Tape Reading Mini-Mentorship

Reading tape is undoubtedly the purest form of trading. It is definitely one of the most misunderstood forms of trading, it's a skill that virtually all short-term traders would love to master, and it is also very difficult to find any useful information about on the web. The little bit of information that does come up on a search engine is frustratingly stupid, usually a YouTube video of a novice yelling out something like 'lots of red on the tape, lots of red - I think I need to short'. So if you're all about losing money, be my guest and jump into the position after you see the waterfall. Usually that entry is way too late and for all the wrong reasons. This has changed with the release of our new Tape Reading Made Simple video. It is beyond any doubt the most comprehensive work ever published about reading tape in an electronic era. It details setups ranging from a beginner level through a very advanced tape reading level, and presents things in such a way that many of the skills can be learned in a reasonable period of time instead of taking several years worth of 7 hour days staring at a Time & Sales window. Before we rattle on too much about the video, let's talk a bit about tape reading, define what it is, and give an idea of what a skilled tape reader can accomplish.

Tape Reading Defined

The term "tape" came about back in the 1870's with the invention of the ticker tape machine. It was basically a modified telegraph machine; the difference was that you didn't listen to the dots and dashes clicked on the telegraph. Instead, it printed a brief symbol of a stock followed by the price and volume of the last trade - this rolled out on a paper tape. It provided a huge increase of speed in transmitting trade information to the various banks across the country.

How was it used? Traders would stand around and read the tape - or actual executions - coming out of the machine and make decisions on whether to buy or sell. If they wanted a chart, they drew it by hand based on the closing price at the end of the day.

Fast forward 140 years and we now know the "tape" as the electronic Time & Sales window on our charting platforms, such as the one shown at left. When it is set up correctly, it conveys information that can be used to fine tune entries to a very precise level.

There is an old saying - you've probably heard it - 'the tape never lies'. That is a profound truth, which is what makes learning to read the tape so valuable.

Think tape reading won't help? Chew on this for a moment: Large traders, traders who scalp 5-20,000 ES contracts, they know all the levels - the pivot points, support and resistance areas, POC/VAH/VAL numbers, they know where traders are likely to initiate trades, and they know from the chart where other traders are likely to place stops. When you trade off of a chart, you won't know they're working until you get stopped out.

However, when you read the tape correctly, you can tell when these large traders are acting. So answer me this: would you rather see the 20,000 lot trader building a position and join him, or sit around trading off of a chart, waiting for him to pick your pocket?

Oh, and by the way, using a tick chart is not reading tape, even if you set it to one tick - it's using a tick chart. It doesn't display information in the same way. Your platform cannot draw the movement of a bar or candle in such a way that it clearly conveys the same information as a T & S window.

Really, the same goes for watching price move up and down your DOM or watching the Bid/Ask change on your Level 2 - it can be effective but it's not reading tape because it's not accurately representing actual sales and volume.