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Reading 101
Bidhitter.com
Introduction
What
is
tape
reading?
Tape
reading
is
the
art
of
studying
pure
price
action
in
real-time,
based
on
the
data
fields
in
the
Level
II
box.
Using
the
tape
you
are
able
to
gauge
players
psychology
and
imbalances
in
supply
and
demand
to
formulate
trades.
Tape
reading
is
a
leading
indicator
because
it
analyzes
current:
bids,
offers,
and
volume
transacted
at
a
given
price
(collectively
known
as
order
flow)
as
they
happen,
unlike
charts
and
studies,
which
are
derivatives
calculated
from
order
flow
data
and
displayed
after
the
fact.
Bids,
Offers,
and
actual
transactions
are
what
happen
NOW.
Charts,
MACD,
RSI,
are
created
later.
They
are
the
history
of
price
action.
Because
you
see
the
characteristics
of
buying
and
selling
as
it
happens,
developing
this
skill
will
improve
your
entries
and
exits,
minimizing
your
risk
and
maximizing
your
reward
by
allowing
you
to
catch
larger
moves
using
smaller
stops.
Tape
reading
is
a
tool
that
will
put
you
ahead
of
many
other
traders
who
think
technical
analysis
is
the
only
skill
they
should
know,
giving
you
access
to
more
plays
that
charts
simply
dont
show
you.
With
tape
reading
you
will
be
able
to
determine
where
the
stock
is
going
to
move
70%
of
the
time.
Why
is
tape
reading
important?
Because
it
gives
you
an
edge,
an
additional
tool
to
improve
your
entries,
exits,
and
trade
management.
Back
before
charts
were
actively
used,
most
intraday
traders
would
trade
by
using
their
skills
of
reading
the
tape,
and
reading
the
tape
only.
There
were
no
charts
or
indicators
for
them
to
use.
The
last
thing
tape
reading
gives
you
an
edge
to
combat
the
algorithms
and
HFTs
prevalent
in
today's
trading
environment.
What
can
you
see
on
the
tape
that
you
cant
see
on
the
charts?
Bar/Candlestick
charts
depict
a
range
of
price
action
defined
by
the
open
price,
range,
and
close
price,
over
a
specific
interval
of
time,
or
in
the
case
of
tick
charts
the
price
action
over
a
specified
number
of
transactions.
What
the
individual
bars
don't
tell
you
is
how
bids
and
offers
acted
at
a
given
price,
or
the
specific
volume
transacted
at
a
price,
within
the
time-frame
(or
transaction
count
in
the
case
of
tick
charts)
of
the
individual
bar.
By
reading
the
tape
you
can
see
the
active
buyers
and
sellers
and
see
what
levels
they
are
participating
at
by
watching
the
supply
and
demand
they
seek.
You
can
follow
a
certain
buyer
and
recognize
the
pattern
in
which
he
is
accumulating
the
stock.
The
same
goes
for
sellers.
With
tape
reading
you
can
feel
how
the
market
is
taking
your
orders
and
have
a
sense
as
to
whether
a
certain
stock
is
weak
or
Bidhitter.com
strong. For example: if a stock looks weak on the chart but it is very difficult for your bid to get hit then that is a clue that there is not that much selling happening, so the stock might not be that weak after all but more on this later. Finally, charts are showing you past data... granted charts are valuable, but when you mix tape reading and technical analysis you will have an edge many intraday traders do not possess. How tape reading is an art and not a science Tape reading is not a science. It is not like learning how to do an experiment, and then being able to repeat the experiment with success ad infinitum. Because trading is a probability driven activity, and different stocks have different personalities, tape reading is something you learn over long periods of observation and personal experience. The more you watch the tape, the more you will be able to identify certain patterns. The basics of tape reading are very simple, but after you understand the foundation of tape reading you will only get better over time. How does tape reading affect efficiency with entries and exits? We defined the difference between the tape and charts in an earlier question. The granularity of real-time data on the tape, because it allows you to analyze intra bar data. It also allows you to choose entries and exits, with finer granularity. You don't have to wait until the next bar on the chart to make a decision, which could both reduce your profit potential and increase your stop risk. Here is an example of using the tape to get long at a great entry:
Bidhitter.com
In this chart, you can see that GMCR gapped up big on news over the weekend. By using just the charts, your entry would have been long at $34.15 when it broke the high or even $33.96 when it broke the mini range. By using the tape to find an entry you would have noticed there was a held bid and accumulation around the $33.50 level. You could have gone long at $33.51 with a stop at $33.44 (or when the bid dropped and offer held below 50c). That would have been a great entry and tighter risk using the tape instead of getting long at $34.15 or $33.96 risking about 50 cents. Also, your risk reward ratio is heavily skewed in your favor using the tape. How does tape reading lower risk? A good example is the one above on GMCR. By using the tape you can spot accumulation (held bids) or distribution (held offers) and go long (just above a held bid) or go short (just under a held offer), using a break of the held level as your stop. If you are looking to buy in an uptrend, or add to your position, but do not want to chase you can look for a held bid to get in, and the subsequent failure of the held bid to get out, keeping you from taking on unnecessary risk. Below is an example of lowering your risk while finding great entries and exits:
ASTM
was
in
play
after
a
trading
halt,
and
subsequent
re-opening,
moving
down
sharply,
we
dont
usually
play
stocks
that
are/were
halted
but
this
presented
a
great
risk
reward
situation
to
enter
a
trade.
Although
ASTM
is
a
cheap
stock
(we
dont
usually
trade
sub
$10
stocks
either)
there
was
a
great
opportunity
to
trade
it.
ASTM
opened
up
after
the
halt
and
dropped
sharply.
We
looked
for
a
great
entry
to
short
while
keeping
our
risk
low.
ASTM
bounced
and
started
to
hold
an
offer
around
$3.60.
Also,
when
the
offer
was
being
held
another
big
offer
showed
up.
CONFIDENTIAL:
BIDHITTER
HOLDINGS,
LLC
Bidhitter.com
You can't see that on the chart, but you can, if you know what you are looking for, see it on the tape. We got short and waited for the offer to get filled to get out. Our risk was about 3c if we saw the order decrement quickly we would have hit it also and not waited for it to get filled. Some of the order got filled but not quickly then the stock dropped. The stock kept dropping and the offer kept stepping lower. Finally the remainder of the order was filled around $3.15 where we exited. Not a bad trade risking a few pennies to make about 45 cents. How does skill at tape reading improve understanding chart patterns? Tape reading will improve your understanding chart patterns because you will be able to see the supply and demand dynamic in real time. A prime example of this is GMCR from above. GMCR showed some technical support and you saw there was accumulation on the tape, a great set up to get long while keeping your risk tight. Also, with tape reading if a stock reaches a significant long term technical level you can spot on the tape how its reacting to it and play it from there, all by seeing what the buyers and sellers are doing real time. How do you improve tape reading skills? Improving your tape reading skills will take time. You will only get better by watching the tape. You will understand and see more things on the tape 3 months from now than you will see today. To help accelerate the learning curve you can watch video recording of your trades or watch video tape from the Bidhitter.com library of trading tapes. It is easier to spot something on the tape when you are not in a trade and the market is closed. As I said before, the best thing to do to speed up the improvement process is to screen record your trades, and then review them after the close when you are not under the stress of the trading market, and to tap into the Bidhitter.com video library of recordings. Trading the open with only reading the tape Trading the open with just charts is difficult because actionable levels for the day have yet to be defined. Granted, you have previous technical levels from other days and time-frames but your edge on the open will most likely be on the tape. Intraday traders make most of their money on the open and the close because those are the times when the market and individual stocks move the most and have the most volume during the day. By knowing the Market Maker box you can find key levels, almost predicting where the chart will go, and find good entries for longer-term trades. With the Market Maker box you will be able to find key levels where significant volume has been done and trade off those levels while keep your risk tight. If a certain level has done a significant amount of volume and doesnt break it, then you have spotted a great entry to trade
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with a core while scalping around it to lower your risk and make some quick chops when you spot them on the tape.