Tape Reading

Presented By: Geoffrey A. Smith DTIs Chief Instructor

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There is a very high degree of risk involved in trading. Past results are not indicative of future returns. DTI Partners, Inc. and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the futures trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of DTI Partners, Inc. may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Past perform ance is not indicat ive of fut ure result s. 2

Tape Reading 101

Opens Relevance vs Importance Ranges

Opens
Open of the Year Open of the Quarter Open of the Month Open of the Week Open of the Day Open of the Reference Bar Half Hour Open
The Open of the Year is the most important The Half Hour Open is the most relevant

Bridge Relevance and Importance

A number is relevant when it has a reasonable

ability to influence the current market action.

Open of the Day > Open of the Year

A number is important as its order of

magnitude increases.

Open of the Year > Open of the Day

Ranges
Like Opens Year Quarter Month Week Day Reference Bar Half Hour

Ranges 2
Some Ranges can extend their importance

with the voracity of their numbers A High or Low that contained the market two or three weeks ago can come back into focus and become a market changing event. The next Chart displays a daily chart leading up to September 4

Daily Chart ES Jan 22, 2010

Support around

1112.00 Held for 4 weeks 109.75 was the low on December 31 The ES broke below 1109 at 5:45am on Jan 22 The market reached a low of 1086 by 15:00 on Jan 22

Summary
Opens Represent Points of time in the market

that create Key Numbers Ranges represent levels in the market that create key numbers A number is most relevant when the market is trading near it. A numbers importance derives from its magnitude All numbers are meaningful

Tape Reading 201

Repetition of Numbers Higher Levels Natural Numbers

Repetition of Numbers
Seeing the same number more than once is

interesting. Seeing the same number on 5 to 6 different occasions is noteworthy. Seeing the same number more than 10 times reason to take notice. Seeing the same number more than 20 times is a clear statement from the market.

Higher Levels (the digits in front)

In Looking at numbers, the higher levels

should be excluded, but also noticed Example:

The 2009 High of the Year is 1128.50 The March 2009 open is 731.25 The May 2009 High was 929.50 The November 2009 open was 1031.25 The key number is between 29-31

Notice there is 100-200 points difference in

the numbers

Natural Numbers
Some Numbers will exert influence regardless

of repetition. Natural Numbers are Halves and Wholes In the ES Natural numbers are the 100 and the 50 level
1200.00, 1250.00, 1300.00

In the Dow Jones Futures Natural numbers are

500 and 1000

11000, 11500, 12000

Summary 201
Repeated numbers become more important

when they repeat more often Higher Levels should be shed when comparing numbers, but remembered for their significance Natural numbers are always important even when not repeated

Tape Reading 301

A Pattern in Numbers Strength of Numbers

A Pattern in the Numbers

Not all Patterns are the same. Each market has a Basic Pattern The Basic Patterns are helpful to know They are not EXACT In the YM the Basic Pattern is Quarters In the ES the Basic Pattern is Eighths

Quarters Pattern
The Quarters Pattern Breaks the market down

into equal Quarters on a 100 point Scale. The Quarter levels are 25, 50, 75, and 100 Therefore in the YM we would expect key numbers at 10025, 11050, 12075, and 13000. The First three numbers are irrelevant to the pattern: 11025

Eighths Pattern
The Eigthts Pattern Breaks the market

down into equal Eighths on a 100 point Scale. The Eighths levels are 12, 25, 37, 50, 62.50, 75, 87, and 100 Therefore in the ES we would expect key numbers at 1012, 1125, 1237, 1350, 1462.50, 1575, 1687, and 1700. The First two numbers are irrelevant to the pattern: 1237

Strength of Numbers
Through Observation you will find some

numbers exert greater influence than others. The Natural numbers serve as good, but not the only Examples A strong number often creates a buffer range. In the ES 1250.00 would be surrounded by a buffer range extending from 1248.00 to 1252.00 Stronger numbers can create wider ranges Therefore it can be more difficult to know

Summary
Patterns can identify levels of support and

resistance Basic patterns of quarters and eights can be applied to certain markets Strong numbers can exert an influence to create a buffer range.

Tape Reading 401

Pattern Recognition

Pattern Recognition
This is the true tool of the tape reader Some people are more adept at this than

others Jesse Livermore read the tape, and his explanation of what he was doing was both frighteningly simple, and seemingly impossible to follow.

Patterns in Prices The Message of the Tape

As time passed, Livermore began to believe he could discern patterns, or

repetitions, in the waves of numbers that flowed each day from the tape. He began to write the numbers in a notebook and tested himself, predicting the direction that different stock prices would take: "Say that after studying every fluctuation of the day in Sugar I would conclude that the stock was behaving as she always did before she broke eight or ten points. Well, I would jot down the stock and the price on Monday, and remembering past performances I would write down what it ought to do on Tuesday and Wednesday. Later I would check up with the actual transcriptions from the tape. That is how I first came to take an interest in the message of the tape. The fluctuations were from the first associated in my mind with upward or downward movements. Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn't go into explanations... The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now - not tomorrow. The reason can wait. But you must act instantly or be left. Time and again I see this happen. For more Information on Jesse Livermore and Patterns go to:

http://www.jesse-livermore.com/price-patterns.htm

Ways to develop the Skills

Recognizing Patterns in markets is a

learned behavior. Some things you can do to train your mind.

Logic Puzzles A puzzle deriving from the

mathematics field of deduction

Pioneered by Charles Lutwidge Dodgson (Lewis Carroll) Sudoku Here is a game specifically designed to find and develop patterns in numbers.

Good Tape Readers are Great at Sudoku

Summary
Pattern Recognition is a critical tool to any

tape reader. Jesse Livermore was adept at recognizing the patterns in the tape. Logic Puzzles can help to train your mind. There is NO Simple answer

EXAMPLE
Time of Day Gathering Numbers Mini Pivots Reading the Tape

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Time of Day

Open

Close

ES (emini S&P) 15:30 15:15 NQ (emini NASDAQ) 15:30 15:15 YM (emini Dow) 15:30 15:15 Globex (night session) 15:30 08:30 Day Market 08:30 15:15 Markets open Sunday 17:00 15:15
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Gathering Numbers
Globex High Globex Low Previous Day High Previous Day Low Globex Open Day Market Open Month Open Week Open Year Open

1079.75 1063.00 1078.00 1057.50 1076.25 1065.00 1070.00 1062.00 1113.75

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Arrange Them in Order High/Low

1113.75 1079.75 1078.00 1076.25 1070.00 1065.00 1063.00 1062.00 1057.50
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Mini Pivots
Using the gathered numbers, look at the open

of each 30 minute bar. If all markets are above the open, look to go long If all markets are below the open, look to go short

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Tape Reading
Start watching the markets and watch to see

what they do Look at what they can do and what they cant Lets look at the market

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Questions?

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