Tape Reading – What is it? How to Best Profit from it?

Trading concepts

Tape Reading

Tape reading refers to making trading decisions based on information collected from observations of stock price and volume reports. It is one of the most ancient trading techniques. 

So, what is this tape reading? Is this old-fashioned trading technique still useful? How can you best profit from it? These questions are our discussion points for this article. Let’s dive deep into the topic at hand and learn all about it.

Tape reading definition

Tape reading is a trading technique that revolves around studying and observing stock prices, volume, and time to make trading decisions. In simplest terms, tape readers observe and analyze stock prices as well as volume to enter or exit a trade. That is why “times and sales” is the alternative name for tape reading. 

Tape reading history

Trading is a profession that has been here since ancient times. Traders have been developing and refining trading strategies since then. Numerous strategies have evolved that traders use to win against the market. For example, some traders prefer to use fundamental analysis to make trading decisions. On the flip side, there are some who prefer making decisions based on technical analysis. Indeed, there are also those who observe price action for making trading decisions. 

There are also some others who make trading decisions based on tape reading. It is one of the oldest trading techniques. History tells us that traders from the late 1800s and early 1900s used to employ this technique. There was no electronic trading back then. Instead, traders used to submit market orders through telegraph lines on a ticker tape. 

This old-fashioned ticker tape included three pieces of information – a ticker symbol, stock price, and a number of shares or volume. Thus, traders back then started analyzing ticker tapes to make trading decisions. Furthermore, the tape reading technique was so successful that traders like Jesse Livermore made a lot of money.

However, the advent of electronic media in the 1960s phased out ticker tapes. Today, tape reading is still there. But modern technologies have revolutionized this area as well. Now, computers with remarkable computing capabilities and other facilities like data feeds and Level 2 quotes have made tape reading easier and more seamless. 

A modern reading of the tape

Although it is fair to call tape reading an ancient technique, it is also true that it still happens. However, its dynamics have changed over the years. Today, modern technologies have transformed tape reading as well. Thus, you don’t need to analyze ticker tape anymore. Instead, data feeds and Level 2 quotes are all that you need.

What does the reading of the tape tell traders?

A tape contains all the information about an executed trade. It is called a print that offers three crucial pieces of information.

  1. The price
  2. Volume or the number of shares traded
  3. Time at which trade was executed

Therefore, the alternative name for tape reading is time and sales. So, what does tape reading tells traders apart from these three pieces of information? Let’s see.

The first thing that it tells is to observe where the smart money is going. Yes, it tells traders about the trading moves of big fish in the market. Big players cannot hide anything from other market participants as a tape records everything. So, if they are taking big positions, they cannot hide them. Simply put, traders observe the flow of smart money and follow it. However, there are some traders who use the tape to anticipate when large financial institutions are done with buying or selling to trade reversals. 

Traders may also use reading of the tape to determine supply and demand. Because tape helps in determining the shifts in supply and demand. It helps them in day trading or scalping as they use price action to make trading decisions. However, it doesn’t necessarily mean that tape reading helps only in short-term trading. Instead, it helps in long-term trading as well. Traders use it for long-term goals when they see a perfect long-term setup developing. 

Key factors to consider

Reading the tape offers certain key factors to consider carefully. 

1. Bid and ask prices

When it comes to the analysis of time and sales data, bid and ask prices are of significant importance. As you know, the bid is the best price buyers willingly pay for financial instruments. Whereas, ask is the best price sellers willingly accept for their assets.

Typically, on any broker’s platform, you will find red-colored orders that are placed on the bid price. Conversely, orders that are placed at the asking price are colored in green. And platforms print orders placed in between the bid and ask prices in white.

Why so? Because buyers buying at the asking price indicates a bullish sentiment. This is because there is no liquidity for buyers to buy at the bid price. So, when this occurs a lot of times during trading hours, it means there is a substantial imbalance between supply and demand. 

2. Direction of the market

Secondly, you can learn about the market direction through tape reading. As you know, a market trend is simply an imbalance between supply and demand. Additionally, market trends develop on all timeframes ranging between minutes and decades. And there is no better way to determine a market trend than time and sales data. Although it is true that price charts also help in determining trends. However, a tape provides extra context that proves the icing on the cake and offers further confirmation. 

Now, how tape reading helps in determining market direction? When you see a huge number of buyers willing to buy at the ask price of an offer, it indicates a bullish sentiment. In other words, buyers are aggressively buying, even more than sellers wishing to sell. Moreover, you also need to focus on above average orders because large orders make the market higher or lower. And if such orders are pushing prices high or low, that indicates an imbalance between supply and demand that you can capitalize on. 

It is important to note that tape reading helps you gauge market trends earlier than charts. So, you can capitalize on time and sales data to maximize your trading performance. 

3. Speed of transactions

Tape reading also helps determine market sentiment through the speed of transactions. Speed of order executions in one particular direction explicitly tells the market’s direction. So, increasing the speed of prints in one direction means increasing momentum. 

For example, you are interested in buying Amazon’s shares. When you look at the time and sales data, you find that one order per second is being executed. However, you see five orders being executed per second. It indicates momentum is increasing and the market is heading in a particular direction. 

However, it is also important to note that the speed of order execution isn’t a convincing indicator on its own. Traders use it with other indicators for further confirmation. 

4. Volume

As you know, small and inconsequential orders, typically a few hundred shares per trade, don’t matter. They cannot move the market in a particular direction. Therefore, it is important not to focus on such orders. Conversely, you should focus on a string of large orders ranging between 100 and 2000 shares. 

It is important to watch for such orders as large institutions place those orders. They divide one large order into a series of small orders. Large financial institutions do this to avoid unnecessary attraction. These are the orders that can easily move the market in a particular direction. By looking at the time and sales data, you can find such orders and follow where the smart money is going. 

That said, it is important to look at the volume when reading a tape. It will help you find out where the smart money is going. You can follow them and make significant gains. 

Some useful tips for reading the tape

The following are some key tips for reading the tape.

  • Firstly, it is important to know that tapes nowadays move too fast. Tapes of highly liquid companies like Apple and Microsoft move too quickly. Whereas, tapes of less liquid companies move not too fast. You should never waste your time looking at all orders. Instead, you should maintain your focus on large orders or a string of orders. 
  • Secondly, if the tape of your chosen company is moving too quickly, you can use a size filter. Most platforms offer size filters to make the game easy for you. You can choose a minimum and maximum share counts for your tape. 
  • Thirdly, it is also important to use tape reading with other techniques for decision-making. You should not rely entirely on one thing as it is your hard-earned money at stake. Instead, use time and sales data with other technical analysis techniques and price action.
  • Finally, always use tape reading for stocks with higher volatility. Reading time and sales data for less liquid stocks is frustrating. Typically, experts use this technique for stocks that are traded in millions per day. 

The wrap-up

Tape reading is a trading technique that involves the analysis of price, volume, and time to make trading decisions. It is also known as “time and sales”. Furthermore, it isn’t a technique that is new. It has been in practice for more than two centuries. However, modern computers and data feeds have also revolutionized this aspect of trading as well.

A modern reading of the tape helps you in analyzing price, volume, and time to make your trading decisions. What is its biggest advantage? Of course, it helps in understanding what is exactly happening behind your trading charts. It also makes you understand the reasons for continuous price fluctuations. 

Tape reading was highly successful even centuries ago. That’s why traders like Jesse Livermore capitalized on this technique. It is still popular and very effective. Simply put, tape reading is useful for trading trends, scalping, and day trading. With all that in mind, it is a good idea to learn how to read the tape. It will surely transform your overall trading performance. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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