SOME THOUGHTS ON TAPE READING I will weigh in abit on the concept. Tape reading is the science of interpreting price and volume with a view to anticipating futures moves of the market. It is correlating price and volume. Volume is a “leading” indicator of price. Price is 1/2 of the picture. Volume is the other 1/2. Tape reading is correlating the two to facilitate the interpretation of supply/demand. Tape reading can be done on a single issue or on the broader market using the “leading issues” as suggested in the book Rollo Tape. The main job of the tape reader is to determine the balance between supply and demand. Which is greater supply or demand? Said in different words; who controls the market the bulls or the bears? Said another way; where is the pressure, buying or selling? THE “ACTION” of the volume “speaks volumes” ROFLMAO on the STATE of supply and demand. Now consider this; what is volume? Volume is amount of shares or contracts traded. What do the shares or contract represent? Only ONE thing...$$$$. So.....in correlating price with volume in an attempt to interpret supply/demand (i.e. to “see” which is stronger or has the upper hand, the bulls or the bears..buying or selling) one is basically attempting to get a view on where the “money” is going. You want to know why people do what people do, follow the money trail. You want to know why price does what it does follow the money trail. PRICE MERELY DENOTES THE VALUE OF VOLUME. Let that one sink in! See, volume is a leading indicator of price. But price is ALSO a leading indicator of price. The spread (distance from H to L of a bar) and “how” that price spread was made (it’s volume...swoosh...grudgingly...etc) and where price has gone (north or south) says something about where price is likely to go IF one can correctly correlate the picture of price, with the picture drawn by volume. We are talking probabilities here based upon past “actions” of price and volume as no one can tell before hand WHEN a big wholesale buyer will visit the candy factory and scoop up every last crate cleaning out the factory. ROFLMAO...You get my “drift”? We can never know, for certain, because there are too many variables. Known variables, variables yet to happen, and even unknowable variables. But tape reading can increase the PROBABILITY of future PA but nothing is “for sure” because of the three categories of variables I just mentioned. Therefore, as Mr Brooks is fond of saying “we trade in fog of uncertainty but there are moments of clarity” As general Patton of ww2 said “when the enemy is shooting at you...and the soldier next to you gets blown away.....you will know what to do.” In others words, things will suddenly become very clear. Trading has those moments. Now consider this: charts with price and volume are pictorial views of price and volume. They graphically lay the picture out, for us, on price and volume. But they do not interpret them, nor do they correlate them, to arrive at an interpretation of supply/demand..bullish/bearish pressures...etc That is the job of the tape reader. Price and volume are just data. What you do with that data is a horse of a different color. That data, in it’s pictorial form, helps a trader assign “probability” to the “traders equation”, as Brooks calls the equation. Traders devise strategies...set R:R....set SL’s set PT’s...have favorite setups....BUT often fail to assess probability. What is the probability of the trade actually reaching your PT before it hits your SL? Just having a good R:R is theoretical and having a good setup or entry/exit signal is ok But what about the context. The exact same price pattern in different contexts will render different results. Thus PROBABILITY MUST enter the equation. You might want to read and think about the article I will post in my next post on this thread. Look at right now, please. Having said all of the above I rarely use volume. Why? I am a scalper of 1 to 8 points in the ES and other emini’s. As a scalper I can pretty much just look at a bar and determine if it was made on big or little volume. Look at the chart below. Notice that big bear bar at the top of this chart. Strong bear bar breaking hard ...breaking below MA...closing almost on it’s low tick. Closing the previous gap to the left in one concerted swoop. What are the chances this bar was made on low volume? On big volume? I don’t need to look at volume bars to know that this bar was made on high or increasing volume. If I have any doubts I can pull up the volume bars but I just “know” from experience that this sort of price action is made on high or higher volume so I can “tape read” (on the fly) i.e. correlate price and volume to arrive at an interpretation of supply/demand (bearish/bullish...buying/selling pressures). What is the PROBABILITY, given the context, of seeing a price reversal to long on the next bar following that big bear bar? Very little IMO as I would interpret the tape, on this specific example, without any look at the broader market of other leading issues. Nothing wrong with looking at the broader market. It too is tape reading. So..what is the probability of the NEXT bar being a follow through (FT) bearish bar? 30%? 50%? 60%? 70%? What is the probability that we will see more price action south after the close of that big bear bar? Greater than the probability of a reversal to bullish? I mean the big candy buyer COULD show up at the factory on the very next bar (that is an unknowable variable) but the odds IMO certainly favor at least enough more move down on the next few bars to warrant entering in on a short scalp..placing my SL at the top of that big bear bar and averaging down even more short if price climbed back up some on the next bar after that big bear bar. Probability favors SOUTH. Would you really want to be long? Next two bars are indeed bear bars (Note they are smaller) but the context shows them breaking way south of the last 30 to 40 bars. Then some PA sideways as profit taking takes place. We see some bull bars in the PB but they can’t even manage to push price back up to the MA before we see bear bars appear again. So...what are the odds we will see another push down? Pretty high IMO. I would be looking for a second leg MM south and we got it and even got a third leg south. I don’t have to look at volume to know that this first failed PB i.e. the reaction was made on less volume than that first leg down. But if I have any doubt I can pull the volume bars up. The “tape” is “dull” on the reaction (i.e. on the PB) In bear trends when the reaction is dull expect more PA south. In bull trends when the market gets dull on PB’S expect a resumption of the bull trend. The second leg down had a subsequent PB (also dull reaction and the profit taking by bears along with the reversal attempts by bulls) couldn't push price back up to MA before another series of bear bars appear graphically on the chart. Odds anyone the move south will continue? This is tape reading on an individual instrument. You might want to read the book below for a marriage of classic tape reading with modern charting via computers in place of by hand back in the day. At the very least you ought to find some interesting concepts in it. https://www.amazon.sg/Tape-Reading-21st-Century-Droke/dp/0967069718
The Counter Intuitive Nature of Risk/Reward Ratios by Boris Schlossberg What’s better – taking many trades that have a reward to risk ratio of 1 to 5 or taking many trades that have ratio of 5 to 1? Would you rather make many bets that pay 1 and risk 5 or many bets that pay 5 and risk 1? If you answered the latter you’d be dead wrong. On the surface the idea of making many trades that have a positive risk reward profile looks immensely attractive. Who wouldn’t you want to get paid 5 every time you risk 1? Unfortunately many traders confuse the idea of payoff with the probability of actually collecting those payoffs. The probability of consistently making a trade that makes you 5 while keeping risk to 1 is generally very small – MAYBE 15% if that. One time I was in the green room with a very well known currency analyst who pompously announced that he doesn’t take trades that are less that 4 to 1. Right then and there I knew the guy never bet his own money in his life and was just a glorified paper trader like most Wall Street analysts are. Assuming you have a long term positive expectancy (i.e. say you lose 3 for every 1 you make, but your winning percentage is 77% or better) you should do as many trades as possible for the same reason that insurance companies write as many policies as possible – the law of large numbers works in your favor. As long you keep each individual trade loss to a very small risk size (between 0.5% and 1.0%) your risk of ruin is manageable. The more you trade the more profits you’ll build up the more capital you’ll have at your disposal to survive the drawdown. The high reward/low risk trades have the exact opposite profile. You spend a lot of time bleeding away money until you finally hit a good trade. Worse, since good trades are rare – your chance of missing them is very high as you can’t watch the markets all the time. Lastly the psychological toll of constantly losing money makes traders much more reluctant to pull the trigger just at the moment when they need to. That why when you study all the great hedge fund manager who trade with high reward to risk ratios you notice one thing that most retail traders miss – theyare highly selective. From Soros to Tudor Jones many of the great traders will make a few forays into the markets and take quick losses but will pounce on the opportunity when it goes their way. To do that they are perfectly happy to be very patient and select their targets after massive research. Retail traders on the other hand will trade blindly using high reward to risk ratios because that what they’ve been told and then wonder why they are losing all their money. Relax and Trade with US – Swing Signals, Day Trading Signals, 24 Hour Trading Room So the lesson of the day is if you trade like an insurance company don’t be afraid to write a new policy after a hurricane wipes out your profits but if you trade like a hedge fund – you better know exactly what you are doing. BORIS SCHLOSSBERG AUGUST 28, 2015
Thank you so much volpri for your post. I read it twice and great read. I love reading your post. The things you are talk about real trading. I see it all and feel it all when I trade pure PA every day and every minute. I like reading things that goes against the standard way of trading. Very well said. There is nothing we can do about uncertainty and this is where probability prevails. We are probability traders. Our skills improve our probability. This is the best point of your post. Al Brooks talks about the probability equation in detail. Just setting a 1RR or 2RR trades is sometimes not enough. I always think now as you stated "what is the probability of my target getting hit" The probability favors short and in my mind it's an easy win short, BUT, most traders will say "But your risk is too high", "got in too late", "Wait for a pull back and then enter". Not me, I am not thinking about any of that stuff, I am entering short, happily, and exiting directly for 4 points (the first big bear bar was 12 points and second bear bar was 8 points), there is high probability I can atleast get 4 points entering at the close of that FT bear bar. On the breakout of the bear flag, a few bars later, I take the first bear BO bar (not waiting for the FT) and scalp it for 3 points, end the day with $350. Good post and like the relationship to price and volume.
Another great article volpri. Please keep them coming so we look at things different from the standard way of trading. Holding for that +2RR sounds good until those losses start piling up and drawdown.
Glad you like the posts but more important I sincerely hope they are useful as you trade. Also you mentioned the “best point” for you of my post was: “What is the probability of the trade actually reaching your PT before it hits your SL?” I said I would put my SL above the big bear bar. Looks like too big a risk right? Now flip my statement around. “What is the probability of the trade actually reaching my SL before it hits my PT?” See looking at it this way gives some confidence for adding to the short if it moves against me as my stoploss is wide enough to do so. Look at the picture: Big bear bar closing almost on the Low tick of the bar ..made on big volume...close the previous gap....SO...I ask will it likely trade down enough for a profitable scalp before it would hit my stop loss? Would it likely reach my SL before it reaches my scalping target? The odds IMO favor it staying below my SL EVEN if it retraces a large amount of that big bar before it’s close or if it retraces a goodly amount on the next bar. So, the retracement gives me opportunity to average down with more shorts. I gauge the probability both ways. Mentally doing it helps for confidence to average down. Lastly if I am averaged down I want a give up point where I will dump the losing position then double up and go the other way. Price then only has to travel 1/2 the distance (more or less) and I am back to even then a little more and I am in profit. Triple up and things get interesting fast.
Nice Al brooks-ism, Plus high probability of at least 2 legs down so it wont hit your SL anytime soon. I would say on your chart where you say "look for opportunities to get in" At that point you get in for any reason - Per brooks.
Good post volpri, That is good way to play the probability scenario. Those big fast moving bars are very good to me., I jump in very quick and just exit for a profit (3-5 points) and put the stop very wide, so I can make the money. I only want the high probability trades, because more likely the money will come. Like now, I am currently long a blue dot, and target at purple. Lets see if I can make some money here
Lost some money on that one, but good thing was I was able to make some money on this one after getting stopped out. So its similar to what volpri always saying. Gotta be ready to go either way, and shake the lost off and get ready to make some more money.
I know you were looking to trade the BO of the ascending triangle however look at the context of the triangle. It is in the top 1/3 of the larger trading range. You got a strong down leg prior to your entry that went into the bottom third of the TR and that biggest bar of that leg Showed strong buying by it’s close (tail on bottom) that immediately brought it back up into top 1/3. That move down was a vacuum test of the lower part of the bigger TR. Right after that Buying you entered long on a BO of the triangle. But you have to remember context...context...context. It is always very important to see where any price action pattern (bo...triangle...wedge.let) is located at in the larger context. I actually would have shorting that triangle BO and adding as it moved against me betting the move up would reverse at the top or in the top 1/3 of the larger TR. You went short as it raced back down and recovered some of your loss which was ok but it was a bit risky as price was in the bottom 1/3 of the larger pattern. I realize you were playing the momentum here in that last trade and that is Ok for a small scalp because chances are it would go down a little more as the previous bar was a big bear bar, however, if I scalped that short once I locked in my profit I would be exiting and I am reversing and taking a long position. Why? Because price is now in the bottom third of the larger TR. 80% of BO attempts of TR’s fail and within 5 bars price starts going back towards the range. I do not know what happened afterwards but at your exit of that short I would be going long and averaging down long as it moved against me betting that even if it went south of the bottom of the TR it would probably start reversing back up towards bottom of the range within 5 bars and move enough into the range to give me a profit on my averaged down position long. on the flip side of the matter If any BO south of the TR is successful and does not go back up enough for a profit then I am dumping the averaged down long and reversing short and doubling or tripling up in size recovering any loss from the averaged down long very quickly. why don’t you post what happened to price after your last trade when you get a chance.that way we can see how i would have turned out in my description above.
Hello volpri, thanks for the feed back. I am still reading your comments. The rest of that price turned out like this.