The success of stock traders depends heavily on their understanding of different trading strategies. While there’s a diverse array of strategies that have the potential of bearing fruit when implemented correctly, the one that is considered to be extremely crucial is called “Tape Reading”. This article provides an overview of what Tape Reading is all about.
Tape Reading is a stock trading strategy that is used for price & volume analysis of stocks. Alternatively knows as “time & sales”, this strategy has been practiced in the trading world for centuries. Learning how to read tape trading proves to be very useful in a variety of situations such as following trends, engaging in day trading, or scalping.
A trade that has gone through the time and sales window typically indicate the precise stock trading time, the volume of the transaction as well as its price. Traders are advised to learn Tape Reading in order to fully understand what exactly is going behind the price chart and to gauge the reasons for the movement of price.
Tape Reading Benefits
Tape reading has a multitude of benefits. Some of them are listed as follows.
- It is considered to be an underlying factor in successful active-day trading with the ability of enabling you to stay on top of all short-term moves.
- It helps you build a robust strategy for determining all risks and their associated rewards.
- Tape reading serves as useful indicator for trend leading by offering a view of all buying and selling transactions.
Tape Reading – Ground Rules
Here are some of the major tape reading rules traders must follow:
- With the maturing of the new stock trend, the drop in trading shares should lead to buying pullback and other natural reactions.
- The average duration of the pullback should be a minimum of 3 days and maximum of 3 weeks. This pullback should be followed by the price following the trend direction and a rise in trading shares.
- The volume of trading shares should be more than average when complementing the breakout.
- For a number of days, the direction of the stock price should be same as that of the breakout.
Key Tape Reading Indicators
There are certain clues associated with buying/selling orders that you should look for while tape reading. Listed below are the conditions that should be satisfied in a stock-buying situation:
- The bid being held by buyers
- An increase in bids
- Trades taking place on ask price
- Imbalance in supply/demand
- Ask price leading to large orders
- Price remaining firm in spite of time and sales picking up
- Downticks being limited
Tape Reading Tips
1.Filter orders by size
In this day and age, the tape market moves at a rapid pace with loads of small orders that may not be worth your while. That is why it is a good idea to always set a minimum and maximum order size criterion in order for the Level II data window to display appropriate orders.
2. Create a combo
The act of making day trading and price action tape reading work in tandem usually proves to be very beneficial. Professional traders mainly confirming entries and exits through tape.
Learning Tape Reading requires you to extensively observe the tape and notice how stock price moves in different conditions. Good tape reading skills will enable you to keep track of big orders entering the market, among other benefits. Traders should only trade stocks that are in close proximity of a key pivotal point, focus in the direction of the trend that is prevalent at that particular point in time and act patiently.
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