Saturday, January 16, 2010


We left off of part one of the series by discussing the 'edge'. The edge is basically what works for you consistently and profitably. It is
your system, and it's different for everyone. You don't necessarily need an indicator to see the trend because a chart is usually enough. A system doesn't have to be cumbersome, incomprehensible, or basically, complicated and otherwise a failure. There is a certain simplicity you arrive at after a series of complications.

This particular style of tape reading involves more with the reading of certain visual formations vs. analyzing numbers. In addition, these visual patterns work the very best with the intraday time frame. Since we want to utilize trending days for each individual stock, neutral range-bound days should be ignored. The probabilities significantly decrease on non-trending days.

The principles of tape reading basically match up price movement to crowd behavior as a 'rate of volume'. Through this, traders can see when the 'footprints' of a stock are made. These traders will be aware of when the majority moves into a stock that is presently dominated by the minority. Why tape reading is a lost art is beyond me. In fact, most trading systems don't even incorporate it, despite the fact that it stood the test of time for 400 years, give or take.

Trading wisdom states that the majority is usually wrong. Well, that depends. Tape reading is based on a handful of stock operators taking the money from the majority. We make money from the imbalance of buyers and sellers that is created. This is how trend reversals and explosive moves occur. The question is, "Are you the first one on the scene when the imbalance takes place"?

The important thing is to get there before the real breakout occurs, the path of least resistance. Consider this: not many people get in on the first sign of a major move. As more people become aware of the pending move, they accumulate shares. Then more people get in. Aggressive buying hits the stock and everyone wants to get in on the action. Keep in mind that that every buyer now is a potential seller. Finally, distribution takes place and the losers are left holding the bag. We all see it everyday.

How does the accumulation & distribution work with tape reading? The minority (you) watch how the other minority players are acting and then wait for the majority to create the mass movement. Typically, smart money can be identified by price movement when it is a slow, gradual movement with slow and steady volume. The general public's price movement can be viewed as euphoric with parabolic spikes in both price and volume to the point of exhaustion and instability.

There are six principles,k and I utilize all of them for my various day trading strategies:

1) Capitulation/parabolic exhaustion (long/short)
2) Beginning of a trend (accumulation-aggressive)
3) Confirmation of a trend (accumulation-aggressive)
4) Continuation of a trend (retracement-shallow)
5) Reversal (decreasing volume)
6) Accumulation and distribution (passive, non-aggressive)

1. Capitulation/parabolic exhaustion (long/short)

There is a pure acceleration in price movement with a massive surge in volume. Price usually advances/declines the most in the shortest period of time here. However, this move is usually unsustainable and can produce devastating sell offs or sharp bounces. This applies to both up and down price spikes. These moves usually last for only a few minutes, or even seconds, and they are the hardest to master. The key is identifying the price and volume and the accompanying imbalance in the accumulation/distribution through observing price and volume.

Usually, you see what I call "volume mountains". Yes, I call them that because they look like mountains. How do you know when to get out entirely or scale out and piecemeal your exit? We'll get in more detail on these 'mountains' in the future perhaps, but we've all see them.

2. Beginning of a trend (accumulation-aggressive)

This is a completely different idea than the one above. It is the steady, upward movement of a stock with consistent volume that usually precedes more serious momentum. There is consistent buying going on, with 'consistent' being the key word. There is not enough to attract everyone else, thus giving the stock an appearance of 'floating'. The key here is to scale in on each intraday breakout until you see signs of distribution. More on this on the future.

3. Confirmation of a trend (accumulation-aggressive)

This is a slow advance in the price movement with increasing volume, which makes it another momentum signal to pay attention to. The trend is beginning to draw the attention of the majority but is not yet ready to experience a full-scale momentum move. This precedes a powerful price move. What follows is the euphoric, sometimes idiotic, action of the majority. We'll discuss how to catch these in a future article with examples.

4. Continuation of a trend (retracement-shallow)

This is marked by a huge price increase, but with low volume. This is a classic pullback or short consolidation. You already know what these are and I don't have to explain them.

5. Reversal (decreasing volume)

Buying has slowed down and distribution is imminent = GTFO. The buying is drying up and this is your last chance to get out before you turn into a bagholder. Volume is especially important here. I will cover examples and models of how volume acts here in the future. Bottomline, volume indications help us determine our actions since price action is not as relevant or important as volume here.

6. Accumulation and distribution (passive, non-aggressive)

Large volume of buying with no price change typically tells me that there could be a shadow resistance level with a quite a bit of overhead supply. Most of the time though, the resistance is defined by identifiable resistance lines and even better, moving averages. I sure love those moving averages. This principle identifies 'stand offs' on both sides and I would be extremely cautious here. Of course, more on this and the others later on in the series.

Friday, January 15, 2010


Thanks to everyone that watched my Stocktwits TV show "Charts Gone Wild" last night. Thank goodness there were no technical problems. A lot of people loved the show and the new program that Stocktwits is running. If you missed the show, it's in the archives on The program will be back to the regular Tuesday 10PM scheduling.

The next tape reading article will come this weekend.

I received more inquiries on private coaching just randomly over the past few weeks. If you are absolutely serious, then shoot me an e-mail at JCLee84 @ hotmail .com (no spaces). We can discuss what it is that you need and how I can help you. I am willing to start my first session for 2010 on Janaury 23-24th. I have already e-mailed the ones that have expressed their interest. Thanks!

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.


If you haven't done so already, vote for me in the ShortyAwards in Finance. It only takes a minute and I'll appreciate it greatly. For those that already voted, thank you so much.

Monday, January 11, 2010


I was interviewed by Tim Bourquin over at a few days ago. It is up and running right now (the audio is where the red arrow is):


Here's a little on Tim:

Tim Bourquin is the co-founder of both the Online Trading Expo (now Traders Expo) and the Forex Trading Expo. While a police officer with LAPD, Tim was trading the stock and currency markets by morning and arresting criminals by night. When he went looking for a convention for traders to learn more about how other traders were approaching the markets, he couldn't find any.

So in 1999, along with a business partner, he started an annual convention and tradeshow for online traders and investors. Those events continue to be the premier events for active retail traders with shows in New York, Las Vegas and Los Angeles.

After speaking with countless traders throughout the past 14 years as a trader himself, Tim realized that the best way to learn how to make money trading was to ask those who were already doing it every day. Tim set out to find the best in the business and ask them exactly how they made their money. Some people talked to him and others refused, but through persistence, he was slowly able to interview hundreds of traders about their strategies. In 2006 Tim founded, an online media site featuring those frank discussions.

Each week Tim interviews successful full-time traders and asks them tough questions about the strategies they employ, the software they use, and how they became confident in the markets.


I'm going to restart my educational articles.

Tape reading is only thing that I value just as equally as my charts and technical analysis. Being able to properly read charts and analyze technicals gives you an edge over many traders. However, reading the tape gives you the advantage over all of the technical traders that rely solely on charts and do not know how to read the tape. Perhaps you are missing this one element and I will use this entire week to talk about reading the tape.

I am #9 on the ShortyAwards for Finance. I know you guys can do better than that. Take a minute out of your day and vote, no matter how 'non-hetero' you think the awards are: