Leave Less Time for Error in Trades

When we invest in a stock on the basis of the fundamentals of the company, earnings forecasts, expectations for demand, expectations for growth and future products, we really are investing in the good intentions of a company based on present conditions and what its managers now know or believe. When we invest in a stock on the basis of longer-term charts, we are going on the assumption that past patterns will repeat in the future.

Companies aren't immune to life's unpredictability. Just as with vacation plans, the longer the time frame of an investment, the more opportunity for obstacles to arise.

Immediate Advantage

Unlike investing, however, daytrading is based on what is happening in the moment. Daytraders watch the most immediate indications and the present action in order to predict short-term movements. They observe the only truthful indicators: price and volume. By focusing on what is actually happening, daytraders separate what's really happening from their perceptions and hopes. The basis of this is tape-reading.

I have written quite a bit recently about the two parts of my trading decisions, anticipation and confirmation, and I've stressed the importance of looking for confirmation in the tape. It's one thing to find a good trade setup, which I usually base on patterns, the amount of price movement, support and resistance levels, etc. It's quite another to find confirmation of that setup in the tape, and it's always necessary.

Tape-reading is essential to daytrading. Generally speaking, it is the attempt to predict short-term price changes by examining price and volume information as it comes across the ticker tape. To return to my 10-minute analogy, tape-reading is the equivalent of looking around to see if anyone is coming in to bother me while I am writing, and checking to make sure my computer is still running. It is checking out the present action so I can make a safer assumption about what will occur in the next few minutes.

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Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of Investingonmomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. At the time of publication, Wolff had no positions in any of the securities mentioned in this column, but positions may change at any time. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.