This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

10 Tips for Reading Tape

This column was originally published on RealMoney on Feb. 14, 2008 at 11:22 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Pure chart reading can get you into a ton of trouble if you don't take the time to read short-term price action before committing to a new position. Those short-term bursts of buying and selling pressure expose underlying forces that often mean the difference between a vertical breakout and a gruesome failure.

Of course, I'm talking about tape reading, a curious and misunderstood concept in our fast-fingered electronic markets. Despite the strange aura surrounding this subject, all traders with tape-reading experience recognize it's a more valuable tool to their profitability than the most perfect pattern. The reason is simple: the tape never lies.

Sadly, there are few shortcuts in learning this essential skill, so be prepared to spend a very long time building up your tape-reading prowess. Why are there so few good books on the subject? Unfortunately, it's almost impossible to render down years of ticker watching into a few simple observations.

In fact, when students ask me for seminars on tape-reading mastery, I usually tell them to just sit down, pull up a notepad, and watch the numbers for a decade or two. They think I'm kidding, but I'm not. Literally, it takes 10 years or more staring at the shifting numbers to decipher the games played by Wall Street and other ticker-tape participants.

Fortunately there are great ways to speed up this steep learning curve. Start with these 10 tips and techniques to improve your tape-reading skills.

  1. The Level II screen tells lies because the vast majority of market size is hidden from public view. But it's still a good place to start your examination of the tape flow. However, when you're tired of staring at the paint job, turn it off and focus exclusively on a simple display that shows only the last price and bid-ask spread bid-and-ask.
  2. Skilled tape reading depends on a single key observation: Professionals move markets in whatever direction yields the greatest volume volume. To this end, the most basic order flow manipulates price against the crowd's emotions.
  3. The ticker tape already knows the chart. Market insiders push prices toward support and resistance levels to test the waters, trigger the stops and see how much interest they can generate with the public.
  4. Filter the tape's message through index movement and market breadth. Look for the ticker to react with surging volume when the indices break out or break down. Recognize that a strong tape rings a loud bell in a weak market, while a weak tape rings the same bell in a strong market.
  5. Rapid bursts of activity on the ticker tape reveal greed and fear under the surface. They show you where other traders are committing to the market or getting out in disgust. Look for nervous prints above the offer price during breakouts and desperate prints below the bid price during breakdowns.
  6. The bid-ask spread engine expands and contracts as it reacts to shifting market conditions. Look for spreads to widen when neither side wants to make a commitment to the current price.
  7. Liquid stocks move in channeled ranges, driven by computerized market-making systems. Ignore oscillations in the middle of these zones, but focus undivided attention on the tape's quality when prices reach the upper or lower boundaries.
  8. Look for stock prices to move in lockstep with the index futures at least 75% of the time. The percentage rises during the midday doldrums and drops in the first and last hours of trading.
  9. Watch the relationship between the current price and the daily range trading-range. This single number, often referred to as "percent in range" can track the progress of an entire watchlist in just a few seconds.
  10. Know the fish you're swimming with. Most volume comes from scalpers who push prices in both directions for a few pennies. It's your job to find the whales beneath these minnows that are in real control of the underlying trend.

Finally, here's an observation that will add considerable power to your tape-reading expertise. Look for price action to move in three distinct phases just above resistance or just below support.

  1. Excitement driven by the break.
  2. The fade against the break.
  3. Resolution that confirms the break or triggers a failure.

Most traders focus their attention on the excitement of the break, jumping in when the ticker bursts with buying or selling activity. But this is a good way to lose money. In contrast, tape readers step back and examine the quality of this three-prong conflict, which tells them if the embryonic move is bona fide, or a nasty trap waiting to be sprung.

This column was originally published on RealMoney. For more information about subscribing to RealMoney, please click here.

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product, The Daily Swing Trade, brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs