in at critical price levels (previous day high, previous day low, pivot point, etc.).

2. Best is looking at a depth window with the current bid ask listed at the top, next is watching the quote window with the best bid and ask at the side. Using time and sales window to read the tape is not recommended.

3. Learn to identify 2 distinctive behaviours - a. when the market is moving in a particular direction, is there a lot of resistance. b. when the market is charging a particular price level, is it taking out that price level decisively.

4. Learn to identify a third state - the market is confused.

Some Useful Hints at Learning Tape Reading

When a price level is a strong resistance, the asking price will keep reappearing again and again even though the price got taken out a few times.

When a price level is a weak resistance, the price will be taken out decisively (sometimes after struggling for a short period of time).

A confused market will usually rally to a particular price point and then drop suddenly to a lower but close by price level. The market will then struggle between the two price levels. That implies a confused market and it is not likely you can figure out the direction of the next big move. In this case, stay at the sideline.

Having huge size in the bid does not necessarily means the bid is strong. On the other hand, when a bid got hit and trades started to fill at the bid, while the bid size keep increasing, that is a strong bid.

Tape Reading is Not Fool Proof

Tape reading is a useful technique but it is not 100% correct all the time. Thats true especially when some major players are hiding their bids and offers.

When the buy side traders are scaling into a position (i.e. buying at the bid while the price is dropping, or vice versa) it is then very hard to identify the strength of the market. That will usually results in V-shape reversal price pattern.


Sorry, have to fly, so this is just a quick few points. Of course, one has to put in the hours to really learn these things subconciously and be able to react to them quickly. Certain markets will also move in various ways and this is why I personally believe it is important to study one market in-depth before moving onto others.

Discussion would be good as the art of intraday and real-time 'tape reading' is seldomly talked about here at ASF. These are just things I have currently noticed in my short time practicing.
 
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I have Linda Bradford Raschke's tape reading article on my wall right next to me. I'm a big fan of hers. I'm sure she knows what she's talking about :)
 
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One thing that you need to take into consideration IMO is the psychological levels of anything that ends in 50 or 00. Watch closely at what happens at these levels. If futures/stocks or whatever you are trading is anything like forex then these numbers will mean something to you.

I like Linda how she talks about watching for the bounce in support and resistance levels and how the response at those levels tells you something about where the market is trying to go.

I can't comment on volume because forex there is no volume---unless you trade currency futures or something.

I've been doing a lot of intraday forex trading (demo trading) over the last few months. I love it :cool:
 
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Yes, all clean numbers can be support and resistance and added when you add in your other levels pre-open. Or you can just mentally note them as I do.

Learning reactions around important points from what I can see, is THE most important aspect of tape reading and intraday trading. This is what motorway talks about a lot.

But as stated, you need to understand VSA and traditional patterns to help define and put into context exactly what you are looking at. Haven't traded FOREX yet.

Linda is the perfect example of persistence in this world and appears a very confident, yet humble person.

Prob made this thread a bit long, so won't get many responses.
 
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Yes, all clean numbers can be support and resistance and added when you add in your other levels pre-open. Or you can just mentally note them as I do.

Learning reactions around important points from what I can see, is THE most important aspect of tape reading and intraday trading. This is what motorway talks about a lot.

But as stated, you need to understand VSA and traditional patterns to help define and put into context exactly what you are looking at. Haven't traded FOREX yet.

Linda is the perfect example of persistence in this world and appears a very confident, yet humble person.

Prob made this thread a bit long, so won't get many responses.

VSA would be really important in Stocks and Futures etc for sure.

One thing that I've been trying to do is do this in stages. So for example. Instead of looking at all price + volume + S&R and candles and all this head and shoulders or necklines or a million other patterns I decided to focus on one thing at a time.

First I looked at candles and the main big patterns like bullish/bearish engulfing. Then look at Doji patterns and just try to paper trade using candles for awhile. Soon I realised I couldn't just use candles.

THen I started using Fibs and Support and Resistance lines and looked pretty much only at that and some candle patterns. I soon realised that I couldn't rely on just that either.

THen I started drawing trend lines and channels--these are very helpful to me. And then start combining S & R and everything learned up to that point and things start to come together more.

I started my own Journal in spreadsheet and so anything major that happens or a flaw in my thinking I record it down and think over it and try new things out. I think the Journal is critical.

I am no expert but I am working hard at learning how to trade well. I believe that immersion is the most important thing in trading. Then after that figuring out a money management system to go with it. THere is no point trying to do the money management first since the money management must depend on the trading system and not the other way around.

These are my views at this point in time. I have a long road ahead but I'm loving the journey :)
 
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Yeh, sounds like a good plan. A lot to take in at first.

Personally, I barely ever use fibs, at least for now anyways. Haven't really seen much unusual price reaction around them, maybe simply because I don't take note.

An interesting thing I read today, was most VSA experts use bars as opposed to candles, to specifically see the close, as open is given little importance. You can still see this with candles, but you are always generally looking at the open in comparison to the close.......
 
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Yeh, sounds like a good plan. A lot to take in at first.

Personally, I barely ever use fibs, at least for now anyways. Haven't really seen much unusual price reaction around them, maybe simply because I don't take note.

An interesting thing I read today, was most VSA experts use bars as opposed to candles, to specifically see the close, as open is given little importance. You can still see this with candles, but you are always generally looking at the open in comparison to the close.......

I don't know about bars. Maybe I'm just used to candles. I like candles because visually it is so easy to see trends etc. Just look at the color. Is it red or green etc. The other thing is that it should be easy to switch between bars and candles in your charting program anyway, so you can have the best of both worlds.

I'm no VSA expert but I definitely like to see everything on my chart and clearly (O, H, L, C). It is easier to see paterns as candles too IMO.

Maybe one of the more experienced intraday traders in VSA can comment in this thread about whether they prefer bars or candles and why?
 
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First I looked at candles and the main big patterns like bullish/bearish engulfing. Then look at Doji patterns and just try to paper trade using candles for awhile. Soon I realised I couldn't just use candles.


Eek!!! That Linda Raschke article is multiplying

From past exeprience many "reversal" candles are really only signals that the previous trend has stopped and is taking a rest before reversing or continuing its trend. So it is a bit misleading that these are called "reversal" patterns because we are used to learning traditional chart patterns.
 
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Eek!!! That Linda Raschke article is multiplying

From past exeprience many "reversal" candles are really only signals that the previous trend has stopped and is taking a rest before reversing or continuing its trend. So it is a bit misleading that these are called "reversal" patterns because we are used to learning traditional chart patterns.

well yeah but that's why IMO you don't want to look at candle patterns in isolation. That is where I came to realise that trading candles on their own doesn't work for me. It is best to watch for certain support and resistance levels and buy/sell on penetration of those levels.

You determine the amount of breach/penetration required to trigger a buy/sell order that works for your system.
 

nomore4s

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Maybe one of the more experienced intraday traders in VSA can comment in this thread about whether they prefer bars or candles and why?

While I'm probably not the most experienced trader around, most of my trading is based around Wyckoff.
I find bars easier to read the close, as MRC has said the open doesn't matter.

If you prefer candles though there is no reason why you can't use them for VSA it's just bars are a bit easier imo.
 

nomore4s

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Yeh, sounds like a good plan. A lot to take in at first.

Personally, I barely ever use fibs, at least for now anyways. Haven't really seen much unusual price reaction around them, maybe simply because I don't take note.

An interesting thing I read today, was most VSA experts use bars as opposed to candles, to specifically see the close, as open is given little importance. You can still see this with candles, but you are always generally looking at the open in comparison to the close.......

The only fib level I really use is the 50%.

I use this only as a guide to the strength of the trend.

If the trend is up and the last wave has taken the price from $1 to $1.50 on the next wave down if prices can hold around or above the $1.25 mark this gives an indication that the strength of the trend is strong and will have me looking for an entry. Probably not a great explanation but its late, I will try to post some examples later in the week.
 
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Yes, I agree nomore. I look for Wyckoff things such as effort, outcome etc and find bars a lot easier to read the close. I currently use candles as I find them easier to understand at a quick glance, but am contemplating shifting to bars so I put more emphasis on the close..........

For trend structure and strength, I find just looking for breaches of previous highs, lows etc are best. Though 50% is the only real fib point I will sometimes take any note of, so agree again there.

http://newsletter.neoticker.com/2006...minute-charts/

This link, also states something very interesting, a breakdown of individual 1 minute candles, to get a feel for price action within those periods. So over 5 minutes, you don't just get 5 1min candles, but an entire flow. If you can remember what volume came online and in which periods during each 1 minute bar, then that is fine, but if you are like me and don't remember the exact flow within each candle, I can see a lot of use in the idea of another chart in much smaller timeframes.

I have heard this argued as simply noise, but a guy on another forum put it well, ebbs and flows have to start from somewhere, before we can see the currents in the ocean. I'm starting to sound like motorway and Wyckoff! But there is a lot of truth in this and after a lot of watching, I can see the value in getting a great feel for what price and volume are actually telling you.
 

nomore4s

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I have heard this argued as simply noise, but a guy on another forum put it well, ebbs and flows have to start from somewhere, before we can see the currents in the ocean. I'm starting to sound like motorway and Wyckoff! But there is a lot of truth in this and after a lot of watching, I can see the value in getting a great feel for what price and volume are actually telling you.

The big boys (smart money) have to buy at some point to establish a position and they have to sell at some point to exit a position and this effort is shown in the volume & the reaction the price has to that volume. The trick is identifying the signs and riding on thier coat tails for as long as possible.
 
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Yeh, I also have found since doing all the EOD trading, and then using 30 min live charts for some swing trading, moving to the smaller scalping timeframes has been easier to adjust too. Can pickup volume and patterns in real-time reasonably quickly now (at least I can for now, ha ha, things may change :().

Since looking at the order book and getting a feel for the flow, I've only had a few down days in the past 20 or so days scalping. It just almost feels too easy at the moment, which has me mightily worried! SPI just then was almost a giveaway if I'm doing this right. Double top formed, last saw some distribution, this one saw some more, then barely an ask being hit, with bids looking very weak before price went crashing down. Giving away 20 odd easy points with 5000 holding absolutely no support. :confused:

I hope it remains this easy! lol.
 

Trembling Hand

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Something of relevance from Traderfeed,

When traders see enough examples of supply and demand, they develop a "feel" for markets that is the result of implicit learning. Invariably, the very short-term traders (scalpers) I have worked with cannot verbalize their rules for entries and exits. They react to what they see, having seen those patterns play out thousands of times in the past.
 
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Yeh, that is what I am currently doing TH, good to get you in here, the resident real-time tape reader! Trying to just get a 'feel' for supply and demand and it's effect on price action.

I had absolutely no clue what to look for in the order book at first, was just watching it aimlessly. ha ha. Until I started to notice support and resistance points happening before my very eyes. Then it clicked and I realised I was meant to look for reactions at these important points (should have thought of that before hey :rolleyes:). ha ha.

Though, I still sometimes notice support and resistance points in the order book (hitting the market) of which hold absolutely no significant support or resistance according to my chart analysis. Does that sound right? Guess others analysis provides different important points to my own sometimes.......
 

tech/a

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Students of S and R really need to add Point and Figure to their studies.
 

ice

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Yes tech/a, seems the ideal combo.

Of course if you're a tape reader it helps if you're an obsessive neurotic, happy to stare at numbers on a screen all day. :)
Works for me.

ice
 

Trembling Hand

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I would actually not worry about it, trying to read the DOM or T & S.

I would concentrate on finding patterns that offer good R:R set-ups in 1, 2 & 5 min time frames. Then after you know what you are looking for THEN go about seeing how they developed in the DOM.
 
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