Reading the Tape

 Dr. Steenbarger, aka the godfather of modern trading psychology, wrote: “My experience is that an understanding of (and ability to read) order flow is one important factor that separates the older, successful generation of day traders from the newbies who only know simple chart patterns and indicator readings.”

continue working on the skill of reading the tape and to sell the stock on the offer when the tape showed weakness.

“Reading the tape must be learned through personal experience and long observation.” keep in mind that nothing can top experience. Don’t give up.

It is not always this easy to Read the Tape. But there are plays where it really is simple. And reading the tape will offer pattern recognition plays that you can exploit.

Overcoming a Confirmation Bias

We all fight confirmation bias. But it will harm our performance if we do not overcome it. Let the tape talk to you. And use online vehicles like StockTwits and your peers sitting next to you to gain second opinions. This does not mean mimic other traders. Just consider another opinion. That did not mean I automatically flipped my position. It just gave me some valuable color on what someone else was seeing with this stock. These other opinions will help you fight confirmation bias.

I hit the bids in a weak stock and saved myself from a five-point rip.

We take money from the markets by finding patterns, improving our skills (such as our tape reading skills), and adapting.

READING THE TAPE 101

“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.” —Jesse Livermore

When we Read the Tape, we determine whether there are more buyers or sellers at a given price. We carefully watch order flow. We search for what we call held bids and offers, and unusual volume done at the same price that creates a key intraday level.

A held bid is when a buyer buys 5–10 times more shares than we had expected on the bid. For example, if a stock creates a pattern where it does 5k shares on the bid before dropping and then 50k shares print at the same price on the bid and the bid does not drop, then this is a held bid. This is information that a huge order may be present. Why is this guy buying so much at the same price on the bid? Probably because he has a lot to buy. It is not 100 percent determinative that he has a huge order, but it is important information that he probably does. And if we spot a held bid often, we get long.

The key to being a tape reader is locating where most of the volume is being done intraday. This volume may not show up on your charts until after a significant move. Remember, charts are at their core lagging indicators. Reading the Tape is a leading indicator. Use an unbiased principle to play both sides and be mentally agile.

TRADERS ASK: “CAN’T I JUST READ CHARTS?” 

Hey Bella, 

This morning when you were trading USO on the Open and buying at the 32 level, initially 32 had dropped but you mentioned to someone else who was also trading USO that you did not hit out because you wanted to see the offer hold below 32. What was the reason for giving USO that little bit of time to see if it would hold an offer below 32 as opposed to just automatically hitting the bid once 32 dropped the way you normally would? Was it something you saw on the tape or was it just because 32 was a really important level and wanted more confirmation than just a bid dropping for the first time? 

My Response: I bought USO just in front of 32 yesterday a few times. Thirty-two has been a significant support level in USO recently. The first time USO traded up toward 30c, it slowed and I sold half. I bought some back when USO traded near 32 again. The bid dropped 32 and USO showed me the 98c bid. I did not hit it. Thus the question above. I keep tight stops. I was long USO because 32 was the support level. So why didn’t I hit USO when the bid dropped 32? Good question. My exit plan was not to hit USO until the offer held below 32 or the 31.95 bid dropped. Stocks often pretend to break levels and then trade much higher. I did not want to get shaken out in a fake breakdown. Further, I was holding USO for a large move. USO had bounced off of 32 the day before and hit 80c and even the whole a few times. This intraday there was some resistance near 32.50. So my upside at a minimum was 50c, perhaps 80c to $1. My risk/reward was still more than 5×1 if I gave USO to 94cish. 

But there is a much bigger issue here. And it is something that we preach on our desk daily. Do not fall in love with charts. The order flow is more important than any chart. Use your trading skills to supplement your chart reading. Since I did not see an aggressive seller before that first time USO dropped the 32 bid, I did not hit out. If I had seen the seller, I would have been quicker to hit out.

There are old school traders who have now transitioned to charts exclusively. Or so they think. They started reading the tape and then gravitated toward charts. But they still use their reading-the-tape skills. They undervalue these skills because they are so focused on their chart patterns. But they exit positions that are not working for them right away because of the tape. They choose entry points superior to lesser traders because of, yes, their ability to Read the Tape.

 if a stock may not hold an important technical support level. And so I exit.

It is too hard to start your career exclusively by reading the charts. If you do so, you are trading with the equivalent of one hand tied behind your back. You are missing an immensely important skill. Learn how to Read the Tape!

Remember that the best part of trading is that tomorrow you can start getting better. Well-rounded traders know how to Read the Tape.