CLASSIC TECHNIQUES
Trading For Purists
Trading By Tape-Reading
by Adam Wasserman
The foundation of all trading systems, indicators, and chart
patterns is the battle of the tape. If you master that, it can make all
the difference in your trading.
Regarded as one of the first-ever successful
strategies for traders, tape-reading is trading in its purest form. Charts,
technical indicators, red lights, and green lights work wonderfully when
mastered, but all are products of the tape and don't exist without it.
By withstanding the test of time, tape-reading has proven to be the most
consistent method of pulling money out of the stock market for a trader.
WHAT IS THE TAPE?
To understand tape-reading, we must understand the fundamentals that
make up the New York Stock Exchange (NYSE). The NYSE trades in a continuous
auction format, one that is driven higher by aggressive buyers or forced
lower by aggressive sellers. The tape is made up of integral variables:
the symbol, last price, last trade size, net change, bid, ask, bid size,
ask size, high, low, and volume (Figure 1). From reading these, a trader
is privy to recognizing patterns that define the amount of stock to be
purchased at a higher price and the amount of stock to be sold at a lower
price.
Being able to read the tape proficiently allows a tape-reader to interpret
how the price affects buyer and seller. Nyse floor traders and electronic
order routes have order filling patterns that can be spotted through study
and experience. By being able to recognize patterns, a tape-reader can
position him- or herself to reap handsome reward ratios.
...Continued in the March issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the March 2008
issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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