How important is tape reading in the modern market?

Tape readers have an advantage over charters because they can interpret intraday data in real time and filter pages of numbers into surprisingly accurate predictions of short-term price changes. This near-legendary market technique has the added benefit of allowing supporters to gauge the emotional intensity of participants while they discover the leaders and laggards of the day. Tape reading can add firepower to long-term market strategies.

The basics of tape reading can be learned in a few minutes, but this practice takes a lifetime to master, for three reasons. First, the market is extremely complex, and it takes years of observation to understand how individual parts affect the whole. Second, the macro forces driving the world market have changed over time. Quantitative easing controlled one cycle, while the real estate bubble kept the market stable in another cycle. Third, and most importantly, the market structure has undergone tremendous changes over the years, forcing tape readers to continuously learn new skills.

Revolution in market structure

In the 1990s, the 50-cent bid-ask spread forced tape readers to abandon simple stock tickers and focus their attention on the Depth of Market screen, often referred to as the secondary market. This approach makes money in the first few years because it accurately reads the supply and demand relationship, showing the long-term orders of the big players and which market makers control the direction of the securities during that trading session.

The U.S. Securities and Exchange Commission’s model day trading rules were subsequently introduced in 2001, triggering capital to flow from stocks into CME Globex index futures. In turn, these tools have tremendous power, moving thousands of securities at once.

Over the next few years, many tape readers abandoned Level II and chose to observe index futures for clues about widespread stock impulses. In 2007, with the adoption of the SEC’s supervision of NMS, Level II lost more supporters, which opened the door to high-frequency trading (HFT) computers and dark pools And other algorithm codes, now occupy more than 70% of the equity. Tape readers have adapted well to this electronic environment, and can now see wider market input than at any time in history.

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Enough of listening, want to be a proficient tape reader? Here are some tips and tricks to help you get started.

Preparation before listing

From the pre-market trading session, view overnight index futures. The 60-minute, 24-hour S&P 500 index futures chart is always displayed on the screen, referring to the overnight level during regular US trading hours. See if the index is leading or trailing the Nasdaq 100 and/or US Treasury futures. Nasdaq’s leading position and lagging bonds point to risk-taking, in which traders want to have more speculative tools, while the leading position of the S&P 500 index and strong bonds indicate risk aversion, usually due to the disadvantages of other world markets Event-driven.

Consider the impact of the expected opening and how the gap will affect the psychology of traders. In recent years, due to the rise of 24-hour trading, big gaps have become more and more common, and playing them well requires careful strategy. Prepare by estimating how opening printing will interact with the overnight level.The gap from overnight highs or lows indicates the possibility of a rapid reversal of range fluctuations, while the gap from levels that have not been traded for several days or weeks means that trend days are more likely action The main tools are moving in one direction for most of the meeting.

Tell in the first hour

Note the opening chart of the S&P 500, Nasdaq 100, and Russell 2000 Index futures or underlying exchange-traded funds (ETFs). The relationship between price volatility and these levels is the first sign of the day, with bulls controlling above the opening price and bears controlling below. Mark the first 5 or 15-minute trading range, and look for small sideways patterns that may cause a breakout or collapse later in the trading session. Now, first look at the relative strengths and weaknesses, and pull out a list of the most liquid ETFs for each major industry. Sort the list by percentage change, revealing the strongest and weakest funds in the first hour. This can also identify a rotation strategy that lasts the entire session.

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Next, pull up/down and up/down trading volume indicators for the New York Stock Exchange and Nasdaq. These four data sets generate very useful information on short-term capital flows. Changes in ups and downs also form an intraday forecast pattern, usually before the price, as you can see above, when the indicator reverses sharply after a strong opening in January. This reversal led to a severe decline and plunged the major indexes into deep losses.

Now note that the Fibonacci grid that initially plunged predicts the extent of the midday recovery, while the swing low near the 1,000 points that broke through the last hour defines the support level.

Now look at VIX and record the observations about the tape in the morning. First, after the first hour, is it flashing red or green, and is the number trending upward or downward? A rise in VIX indicates conflict or fear in favor of falling prices, while a fall in VIX indicates a speculative appetite that supports price increases. Second, follow the divergence between the VIX and the index trend, as they are usually resolved by forcing the indicator or index to reverse and follow the capitulation behavior.

Noon message

Follow the theme of the first hour to lunch time, and watch the opening prints and the inside of the market. When the index is far beyond the previous closing and printing, and then reverse gear, push back in the other direction, please be especially vigilant. The market tells to become the main leading indicator of these turning points, usually breaking or reversing before the price. These can be used to establish or increase intraday positions, or as exit signals, allowing you to profit or lose before people who are in trouble due to sudden changes in the market tone.

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Special attention should be paid between 11:30 am and noon Eastern time on the end of the trading day in the European market, which usually forces the US index to break through the key price level. With the rest of the world’s markets closed, the United States may trigger the second theme of the day in the afternoon. Insiders will shift the morning news to the new news at the end of the day. The second wave may need to reformulate the early trading strategy, including exiting early positions to avoid being targeted by the opposite price trend.

Last hour of reading

It is expected that the ongoing intraday theme will culminate in the last hour, especially in the last 15 minutes. During this period, index prices may rise or fall sharply, institutional capital exits on the sidelines, and algorithms work hard to get rid of traders who want to hold overnight positions. At these critical moments, internal market factors will become your best friends because they will tell you what will happen when the market closes. The numbers that expanded or contracted throughout the conference heralded the failure of the opposite strategy, while the mediocre numbers showed that the close was mixed, and both bulls and bears were dissatisfied with the results.

Bottom line

The tape reader interprets complex background data during the market day to gain a definable trading advantage in the competition. Through experience and skills, they responded well to environmental changes before price changes awakened the sleeping crowd.

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