Greetings traders and welcome back.
Thank you for joining me again for another In-Depth with
Chris episode. In today's discussion,
we are going to talk about reading the tape. In any old trading
movie, you may remember seeing traders yelling while staring at a long sheet of paper.
Well, that long sheet of paper most likely was representing
what was called the "ticker tape". In today's day and age,
we don't really see traders trading with the ticker tape
anymore, but that does not mean that traders aren't finding
a way to read the tape. The method of doing so has only changed with
the times, as you would expect, and the advent of the internet and powerful computing machines.
We're going to talk about what reading the tape is, how
it's done, some strategies involved with reading the
tape, as well as whether or not it might be right for you.
Now, before we do that, there are two methods of doing so that
we will be talking about, and I want to show you how to pull
up the "depth of market", as well as the "time and sales widget"
using the Finamark platform before we get going. In
order to do so, we do actually need to make our charts a little bit smaller.
We're going to drag it from the bottom right over here to the left.
Don't worry about if the chart looks weird, it'll fix itself.
Then, we're going to click on the widgets icon in the top
right, and we're going to click on the "depth of market". With the depth of market already loaded here,
now all we need to do is go ahead and scroll down, and will click
on the time and sales icon. Once that's done,
we can resize these to fit the screen appropriately, or however
we see fit for our personal layout. We need to select
our account, as well as select our asset.
If we're looking at the ES, we're just going to type in
our "/ES", select it, and off we go. Now, you're going to notice
that mine currently isn't moving because I have my data frozen at this point in time.
It's from the past. That way, you can actually look at what we have here.
Otherwise, you would see these bars moving quite a lot, but
we will come back to talk about what depth of sale measures, as well as the time and sales.
I just wanted to show you guys how this is pulled up so that
way when we get to it, you know exactly what we're talking
about. But without further ado, let's get going.
As mentioned, the process of reading the tape is really the
only thing that has changed throughout the years. Traders still love to read the tape,
just the way they do it has changed. Now, what is reading the tape?
Well, reading the tape is generally a word that represents
paying attention to the number and type of trades that are
taking place on the market, and the price agreed by the buyers and sellers.
It's essentially paying attention to the ebb and flow of
the orders that are coming and going or waiting to be filled from the market. We can think of reading the
tape as being aware of all of the different orders that are going in and out at any given time.
The concept of tape reading first emerged in the late 1860's, so it's been around for quite a while.
That was when traders started using ticker tapes to transmit
trading information. Experts generally considered Edward Callahan the father of tape reading. At the time,
he was an employee of the American Telegraph Company. The
tape reading technique then became mainstream in 1869.
That was the year that Thomas Edison developed the first
stock ticker. Soon after, these practical tools
installed across all major brokerages around the US. The ticker
tape included intraday information such as the ticker symbol,
the price, and the volume. The tape reading remain dominant
and powerful in the trading process for transmitting trade
information, until the markets became electronic somewhere
around the 1960s. To some extent, the tape reading became obsolete
as soon as electronic communication networks, which we refer to as ECN's,
were introduced in the 1970's. The rise of computers and
media made markets more accessible for traders, and didn't
require the tape reading method of old. However, tape reading
is not entirely a thing from the past because of this. Today,
it is still used by traders all over the world, but they
do it in the electronic order book fashion, which is what we'll be focusing on.
What makes tape reading so useful to us as traders?
Well, the potential benefits really lies in the ability for analyzing the tape to give us a clearer
understanding of the market environment, as well as the participants in the market's behavior.
That is the traders. That's what they're doing. Being aware of their orders, where
they're at, and when they're interested in executing them.
In the day trading world, there's generally a big split
between tape readers and chartist. Chartist being the traders
that are speculating by using indicators, or whatever information
they decide, by pulling from the charts themselves to analyze
the markets, and get an idea of where if the market is going
Then, there are the tape readers.
The tape readers aren't looking directly at the historical path of price. Instead,
they're analyzing the ebb and flow of orders and the desired
location that traders want their orders to be filled.
The benefit of tape reading for day trading is, you can get access to real-time, intraday data.
This is invaluable for short-term price forecasts. When combined
with a long-term trading strategy, tape reading can help improve
efficiency, and it does this by confirming or rejecting our theories on an intraday basis.
This makes it a useful tool for complimenting any type of
long-term trading strategy when done correctly. Many advanced
day traders like tape reading because it helps them spot
unfair trading practices. These include order cancellations,
or price manipulation, and others. Yes, you did hear me correctly. If you understand how to read the tape,
you may be able to avoid some type of price manipulation that may be coming your way.
To understand how these traders are doing that, we should
point out that nowadays, most traders employ modern trade reading techniques on something called, an electronic order
book. Aside from the information present in the old-school
ticker tapes, the electronic order books also include data for non-executed orders, which is huge.
The tape reading of old did not include the non-executed
orders. It couldn't. Why would it? The page would be infinitely
long. In today's day and age, we now can see orders that
have not been filled but that traders are definitely interested
in having filled, and that information can be very, very valuable.
The rich amount of information that modern tape reading provides
also can help day traders get a glimpse of the way other
market participants are currently feeling about a particular
instrument that they are analyzing, and that in turn, can lead
to a better prediction of the price movements.
How does tape reading work? Well, understanding tape reading isn't really rocket science.
In fact, the basics of tape reading are relatively simple.
Think of it as a mix of several factors including the price
of an instrument, the volume, the bid and offer price, and the bid and offer size.
When we combine these factors, traders get a more complete picture of the market.
Now, the harder part of this is understanding how to combine
all of these in an effective manner, and to do this,
the first thing that traders generally do is pay attention
to something called the time and sales, which is what we
implemented at the beginning of the video. The time and sales
info indicates real-time data about the transaction time
stamp, the price levels, the trading volume for any particular
instrument that you have it applied to, and it also shows the best bid or offer price.
In a nutshell, it shows transaction information.
However, this doesn't say much about what is going on in
the financial markets by itself, or the market structure of the price action.
To get a clearer picture, traders also look at the depth
of market, which was the other widget that we applied to
our charts. The depth of market complements the information
from the time and sales by revealing more details regarding
the auction process of the limit orders' depth.
This shows us the supply and demand for whatever particular
instrument that we're analyzing. The "DOM" is another way
you'll hear it referred to. The DOM also informs you about the last transaction that was made, the current
levels of the bid and offer, as well as their depth. This is
important because it helps make markets more transparent,
and it makes it easier to recognize unfair market manipulations
like spoofing. Depth screens are also referred to as level two quotes,
if you see that somewhere around the web. Mastering tape reading
requires familiarity with the way financial markets work,
but their individual parts interact with each other in a
relatively simple manner. Once you understand how to read
it, the concepts aren't that complicated.
The strategies that traders use while reading the tape generally
fall under these three styles. The first is identifying support
and resistance levels. Traders will often look for large limit
sell or buy orders in the order book of a particular asset among multiple trading venues.
Now, when they're doing this, if there are such then the assets
price may be expected to experience strong resistance or
support depending on the location at that specific level.
By applying this strategy, traders can then get a sense of
whether it's a good idea to trade the particular asset, and where the price floor
might stand. That way, they can estimate the associated risk and better plan their trading moves.
The second strategy is called "riding the wave". Always remember
that you can use the benefit from other market participants'
momentum to your favor. A preferred way to do
this is by using the tape. The best traders like to realize
that they don't have to do everything on their own, and all
they have to do is identify a high potential opportunity, and start building up their positions from there.
If the opportunity is good enough, the market will follow,
and the rest of the traders will create a momentum that we
can ride on and profit from. Now doing that with the tape:
When the trading session opens, we can wait for the chaos, the typical first trading hour that
usually happens, to settle down. Then, we can start looking
at instruments that start taking up slightly from there.
If we pay close attention to the order books to find out whether
there are bigger orders that are beginning to pop up on certain
instruments, let's say, if there's an order of say 500,
or a thousand shares of contracts waiting to be filled,
this is a signal that the market has a positive sentiment
towards a particular instrument, and we can use this momentum to ride it in that direction.
Finally, we have avoid leaving a profitable position prematurely.
As far as strategies go, this is a strategy, but not a
strategy to get into the market, but instead to potentially
maximize our profit in a position that we are already maintaining.
Through the use of the tape that is.The way this works
is by paying attention to the tape and regarding the moves
that are currently happening, which means if we have a trade
open, say we're long on a particular asset and it starts going against us.
Normally, we might jump out at a predetermined rate because we have a stop loss employed,
but if we first consult the tape before we close our position
out, we might realize that it's only a temporary pop and there
could be a large number of buy orders waiting to push the
market back in our favor. Preventing us from getting out and
getting duped by the temporary downfall, and allowing us to continue to maintain our upward ride.
Being a proficient tape reader does come with notable advantages
such as, the fact that it's a great tool for pricing insights.
This is the idea that even a basic understanding of tape
reading will provide you with enough information to get a
clear representation of the intraday fundamentals, the bid-ask
and balances, trading volume, and just a frequency of trades
in general. When you step up and you become a better tape
reader, you're able to recognize even small spikes and mounting pricing pressure before it happens.
You might also be able to derive conclusions from the number
of orders canceled right before execution, their position
in relation to the order book, and even mean reversion
strategies, just from being able to read the tape. Number two
is that it helps traders time their exits. Day traders who
lack experience often struggle from one primary problem. That is staying in a trade for too long
just because of an ego. It is the desire to be right, and the emotions or inability
to withstand the heat of the moment that cause traders
to sit into trades entirely too long. When you're reading the tape,
this helps us overcome this, and makes us better short-term
traders by making it more real that we may be about to see
a very powerful movement because we see all of those sell
orders waiting to be filled if we're currently in a long
position. Number three, we can say it is suitable for both
beginners and pros. This is a relatively simple concept.
the idea of reading a tape, once again, we already talked about exactly what information
it covers. It's not a great deal of information.
It is something that is relatively simple, but the information
is incredibly valuable, making it suitable for both beginners
because it's easy to understand, and pros because it's very
useful. As far as the potential disadvantages, the first
one is that it can be considered hard to navigate the time
and sales and DOM, at least at first, but generally everything
in our trading career is difficult at first. It becomes a very commonplace thing.
once we've done it enough. In the beginning,
it may feel like a foreign language looking at the time and
sales, and the depth of market, but as we continuously pay
attention to the orders coming and going, it becomes a more
understood language, making it easier to work with. The second
potential disadvantage is that it requires laser focus. In
a world where there's thousands of trades happening in a
matter of milliseconds, and a large number of trades are taking
place algorithmically by programs, it makes it a very fast process to pay attention to. There's
constantly numbers changing, and there's constantly things
moving up and down, but then again, isn't that what's happening
when we're analyzing the historical price? Sometimes looking
at time and sales and depth of market to a new trader can
feel overwhelming because there's more numbers that
are changing than just simply the display of price that a historical price chart may display.
Because of that, the focus requirement for analyzing the
tape is higher than just historical price. Number three is its
inefficient as a stand-alone analysis tool. This means that
just by the tape, we generally don't want to use that information
by itself, with no other outside factors to decide whether
or not we want to buy or sell in the market.
This is something that is usually a rule that is adhered to,
or a principle that applies to almost any style of trading.
most anything we do as traders, we don't want to rely on that information alone.
It's always a good idea to have other confirming factors
before we actually execute a position, and this helps us filter
out some potential noise. When traders realize that looking
at an order book may seem overwhelming at first, and it may
be a representation of more work to do, they ask, is the work worth it?
Well, the short answer to that is, the work is what you make
it to be. The simple fact that it is only another source of
information means, it can't really hurt you.
as long as you understand the information that your brain
is interpreting. When you use that information in conjunction
with what you're already doing, all it's doing is giving us
a more defined picture, a higher definition image if you will,
of the marketplace. In my opinion, I think reading the
tape is absolutely an advantage if you are skilled at it.
If you're bored, and you think that you want to give your trading
another step, maybe reading the tape is the way you can go about doing it.
Until next time folks, good luck on your Gauntlet Mini
experience. Please click the like and subscribe button down
below, and I will see you in our next video. Cheers folks!