Due to the gaining popularity of technical analysis (analyzing stock charts) used by traders and investors, most daytraders these days use only their complex stock charts (aside from stock specific news) in determining when to buy or sell stock. For example, if the stock looks like it is going below the 200 moving day average, they sell. And if the stock lifts above the volume weighted average price for the day, they get long. Success at executing a profitable trade using only technical analysis is a coin toss at best in my opinion while hardcore chart technicians will disagree with me. Most of my trades ideas come from reading the tape. Well, what is tape reading?
Reading the tape is a term originated by traders who used to sit by their ticker tape machines. These machines provided the lastest price quotes and trades in securities on paper, where today all this information is displayed electronically on quotron software. Think of the CNBC scrolling ticker bar on the bottom of your televisions as a ticker tape. But back in the early 1900s, the tickers and prices would be constantly printed on a scrolling piece of paper. Traders would read and analyze this tape and figure out which way their stock or the market would be heading.
Well how is that possible? Tape reading is a skill not many traders have. And to be honest, it is very hard to teach because of its abstractness. It incorporates the analyzing of real-time stock trades and orders, through the stock's trades whether it be at the bid price, the offer price, or somewhere in between. Volume size of the trades are also taken into account when tape reading. A trader must also observe the market makers in the stock and how thy fill each trade at the advertised bid/ask spread.
So the sum it up, tape reading is a highly calculative way for a trader to determine whether it is an opportune time to buy, sell, or short a stock based on the analysis of a stock's trades and orders.
From my experience, tape reading was easiest to apply on NYSE and AMEX stocks before the advent of electronic trading and the uptick rule. This was because NYSE and AMEX stocks traded only through one market market, the specialist. And if you could figure out if the specialist was long or short the stock through tape reading, you could easily make a ton of money. All you had to do was go long the stock if you thought the specialist was long too, or short if you thought he was trying to keep it down. Nowadays with electronic trading, there are more market makers in a stock so it's a little harder to understand the tape.
One example of a simple form of tape reading is this. In a thinly traded stock $XYZ, let's say you are long 1000 shares. The bid/ask is $30 x $30.10 / 1000 x 1000 shares. You decide to get out fast and execute an order to sell 1000 $XYZ at market. You broker fills you at $30.01. Why did you get filled at $30.01 instead of $30? Maybe because there is a hidden buyer in the crowd not showing himself and wants to scoop up shares quietly. If you notice things like this OVER AND OVER in the stock, that no trades are being executed at $30 but at a fraction higher than the advertised bid price and all market orders to buy get filled at the offer price, it may signal that the stock is under quiet accumulation and will head up higher.
I believe that being proficient in tape reading is the BEST skill and tool to use for daytrading stocks -- better than fundamental analysis, and way better than chart reading. Why? Think about it. What moves stocks? Answer: Huge buyers or huge sellers in a stock. Figuring out if the buyers or sellers are more aggressive, you can with high probability accurately predict which way the stock is heading. And if these huge buyers/sellers disappear all of a sudden (meaning they are all cleaned out, their orders have all been executed) then maybe it is time the stock will reverse direction. I think this is why I have such a high winning percentage trading the way I do (knock on wood!).
- Hubert Tsai