Tape reading

[charcoalstick]

I am interested about reading the tape.
What are the some of the common "patterns" to take note of such as price movement or timing between transactions?

 

[Mr. Charts]

http://www.trade2win.com/knowledge/articles/general_articles/an-example-of-tape-reading/
Richard

 

[charcoalstick]

intervals

http://www.trade2win.com/knowledge/articles/general_articles/an-example-of-tape-reading/
Richard

Mr. Chart, thanks for the link.


Db, you mentioned in the thread "The Wit and Wisdom of Richard Wyckoff":

"But if we study the action of prices; the responses; the speed of the ticker, indicating urgency or the contrary; the intensity of the buying or selling, as indicated by the volumes; and the intervals when the volume is heavy or light -- all these in relation to each other -- then we gain insight or the design and the purposes of those who are dominant in the market situation for the time being."

Can you enlighten me how does "the intervals when the volume is heavy or light " tell you about the market?

thanks

 

[charcoalstick]

article

Most beginners in trading heard about the concept of tape reading. Unluckily, there is not much materials available that explains it in details. I hope I can provide some guidance here for our readers to learn the basics of tape reading.
What is Tape Reading?
Tape Reading is the study of raw price actions down to the finest resolution - where each trade occurs and where all possible bid/ask updates are monitored.
The term tape comes from ticker tape, print out by the ticker tape machines available since 1870s which reports the latest trade/bid/ask update information.
Nowadays, if you think about it, such information is very hard to interpret due to the fact that the amount of data to process is huge. This concern alone makes tape reading something mystical and sometimes even regarded as born with talents because many well known professional traders are famous for their tape reading skills.
By reading the tape properly, a trader is supposed to be able to tell if the market is weak or strong. This extra information is critical for trading, especially useful when you are daytrading. Just think, if you can identify the strength of the market you trade correctly 90% of the time, you will be able to take advantage of that to wait and buy at bid (when the market is weak), or sell at the ask (when the market is strong). That along will improve your trading performance drastically.
Basic Tape Reading
1. Do not look at the tape all the time, focus on the tape only when the market is closing in at critical price levels (previous day high, previous day low, pivot point, etc.).
2. Best is looking at a depth window with the current bid ask listed at the top, next is watching the quote window with the best bid and ask at the side. Using time and sales window to read the tape is not recommended.
3. Learn to identify 2 distinctive behaviours - a. when the market is moving in a particular direction, is there a lot of resistance. b. when the market is charging a particular price level, is it taking out that price level decisively.
4. Learn to identify a third state - the market is confused.
Some Useful Hints at Learning Tape Reading
When a price level is a strong resistance, the asking price will keep reappearing again and again even though the price got taken out a few times.
When a price level is a weak resistance, the price will be taken out decisively (sometimes after struggling for a short period of time).
A confused market will usually rally to a particular price point and then drop suddenly to a lower but close by price level. The market will then struggle between the two price levels. That implies a confused market and it is not likely you can figure out the direction of the next big move. In this case, stay at the sideline.
Having huge size in the bid does not necessarily means the bid is strong. On the other hand, when a bid got hit and trades started to fill at the bid, while the bid size keep increasing, that is a strong bid.
Tape Reading is Not Fool Proof
Tape reading is a useful technique but it is not 100% correct all the time. Thats true especially when some major players are hiding their bids and offers.
When the buy side traders are scaling into a position (i.e. buying at the bid while the price is dropping, or vice versa) it is then very hard to identify the strength of the market. That will usually results in V-shape reversal price pattern.

 

[firewalker99]

The principles of Tape Reading (Graifer)

Tape reading principles suggest that the majority is usually wrong. The idea of tape reading is based on the obvious fact that, in the markets, only a handful of players take the money - from the majority. The market usually moves in a way that hurts as many players as possible. The path of least resistance is opposite to what the majority expects. To define the direction that the crowd does not want or expect means to define the way the market is going to move.

The cycle of accumulation and distribution favors the minority who can read the tape of the market and participate at levels that feed off the usual ignorance of the majority. It may not be fair, but it's how the game is played. Tape reading principles allow you to watch how the minority is participating and then how to profit from when the majority creates the herd movement, which signals a short-term stop to the current trend.

Smart money action can be seen as a slow, gradual price movement with steady or slowly increasing volume. The public's action is characterized by hysterical and parabolic price spikes, almost vertical movement with a sharp volume increase.

The importance of tape reading is its ability to saves us from making market predictions and arbitrary egotistical assumptions about the value of a commodity. What is important is where the shift of supply and demand for a particular issue in any time frame moves price.

Tape reading and technical analysis are not mutually exclusive. Tape reading is the root, whereas technical studies and indicators are derivatives. They play the role of interpreters. The market talks to us in its original language of price, volume and pace. You can read this language on your own, or you can use the help of interpreters to one extent or another.

With the use of reading the crowd mentality and the footsteps of the minority, we are able to put the probabilities of success on our side. We are not concerned with creating certainties in the market because the market is too random to achieve any kind of certainty. We are concerned with putting the probabilities on our side. An understanding of true market reality increases our chances for success. There is no Holy Grail of trading, but there is a window of truth into the market, and our tape-reading principles can allow this window to be wide open for your domination of the trading arena.

 

[dcraig1]

Which side of the book size is on is quite significant in trading stock index futures. In general, the market moves towards size - until it doesn't, either because there is a lot of size or demand dries up, which is kind of the same thing anyway.

Attached is a chart of today's DAX. The lower plot is a smoothed representation of the ratio of size at ask (total at all five levels) to total size in the book (total at all five bid and all five ask levels). Notice how the order book "delta" stays below 0.5 (size is on bid) almost the whole way down. The gradual rise in the ratio culminating in the cross of the 0.5 level is very typical of the termination of a trend. While the level stays below 0.5, taking a counter trend position is a poor idea.

The single blip above the 0.5 line (at about 6667 - 6668) is around about the floor pivot. Also close to the market profile point of control.

Each chart bar is 75 contracts.

 

[dcraig1]

Same chart with ratio of trades at bid/trades at ask also plotted (lower subchart). We can see capitulation at 6550 -6553 (stops hit ??). Combine that with the order book delta, and it is a very good way to pick a bottom. Data feed is IB, so sometimes the at bid/at ask ratio is not 100% accurate, but IMHO good enough.

 

[firewalker99]

Which side of the book size is on is quite significant in trading stock index futures. In general, the market moves towards size - until it doesn't, either because there is a lot of size or demand dries up, which is kind of the same thing anyway.

Attached is a chart of today's DAX. The lower plot is a smoothed representation of the ratio of size at ask (total at all five levels) to total size in the book (total at all five bid and all five ask levels). Notice how the order book "delta" stays below 0.5 (size is on bid) almost the whole way down. The gradual rise in the ratio culminating in the cross of the 0.5 level is very typical of the termination of a trend. While the level stays below 0.5, taking a counter trend position is a poor idea.

The single blip above the 0.5 line (at about 6667 - 6668) is around about the floor pivot. Also close to the market profile point of control.

Each chart bar is 75 contracts.

I've attached my chart of the same situation, this is how I see it. In fact both views seem to confirm the same analysis that indeed a bottom (perhaps temporary) was found.

At the previous day price reversed off 6650 and today we breached that level but a very quick recovery, on the next bar brings us back above that level. Notice also the high volume peak. Shorting before that was indeed risky as there wasn't any real support to be found higher than that level...

You might be interested in looking at the DAX threads in the European Indices forum also, hasn't been much activity lately, but it's the holiday season...

http://www.trade2win.com/boards/showthread.php?t=17438
http://www.trade2win.com/boards/showthread.php?t=22193

Edit: do you pay much attention to the action these days (considering low volume)?

 

[dcraig1]

Another chart, this time ER2 showing the utility of the order book "delta" on stock index futures. From my scribblings on the chart, observe how an upward channel was forming until price breaks straight through it at around 801.5. Size was still moving onto the bid - fairly convincingly.

Also notice subsequent reversal when order book delta crossed the 0.5 level.

 

[dcraig1]

I've attached my chart of the same situation, this is how I see it. In fact both views seem to confirm the same analysis that indeed a bottom (perhaps temporary) was found.

At the previous day price reversed off 6650 and today we breached that level but a very quick recovery, on the next bar brings us back above that level. Notice also the high volume peak. Shorting before that was indeed risky as there wasn't any real support to be found higher than that level...

You might be interested in looking at the DAX threads in the European Indices forum also, hasn't been much activity lately, but it's the holiday season...

http://www.trade2win.com/boards/showthread.php?t=17438
http://www.trade2win.com/boards/showthread.php?t=22193

Edit: do you pay much attention to the action these days (considering low volume)?

Also agree with your analysis. If one wants to use tape reading techniques (and I include the DOM in that), then IMHO they should be applied at S/R levels - even if those levels are very short term as shown on the ER2 chart.

I'm mostly interested in scalping (which I think means different things to different people - maybe 10 - 30 trades per day), so I'm not really applying much thought to the somewhat longer term - so not drawing any particular conclusions from the low volume days.

 

[firewalker99]

Also agree with your analysis. If one wants to use tape reading techniques (and I include the DOM in that), then IMHO they should be applied at S/R levels - even if those levels are very short term as shown on the ER2 chart.

I'm mostly interested in scalping (which I think means different things to different people - maybe 10 - 30 trades per day), so I'm not really applying much thought to the somewhat longer term - so not drawing any particular conclusions from the low volume days.

Scalping can be many things of course, depends on how long you're holding ,seconds or minutes... I've noticed you posted some stuff in the Dax Cycles thread, I'll have a look at that too. So you trade DAX and ER2 (me too, although ER2 not so often, more NQ), do you look at others too? Or follow DOW after US open to lead DAX?

I'd have to admit that market delta is mostly uncharted territory for me... but I believe rustic1 is into that...

 

[dcraig1]

I'd have to admit that market delta is mostly uncharted territory for me... but I believe rustic1 is into that...

Not market delta which is basically difference of volume of trades at bid and trades at ask. The charts I posted were of the order book delta (my own term) which is the difference of size of all bids at all levels in the book to size of all asks at all levels in the book. ( Actually the charts show ask size / total size - which normalises it in the range 0 - 1.0).

I've had a fairly long look at market delta footprint type charts, but I'm only partially convinced. There are some great examples on the MD web site, but unfortunately it aint always that way. When I post charts I try to post the current session which somewhat reduces the opportunity for selecting historical charts that support ones point of view.

I do think the MD is very usefull on very short term charts - using IB's feed and bars between 5 and 20 'ticks' wide for DAX, ER2. Just the histogram type plot I posted ( line plot just as good) not the fancy footprint style which is difficult to impossible to calibrate on such a short time frame. Like everything else MD must be taken in context.

As for trading I will be getting back into it in the New Year. I've been spending an awfull lot of time developing my software (which produces the posted charts). The software is not just for charting but also to provide infrastructure for eventual ATS though when (or even if) that might happen is unknown right now. And no I'm not an aspiring software vendor.

Preferred markets will be, for time zone reasons, DAX and asian markets - Nikkei, K200 and possibly HSI and SPI. ER2 possibly in the US morning session.

 

[firewalker99]

When the ticker tape is running late...

http://money.cnn.com/2007/02/27/markets/dow_drop/index.htm?postversion=2007022719

"Around 2:00 pm today the market's extraordinarily heavy trading volume caused a delay in the Dow Jones data systems and as a result, the calculation of the Dow Jones Industrial Average temporarily lagged behind the market decline and as we identified the problem we decided to switch over to a back-up system and the result was a rapid catch-up in the published value of the Dow Jones Industrial Average," explained a Dow Jones spokeswoman.

For those who've read their classics will know that I am refering to "the ticker tape is running late", "flash prices", etc...

That was exactly the time to buy and I did. It took only 15 minutes to get almost 200 points higher, enough to call it a day!

 

[firewalker99]

Two big selling days

Recently we had two big selling days: February 27 and March 13. For outsiders very similar, but for tape readers there were important signals in the second day that this was a retest of the low after a potential selling climax and not a continuation of the plunge we had seen before.

Anybody trading that day and looking and watching the candles (or bars) form could "sense" how buying was coming in. Price didn't just move lower without hesitation, it was gradually, and the volume on the buying was substiantially different from the buying (if any) on the first selloff day.

Consider the first big selloff on YM where we moved from 12550 to 12100. Along the way momentum picked up and the selling became fiercer, not only does the angle of the orange lines becomes steeper, also the volume increases. Notice how we don't get any upbar near the low of 12100 and have almost 10 successive red candles. Fear was all around at that time.

Compare this to the second selloff day (March 13), and you notice that each "wave" leads to a potential selling climax. The first one brings us from 12260 to 12175 (85 points), the second one from 12175 to 12110 (65 points), and the last one from 12150 to 12100 (50 points). But there is already some buying going on here. At the first small oval you see a "stopping bar" followed by an upbar on volume lower than the previous bar (absence of selling pressure). Unfortunately buying was not strong enough to make this push last. But notice how the next selloff only reached slightly lower (and a lot more volume was necessary for this!). So, in contrast with the other day, momentum was noticeably not picking up pace!

The 1400 volume bar (highest of all) definitely had a lot of buyers in it, they manage to push price back up 50 points. But still prices drift lower near the end of the session... Buying in a downtrending day is by definition a risk and trying to catch the falling knife. But this time the knife wasn't falling in free air. It had interruptions and small all those paying attention that day would have been on the lookout for an upday (reversal) because selling had become near-exhausted. Incidentally the next day we went lower but made a V-shape reversal.

Note: all the charts of March 07 Futures, that's why the volume on the second chart is lower in absolute values than on the first, but if you look at a June 07 Futures chart the volume will be similar. I used charts of the same contract to compare the same price levels.

 

[firewalker99]

Buying pressure

Note the importance of the 13350 level on this particular YM chart.
Each bar closes above or at that point (on a 5-min chart). Although this will look differently on a smaller timeframe, by "blending" bars together you will get to see the same.

It's important because that level broke to the upside and it shows the level of buying pressure below.

 

[firewalker99]

I posted this elsewhere 5 days ago. In the meantime we've moved to 400 points lower than these highs. And if I'm right, it will take quite some time before we see those levels again.

"Massive selling from the pro's
Look at that volume! Has to be one of the largest unloading I've ever seen."

 

[dbphoenix]

Exactly. And note that it's all "green" . . .

 

[firewalker99]

Exactly. And note that it's all "green" . . .

This is one of those occasions where I am contemplating becoming a swing trader instead of a daytrader (where I'm closing out all my positions at the end of the day)

 

[firewalker99]

Buying climax? :|

 

[erierambler]

Buying climax? :|

Maybe more like selling activity........ selling takes place on the way up.
erie