@Nicodemus Glad to hear that I'm not the only one having this problems - I think I would have done better the past weeks if I didn't give so much attention to LII and short-term charts. But I think I will have a long way to go until I find a solution ...
Tape Reading is one of the oldest methods of market movement interpretation. Like any other methods applied by market players, it's intended to show "what's behind the ticker". There is no tape itself anymore. It has been replaced by a scrolling Times Of Sales Window and Electronic Tickers. But the term, and more importantly, the principles are alive and are as useful as ever. They are based on aspects that never change. These are human psychology and major accumulation/distribution rules. There are plenty of technical indicators used by traders in different combinations. Many of them are very sophisticated and computers make it easy to watch them in real time. However, Tape Reading is a truly universal method that can be combined with any technical study, and I suggest it as a base for any other method traders like. Sophisticated indicators based on complicated calculations tend to somewhat mask the reality of a scenario happening. Tape Reading goes right to the roots of the stockâs action. This is necessary for newer traders. Like no other method, Tape Reading deals with reality itself allowing traders to see market moving forces in action and to judge which one prevails at that moment. It provides us with a look into what other players try to hide and then allows us to separate reality from our perception. The best example of this is as old as the Wall Street situation of âselling on newsâ. There are numerous examples of âXYZ is selling on such a great news.â Tape Reading shows why and how it happens. This tells you when you should expect non-conventional action on the stock and how to exploit it. Tape Reading deals with two major categories of market players. They are the Smart Money and the Public. You can replace these old terms with any pair you like (big guys and small time traders, insiders and online traders, institutions and retail traders, etc). However, the core of market events is the same. Tape Reading is a method of analyzing which side is doing what at that moment. Analysis is done by observing the only, and ultimately, truthful indicators of Price and Volume Action. Tape Reading does not always answer all our questions. In the stock market, nothing does. The stock market has no single ultimate answer. Otherwise this answer would already have been discovered and the market would have ceased to exist. There is no way price would ever change if traders knew the exact situation. Furthermore, any absolute method, once discovered by someone, could not be kept a secret for others. What Tape Reading does is: 1. It puts probability on your side as it allows you to read the truth to the extent it can be read, putting as few "interpreters" between you and reality as possible. 2. It allows you to develop a detached state of mind that a side observer possesses. The state of mind that traders want to experience is when they look at market action with no emotions, seeing clearly what happens. This is in direct conflict with cloudy judgement of emotionally involved traders with formed opinions that could be right or wrong, but in any case has nothing to do with reality. Just my views. I put a few of these in Ken Wolff's book when I wrote the Tape Reading Principles part of his book, this was my contribution. The next book in progress that I am writing with my partner will explain more of the deeper principles of Tape Reading that we use, in addition to the incredible journey my partner Vadym took from the changing Russian environment, through learning to speak English in Canada, choosing a business in trading, and finally accomplishing his truest dream of bringing the rest of family into the freedoms offered by his job and his naturalization as a Canadian citizen. All the best, Chris
Dear Chris, I suppose you're Chris from RT ?! Yes, from what I've heard about the tape , what you're saying is true but I have always been puzzled why not use only charts (say 2 or 5 min.) when they represent what tape is telling you? I mean, tape shows EVERY trade (even like 100 lots - where are those 50 lots and less??) but the chart wont move in one way untill counter wise action is over right? So why watch the tape? And could you give us a couple of things to look for while watching the tape (yup, id like to use your great knowledge while we have you here he he). Anyway good luck! Alex
The chart for me provides the structure, areas of support, resistance both seen and hidden. THe chart by nature is a few minutes late as the data represented by the tape is put up to the chart. Reading it as it happens allows us to do one important thing: Combine the art and science of TA, i.e., having a general area where to look for entry and exit and then the art/science of TR, seeing that area as it's happening. Chris
Accumulation/Distribution Tape Principles. This is probably the best case where the tape shows action faster than the chart, but it is up for debate as it's just my personal opinion. Accumulation of a stock is when the volume ratio is leaning more to the sell side, but the price does not decrease. This shows a support level. Distribution is simply the opposite. The volume ratio is more to the buy side, but the price does not increase. This shows resistance. In TA terms, you see this on a chart where price bars/candlesticks derive the t/s data and turn it into a visual of bodies and tails. In TR terms, we are watching action with the rate of change in volume and price as it moves in a desired direction. Those of us that are true tape readers are then able to remember not only where these areas are, but we are also able to remember the difference in action as the stock makes a test or retest into these areas. For example. The first test of a resistance shows slow buying into it, whereas the next test shows a bit stronger buying into it. Things of this nature take us more into the action of the stock as it's happening and a bit harder to see on a visual representation in TA terms. This is why I like the complementary styles of TA and TR. Both teach the principles that help to define more confidence in your system and fills gaps in each other's systems. Since we have basic principles of accumulation and distribution, we can figure out how the minority and majority act. Knowing that the majority usually is on the wrong side, it's important to understand what the minority is doing in each of these scenarios in order to participate with them, in a manner that we are ready to unload any position to the majority as we see them participating more. Much like when we exit position into price/volume spikes. First, let's go over what the majority believe about accumulation and distribution. Unfortunately, this belief is far from truth as it acts as a theory for why the market works the way it does, but a theory that is far from reality. Many try to apply the idea that: The market likes to drive prices down to "accumulate shares" at lower prices. This can be the famous "they" or the specific "MM", neither of which holds any special meaning to a professional trader. We know the market works in a manner that hurts the majority because the majority tends to be simplistic and lazy. Thus when things go against their thought, there is blame to be placed. Our sense of accumulation does not have to do with the "whys" or theories, it is simply based on the fact that "this is what I see and it's happening regardless of why". Let's talk about accumulation. Two types: 1. Aggressive (normally when we see a slow uptrend that is unassuming as some group or company or firm is trying to establish a position not alerting the public to it until they have the full position filled) 2. Passive (normally seen when a stock makes a sharp move after such events like capitulation where the smart money begins to support the price but not with the same intentions that we see in aggressive accumulation). You can say one is for the rebound while the other is for establishing larger positions. In aggressive accumulation, you often see one or possibly a few major players on the issue. They can be as apparent as their own MPID (Market Participant Identification) or they mask the intention using an ECN such as INCA or BTRD. This type of accumulation is marked by slow steady advances (sometimes some nasty pullbacks are apparent depending on liquidity issues), but for the most part, most selling is absorbed aggressively by these participants. Slow and steady therefore does not draw attention to the public as the public is mostly going for stocks that are moving up and down in a volatile fashion to trade. This unassuming nature and lack of attention to the stock being accumulated, allows for larger positions to be established without much risk of having to pay higher average prices in acquiring the full lot. Quite often, to mask the appearance of accumulation, the MPID will go on the ask selling shares to cap the upside move at certain intervals if he feels maybe it's getting out of hand. Of course he runs the risk of it continuing higher while he tries to sell, but this is the game we play. The main theme continues to be: How can I get my full lot filled while not drawing attention to it. This is their entry strategy. Whatâs the exit strategy? We talked about this already. When the public finally figures it out and begins to hit the stock with major buying. This is the area that the minority that has been accumulating shares during the time period the public wasn't aware, begins to distribute all they want. This whole scenario shows the MPID wants to establish a position but doesn't want to tips its hand.. He slowly buys the stock absorbing the majority of the sell volume creating support levels. He may have a few tricks along the way to try and spook us, but this is not a conspiracy, it's his job to get the best price for his full position. Finally when the public begins to see a stock climb, it gets hit with buy volume, creating price and volume spikes. This is the area the MPID wants to begin unloading some or all of the position. Passive accumulation is the opposite scenario of activity. In this case, we have aspects like a fast selling event. This shows that the majority is already participating and most scanners and filters have picked it up. This draws immediate attention to the stock from wider audiences. So there is no way to establish a strong position as the time period for many of these rebounds doesn't allow a lot of liquidity to get a large position. Most of these moves are displayed with a fast drop, then quick bounce. Now, this is passive for that very reason. The MPID is not necessarily looking to establish a huge position. He is simply playing the overreaction of the crowd. This is the example of the minority taking the opposite side of the majority (sell side in aggregate) and going long once that selling gets exhausted. You and I are able to participate with this passive accumulation when we see the scanner pick it up. As we also look for that pivot where selling seems to be exhausted, we establish our risk and then go long. On aggressive accumulation we are looking at something that is not as clear and is often harder to see (which again is what it's supposed to be or else the public ruins the accumulation) Passive accumulation is easy to see. Panic selling brings us to it. Aggressive accumulation is not as easy and we often have to watch the stock a bit to assess which MPIDs are doing what before making a decision. But the characteristics are there: Passive: Fast drop and looking for area where it gets exhausted and look for long...using that last low as support level. Aggressive: Slow uptrend, strong absorbtion of selling by MPID that is major player and many times volume increases more on average from the previous days trading as they continue to increase their position and more and more are catching on to the trade. Okay, let's move onto distribution. Again, the basic principle is that large buy volume with no increase in price marks distribution and a resistance level. However, again we have two types: Passive and Aggressive. Aggressive distribution is often marked by strong absorption of the buy volume on the sell side. The firm or MPID is taking a short side position for whatever intention. Either from a technical standpoint or because this is an area where it best fits his intentions for his position or whatever. Maybe there is less competition for him to sell at this level versus a level higher as he sees it. Weâll never know at that point in time what the true intention is. For whatever reason, he is doing the opposite of our accumulation scenario. He doesn't let the price drop. In this case, he doesn't allow for price to rise. His risk is that there might be an overwhelming demand that he has to cover. His reward is that he is able to establish a position on the short side in a manner that doesn't bring in the public that will drive the price lower, forcing him to sell lower and ruin his cost basis. As the stock falls, the slide is normally slower with previous resistance becoming lower and lower, establishing that downtrend that eventually the public picks up on. What happens next is that traders see the setup on the short side and sell the stock. Those that are long eventually get to a panic phase (capitulation) where those that are short from higher levels are more than happy to buy, covering partial or all of this short position. And at this point, we have possible passive accumulation again. See how the cycles begin to work together? Passive distribution: Stock brings in the strong majority buy volume and those in from lower levels (minority) are now beginning to sell shares to the majority. At this point: institutional support is no longer there because their accumulation and established position from lower levels is gone. Now it's time to distribute to the public. If no institutional support there anymore (MPID support gone), then the stock has a greater probability to fall. At the time of this spike, this is where buying becomes exhausted and distribution hits the stock and this marks our resistance level. This is again is where the majority is participating and no large unassuming positions can usually be taken by MPIDs and therefore is passive. They are distributing enough shares to alleviate accumulated shares from lower levels. And they are not establishing a large short position, rather alleviating positions they currently have from the long side. Continued...
Continued... So how can we use this? In aggressive accumulation we are able to identify the beginning areas of stronger moves and add bigger positions as the stock moves in our direction, waiting till the public figures it out and unload our position to them. In passive accumulation, we are able to play for the rebound much like in our capitulation alerts. In aggressive distribution, we are able to go short and look for trend continuations allowing those areas of faster selling to let us partial out. In passive distribution., aggressive shorts can look for a scalp short and long side traders can look for pullback entry. I often find that shorting price spikes is a bit more risky due to the fact that if distribution is light and resistance is broken, we now have short covering and long side buyers hitting the trend continuation signals often leading to some strong slippage. Over the years, I have seen some real ugly ones, jumping .50 to 1 before traders could get out. Times have changed a bit, but the principle is the same and a reason that most of thsse "euphoria" alerts are for faster profits on the short side. These principles of accumulation and distribution that I described show you how the minority think and how the majority thinks. You must be able to see the difference in why we act the way we do in order to progress using these principles that illustrates the minority acts against the crowd and can profit greatly from this understanding. Hope this helps. Respectfully, Chris
Chris, These scenarios seem to be top and bottom trading. From what I've heard, you are a trend trader, so why post information about top and bottom plays, of which you don't normally trade? The Realmoney.com posts you do are all going with the trend, or at least most of them. -Brad
This information wasn't really to describe my trading strategy as it was to illustrate a point of why the tape is faster than the chart, especially on capitulation/euphoric alerts, and also an example of using the tape itself to identify areas of slow and fast movement. As a trading strategy, tops and bottoms is certainly valid, but for me, only at these stages of clear public participation (fast buying or selling) as it tends to show exhaustion in that direction and a snap back. I don't subscribe to the "price determines value" methodology of picking these tops and bottoms. Aristotle and his logic can't trade the market well. Just because it's at 50 and goes down to 49, it should bottom, isn't a sound strategy, no matter how much the person thinks it is trying to hide behind his intuition skills. I believe in intuition, but not in order to mask inabilities to see what market reality is. Steve Cohen, one of my favorite guys to read about, stated: If you trade beause you think its too high or too low, then you have no business in the market. Most traders have a much better strategy in hand when they play this strategy. They know areas of support from TA indicators or something of this nature, and then use that faster selling (exhaustion) to mark their entry if they see it. Slow selling into 49 will not be a higher probability for trend reversal than fast selling will and I'd stay short as long as the selling is slow. Fast selling marks public participation and they are usually wrong, so it's time to cover or look long. THis is one instance I will trade a bottom. But the notion that it was at 50 and now is at 49, there is some value there, I won't ever buy it for this reason. Value is intrinsicly opinion. Fast selling is clearly seen. You want my opinion or you want to trade what you see? I'd gather 90% or more would rather trade what they see. Respectfully, Chris
I misread your intentions and post then. I am sorry. I thought you were only using the tape as you call it to catch reversals. I checked out the books already mentioned on this subject. Do you have any other places I can find information on these principles?
Those books already posted are very good ones to review. Of course, you can always ask questions here and there are plenty of posters here that understand the true reality of tape reading, not just using it as a buzzword to sound smart. Ask questions and they will most certainly weigh in with their experience as well. All the best, Chris