Tuesday, January 12, 2010


Trading is not about knowing. Trading is about acting on situations, patterns, and signals that you are familiar with. This all comes from experience, proper training, and something that you and I call intuition. Intuition is required for reading the tape.

Reading the tape is basically studying pure and magnified price action. Long ago, traders used to study the ticker tape to assess price action, the volume, momentum, and other signals long before the internet was born. You must have this skill to refine and perfect your entries and exits. Since most people already know a lot about technical analysis, I wanted to cover the next evolution in your development.

Most of you know that I keep things simple and focus exclusively on price action, volume, moving averages, trends, and other simple signals. If you master price action, then you will be able to tell whether a stock is strong or weak prior to breakouts, one of my most favorite and practiced strategies. You'll be ahead of the pack of technical traders that don't know how to read the tape. Instead of going into Level 2 or the bid/ask, I will integrate the tape with charts as I am most proficient in this area.

Learning to trade requires two things. The first was mention in the second sentence of this article. The other is creating the perfect mindset that can handle unusual and uncertain liquid trading environments. This isn't something that can be taught from a textbook or in a school. It must be practiced over and over again. A teacher must demonstrate what has to be done and I will be that teacher. In addition, I expect you as the student to work on the personal experience that's necessary. Luckily, that's developed over time.

I chose "art" for tape reading because that's what it is. It's not a science. The physicist Yakov Zeldovich once said, "Science has one answer where art has many." Tape reading requires an open mind. It is also interpreted differently among traders, therefore I consider it an art. You are the artist and the trade is your artwork. A big side of trading where art plays a big role is when you adapt when the market changes it's tune. You must adjust or face indefinite loss.

The biggest benefit of tape reading for me is how it defines my entries and exits. Most of you have been following me for months, perhaps even a year and a half when I first started blogging. You already know what I do, and you know my trades already. My job is to read stock price action correctly and then viciously attack each trade. You may have witnessed me attacking the same stock over and over again in a single day. This is possible because of the synergy that technicals, charts, and reading the tape produce.

All of this leads to the "edge". Do you have it? I can tell you that my personally trained army of traders do and demonstrate it on a daily basis. They are confident in their actions. They are consistent with their results and their emotions. Our plays are easily distinguishable and we have our own style. We know exactly what to do with each setup. There is no hesitation to attack. How do they do it? It's their
edge and reading the tape is a huge component of it. There's only one way to develop an edge and reading the tape and it's through experience.

The highest possible level a trader can reach is intuitive trading. As we continue to trade, we reach critical mass that profoundly results in second nature reactions. This is your ultimate goal in developing as a trader.

The next article in this series will explain the tape in detail. We'll talk about various emotional attributes to the tape such as capitulation or euphoria, as well as accumulation and distribution,trend continuations, select high-probability setups, and many other things in future articles.


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1 comment:

C.R.E.A.M. said...

John, this sounds like a great read. Cant wait!

In my humble opinion, I am pretty good at reading price action. Especially while using 2, 5, 30, 60 min time frames and the 8, 20, 50 emas. I trade with a group in Boston and your counterpart at our group believes that the box and prints tell you every thing you want to know. but both you and I know the "edge" we get from charts. i also need to master reading the tape and the level II, like you suggest. here is my blog www.artofthetrade.wordpress.com