The Lost Art Of Trading: Being A True Tape Reader

In Summary:

• Tape reading, trader Paul Tudor Jones says, has become a “lost art form” despite many benefits
• Reading the tape gives you an edge in trading and helps you break out from the crowd

What Is Tape Reading?

Tape reading, a trading technique dubbed by legendary trader Paul Tudor Jones as “something of a lost art form”, has led investors to amass great fortunes. Tape reading has been somewhat shunted aside nowadays due to the flood of information found online. But in reality, this technique of reading the market continues to be present and relevant to current market developments.

Tape reading is essentially the act of determining from “the tape” the immediate trend of prices. In other words, tape reading is the study of price movements as they appear on the modern trading chart.

The tape, or trending price, registers every single move of market participants. It contains the condensed opinion of the majority and weighs hopes, fears, greed, and portrays them onto an uninterrupted price trend. For this reason, WD Gann, a master of technical analysis, says the tape can be your guide if you know how to read it. “The tape tells the truth if you can interpret it correctly,” Mr. Gann states in his book “Truth of the Stock Tape” from 1923.

A Brief History Of The Ticker Tape

Tape reading is one of the oldest ways in which day traders analyzed stock prices. Around the 1900s, stock prices were transmitted over telegraph lines on a ticker tape. For its part, a ticker tape would give traders the current quote of a given stock. It also included trading volumes and the ticker symbol, like GE for General Electric. It was called a ticker tape because it’s practically a long paper ribbon with stock quotes on it.

Back then, stock tickers were considered a revolutionary achievement in the brokerage industry. Machines across the US were being installed and traders were ecstatic about the chance to see almost real-time prices of their favorite stocks.

Once computers started to become popular in the 1970s, the hype around reading the tape began to fade. While ticker tapes still exist, they are no longer as popular as they were in the old days. However, similar strategies are used by today’s traders. Your online trading platform, powered by charting software, originates from the classic ticker tape.

How To “Read The Tape” In Any Market

Successfully reading the tape requires a certain skill set that is not limited only to reading the tape. Tape reading is also a psychological exercise as our minds interpret data differently depending on our perceptions.

What makes you a tape reader is your ability to decide from the tape when to sell or buy any given asset. When ticker machines were introduced, people would gather around them and wait for new quotations to come out. Today’s technology has made a tremendous difference in the way traders work with prices and charts; the modern version of “reading the tape” is to analyze prices and how they move on the chart.

The tape is simply a record of prices, and regardless of the market, price changes happen to any financial asset. In that sense, once you learn to read the tape, you can go into any market and trade virtually everything.

What Moves The Ticker?

Market movements depend upon supply and demand. The tape absorbs and reflects the momentary supply and demand in any particular stock, currency, or cryptocurrency. The volume of trading, on the other hand, allows you to understand the forces behind the price move.

Prices can be moved by large or small amounts of volume. Generally, stronger moves happen when the trading volume is large relative to the size of the move.

In order to make sure you’re on the correct side, is to observe the tape and set clear entry and exit points. Although accessing and participating in the market has become easier than ever, making the right moves is far from straightforward, and statistics show more traders actually lose money than make money. In that context, what the tape can do for you is show you where smart money acts differently from the public.

Smart Money vs Dumb Money

The main difference between smart money and dumb money is the trading result. Put simply, smart money makes more money, while dumb money gets lost. Also, smart money could refer to investors who know what they’re doing and invest profitably. On the other hand, dumb money refers to investors who are not familiar with how the market works and end up losing their funds.

How is this relevant to tape reading? Some analysts and market strategists say smart money leaves a trail on the tape. In other words, by looking at prices, you can spot footprints of smart money’s action, interpret those clues, and position yourself on the winning side.

If this realization sounds theoretical, introducing some trading rules to your strategy will help you put it into practice.

Rules For Successful Trading

1. Capital requirement – before you launch yourself into trading, make sure you’re setting out with enough funds to stay in the game as long as possible. If you had to go on a road trip, you wouldn’t do so on an empty tank, or without enough gasoline.

And yet, many people go to the financial markets without knowing how much capital it would take for them to succeed. To this end, stay in line with realistic expectations, and don’t expect to get rich in a few months.

Instead, fund your account with enough money so you could learn the ropes, experience a few losses, and take off with sizeable profits. A lot of people go into trading with the expectation to make huge gains. While this may be true for some traders, speculation is tricky and requires a lot of research and discipline.

2. Limit your risk – a good risk management strategy is just as essential as enough capital to get you going in the markets. You can stay safe by not going all in on any given trade, and by limiting your risk; you can always have another go if your trades don’t pan out initially.

Stop-loss orders can also help

protect you from any significant drawdowns. A stop-loss order will immediately close out your trade if the financial asset reaches the price at which it is placed. That way, if a position turns against you, it will only catch the amount you’ve set before the stop-loss order.

3. Overtrading – trading too much could actually have a negative effect on your trading results. Further, many traders who think excessive trading will yield more profits, end up with significant losses.

With this in mind, don’t exhaust your account by overtrading. Instead, focus on opening trades only when you are convinced the trade will move in your favor.

4. Don’t let a profit run into a loss – this rule is especially important because it’s easy to violate it. Once you get into the market and open a profitable trade, you may be tempted to let it run more than necessary.

Secure a profit before it’s too late and don’t expect too much from any given trade. You can also set up stop losses once your trade is in profit or use a trailing stop to make sure you won’t let it run into a loss.

5. When in doubt, get out – when you go into a trade but your position is not acting right you have to stay focused on it. If the financial asset you’ve purchased has not moved in your favor and this is making you feel uncomfortable, consider getting out. Doing this will give you peace of mind and the chance to wait for a better opportunity to enter the market!

Summary

In conclusion, make sure to always do your part when reading the tape, or interpreting price moves. Stick to trading rules which will guide you along the trading journey and will help you stay active, stay defensive, and keep growing. When trading the financial markets, Paul Tudor Jones says, “you have to be a tape reader, which is something of a lost art form.”

He goes on to clarify that “these days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything. And that the primary task is simply to find that explanation.”

“As a result,” he says, “technical analysis is at the bottom of the study list for many of the younger generation. Particularly since the skill often requires them to close their eyes and trust the price action.”