Q's Traders - Don't Fight The Tape

A tick is any movement, up or down, however small, in the price of a security. Hence, a ticker tape automatically records each transaction that occurs on the exchange floor, including trading volume, onto a narrow strip of paper, or tape.

The first ticker tape was developed in 1867, following the advent of the telegraph machine, which allowed for information to be printed in easy-to-read scripts. During the late 19th century, most brokers who traded at the New York Stock Exchange (NYSE) kept an office near it to ensure they were getting a steady supply of the tape and thus the most recent transaction figures of stocks. These latest quotes were delivered by messengers, or "pad shovers", who ran a circuit between the trading floor and brokers' offices. The shorter the distance between the trading floor and the brokerage, the more up-to-date the quotes were.

Ticker-tape machines introduced in 1930 and 1964 were twice as fast as their predecessors, but they still had about a 15-20 minute delay between the time of a transaction and the time it was recorded. It wasn't until 1996 that a real-time electronic ticker was launched. It is these up-to-the-minute transaction figures - namely price and volume - that we see today on TV news shows, financial wires and websites. And while the actual tape has been done away with, it has retained the name.

Due to the nature of the markets, investors from all corners of the globe are trading a variety of stocks in different lots and blocks at any given time. Therefore what you see one minute on a ticker could change the next, particularly for those stocks with high trading volume, and it could be some time before you see your ticker symbol appear again with the latest trading activity.

Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind. Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways (consolodating). It is also fairly easy to watch a price go up and then tell when it stops going up - even if it turns out to be only a momentary pause. But acting on these feelings to make money trading stocks is a whole different ballgame.

Most traders use delayed indicators or mechanical systems to develop sentiment. Not to discourage, but there are only a handful of traders who are able to make a steady living for themselves with a mechanical system. It is a mathematical fact that indicators such as Stochastics, RSI, MACD, ADX are shadows of price or delayed indicators and using them in real time can derive many mixed signals is why many mechanical traders fail. All other traders use some type of discretion that invariably involves watching the price action at some moment, even if just to move a stop loss up or down.

If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, "The only truth is the current PRICE." Your job as a stock trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

The key to successful short term trading comes down to Jesse Livermores old saying "Don't Fight the Tape". Someone who is buying stocks while the broad market is falling or selling stocks while the broad market is rising is said to be fighting the tape; this is a cardinal sin among stock traders. Old Zen saying- Every battle which occurs outside the mind and body is a battle against ones self. To be a successful trader one must be in harmony with the tape this allows for emotional detachment resulting in greater risk management. Once you've mastered the tape you will be able to let your winners run to there max profits and cut loose your loosing trades lightning fast because you can see the market turning against you. When you can sense a move becoming overextended and ready to change directions then you'll be three steps ahead of the market.

Most people with a small degree of common sense would not fight the tape and face the music if they could only recognize it. This article is dedicated to helping online traders recognize "The Tape" and to not fight it but profit from it by being in harmony with it.

Since the advent of the modern personal computer and internet we can now observe the cyber-tape, since ticker tape machines are no longer produced. First let's talk about some facts about the broad market a little. Modern Dow Theory has looking to Dow industrials, S&P 500 and NASDAQ Composite to predict broad market intermediate trends instead of using the Dow Transportation and Utilities Averages. If you looked at a chart of the broad market indices like the Dow-30, SP-500 or NASDAQ composite you will see that these markets cycle in a sine wave fashion between support and resistance, with periods of sideways action between or consolidation. If you were to superimpose these markets you would note that for the most part they move in concert with one another. Taking a further look at the issues or companies which compose these indices would reveal for the most part the most liquid issues move up or down with its respective market.

The object of the game then becomes to synchronize ourselves with the broad market and be bulls as its coming off support levels and accumulating and be bears its reached resistance levels and distributing. To understand this we must understand why the broad market goes up and down in the first place we must first understand the concepts of overbought and oversold. When the markets become overbought the markets are coming to resistance when the markets become oversold they are nearing support.

Richard Arms, father of the Arms Index or Short Term Trading Index, uses a simple metaphor of a little boy and cookies in a cookie jar to explain this phenomena, where the little boy is the stock market and the cookies in the jar are issues in the stock market. It goes like this. There was a little boy who had a simple craving for cookies, so he went to the cookie jar to satisfy his craving. The first cookie was good but very small and not enough to satisfy his craving so he had several more because the cookies tasted so good, before long he had eaten all the good cookies. But the little boy was not satisfied, looking in the cookie jar revealed that there were only some burnt old cookies and cookies from a batch perhaps but were bad cookies. The boy consumed those as well thinking his craving would be satisfied. He soon became ill and started to purge from eating so many cookies, even the bad cookies. He purged and purged to the point were he became hungry again and started to crave cookies again.

Because the market is actually the hopes and dreams of millions of trader's investors these emotional highs and lows are exhibited through price changes on a chart. When the market has consumed the max amount of cookies or greed is at its peak, the market is said to be overbought. When the market has over purged itself or fear is at its peak it's said to be oversold. The online trader has the greatest chance of success if he/she can identify the markets condition either overbought or oversold and approach their trading from this aspect. The Cyber Tape tells us this at any given time.

Without knowing whether the market is strong or weak watching price action can actually be very confusing if you don't measure the prevailing market winds first, just like a pilot not checking the weather prior to take off, his course of action can be affected if he is not prepared for turbulence or storms. If not properly prepared and trained for these adverse conditions the worst case scenario can be fatal.

Now let's discuss the cyber tape and what composes it so that we can properly measure the prevailing market winds either bullish or bearish. To accomplish this we use active or leading indicators not passive or lagging indicators. Mechanical indicators are nothing more than shadows of price or lagging indicators repackaged in eye appealing lines and waves, but there predictive value is little to nonexistent. This is an important fact for a master tape reader to understand. Tape Reading should be the backdrop to any mechanical system. Once you've mastered Reading the Tape you will use price as your validating indicator. Not shadows of price.

You see we have Advancing Issues, Declining issues, total issues, and those issues that are making new highs, those issues making new lows, Advancing Volume and Declining volume. If we took the Advancing issues and subtracted the Declining issues for any exchange we get the Advance-Decline reading for that exchange. This is also known as the McClellan Oscillator, a Market Breadth indicator primarily used as a short to intermediate term trading. If you took those issues which were making new highs and subtracted those issues which were making new lows you would have new high over new low or NH-NL, another Market Breadth Indicator. If we take the spread between the Advancing volume and declining volume then we can discern the rate of buying or selling. When the McClellan Oscillator indicates +1,500 (+/- 150) it's said to be overbought. The magnitude of the A-D shows the intense greed in the market place and the market is starting to eat the bad cookies and should start purging soon. When it indicates -1,500 (+/- 150), this means that the market is over purged and the extent of fear in the market.

Alan Farley writes about a hidden volume spring which shows us accumulation and distribution which precedes price movement. The spread between the up volume and down volume is this spring. Otherwise known as the volume spread, the spread tells us if the overall indices is being bought or sold. The Spread between the up volume and down volume becomes overbought when Advancing Volume leads declining volume by a 7/1 rate (+/- .5) and oversold when the selling rate is 1/7 (+/- .5).

Sometimes the McClellan can be very erratic so if we see an extreme overbought or oversold reading we need to confirm it with an extreme volume spread. It is from these extremes that the online trader should approach the market; do not enter until an extreme is recognized. We don't have to trade everyday just from the strongest signals. When an extreme in the market place is recognized it will try to revert back to its mean or partially retrace the previous move. Often this partial retracement is enough to cause a trend change. The Trend is our friend but monitoring the tape will tell you when a move is overextended and possible trend change is nearing.

This will give the online trader the best chances of success. The A-D and U/D don't become extreme at the same time, when the market is overbought or oversold, although they can. One will lead or lag the other by 2-3 days.

Once an extreme in the market place is recognized it doesn't mean that the market will turn immediately. If your timing isn't correct you will loose money. After an extreme is reached there is a period of residual momentum followed by chop. The length of this period depends on the magnitude of the preceding move. As a rule it can take 5-8 days at major turning points. To explain this concept, I'll use the metaphor of a great locomotive going down the tracks at high rate of speed. When the train of emotions course becomes overextended and it's trying to change directions it cannot turn on a dime, it must first apply its brakes, cost down the tracks and then it can change directions.

When we see the extreme A-D and U/D readings, this is the brake signal. We then wait for the train to slow and show signs of change in direction before we jump on. In physics this residual momentum is known as inertia. While were on the subject of residual momentum lets talk about another area where will encounter residual momentum. Arms and Farley both agree that the previous sessions momentum either bull or bear, will bleed into the opening price action of the next session. They also agree that intraday momentum changes, which can lead to larger moves, occur in the middle of a session not in after hours. If a trend change or momentum shift does occur, the tape will alert us. This alert is in the magnitude of +/- 250 change in the A-D at any point and a shift in the U/D by ~ 0.7. More on this later.


Let's say we believe the market is oversold and we're preparing to be bulls. We've witnessed extreme A-D and U/D somewhere ~ -1,653 and 1/7 respectively. What issues do we trade? Master Tape readers usually trade broad market issues and ETF's (Exchange Traded Funds), like DIA, SPY, OEX, QQQ, SMH or the e-minis YM, ES, NQ. Or issues with constant high liquidity like MSFT, INTC, CSCO to name a few and their financial derivatives (options). But if stock picking is our game then we can gear our TC NET PCF scans for these extreme market conditions. It is during these extreme oversold conditions that the low valued equities < $5.00 having a tendency of rising dramatically. For traders with active lifestyles master a couple issues are all that is needed to replicate successful trades.

Say we've chosen the QQQQ, it is the most traded issue around the world, and it's the mother of all issues. If you can Master trading the QQQQ then you could branch off and trade its top 10 components.

We've waited at least 5 days and the market and the market appears to be turning from a consolidation period. The premarket futures are trading at premium, forsaging a bullish open and premarkets bids are showing a gap up. We definitely don't want to chase it. There is a high probability that this gap up will fill partially if not completely within the first 45 minutes after the open. These first 45 mins of trading session is known as the reaction period. It's when gap up fill and then price can take off again.

Knowing that this contra move can take place will get us in at best price.
After the first 45 mins the A-D is -453 and U/D is , hmm? Numbers appear to be bearish but price coming off a precalculated pivot or S1 point (see paper on these calculations). If we were to reference the previous sessions closing A-D and U/D over time we must notice that during the 5-8 residual momentum period that these numbers should've been becoming less negative, for example A-D should've changed from -1,653 to -900, -500, -300 etc.. Yes these are bearish but the numbers must retrek through negative or bearish territory in order to get to the other side or to the overbought area. This is low risk entry for a long position. So you scale into it. After the first resistance levels are broken the bears are throwing in the towel at the positive inflection point (refer to opening price signal) or being squeezed out you scale in completely.

Validating the Trade:

After you've scaled into position the Tape must progressively improve. A-D must progressively become less negative until it's neutral then bullish over time and so should U/D. Coming out of a trough sometimes the market builds too much short term momentum and can become overbought too quickly. The numbers need to slowly build for best upward movement. If the momentum increases too quickly it can come down just as quick. When you note this scale out some and set stops tighter on remaining. This would be seen in A-D and U/D shifting from -453 and to say +1,000 and 3/1. If the market pulls back on you short term overbought assumption but starts to bounce again you need a signal to change your mind if you're wrong. What will turn your sentiment from overbought is of course if the market breaks higher from where the short term o/b signals were witnessed then this is conclusive evidence that the market isn't long term overbought. The original overbought signals witnessed earlier were strong signals that the market is becoming bullish and rally will ensue. So we assume our bullish positions. The market starts to rally; the tape is becoming stronger validating our positions.

A-D soon reaches +500 and U/D is 2/1. The tape is telling us the area that we're in for this up leg. The numbers still have to get to overbought that could take at least a week. Our Swing Trade sentiment becomes extended or lengthened.

So you can see you must have 2 perspectives, a long term (few weeks) and a short term (hours to days). It's from the longer perspective that we initiate new positions or add on to current positions. We even day trade from the longer perspective.

As we're watching the tape and price go higher and higher we see periods of rest which are revealed as pennants or round tops. New traders think these are tops and usually get shook out. These are bullish pennants or handles which fulfill higher and higher. When the prevailing market winds are bullish then these patterns have a higher probability of continuing up.

In an up trend the intraday price pattern appears to be a cup with handle. After a pop a pullback follows shaking out the day traders. The swing traders are still hanging on because the tape hasn't deteriorated to previous bearish levels as indicated by our rebaselining technique.(Rebaselining simply tells us if the bulls or bears are carrying on where they left off at. If after the the first 45 minutes of trading the numbers are stronger then the closing A-D and U/D then this means that the bulls are present. Numbers can still be bullish but less bullish then the baselines or closing numbers which usually indicates a falter in the momentum). The market reestablishes its momentum and goes higher and higher. Finally we reach our overbought readings +1,550 and 7/1. Do we exit completely? No, we scale out by selling into the residual strength. Then we prepare to become bears. In an up trend a weaker reading then baselines as we said would indicate a falter in the momentum which would result in choppy price action. If momentum cannot be reestablished a reversal will ensue.

The main points here are to always reference an extreme condition and always compare current tape readings to the previous sessions closing readings or rebaseline off of them.

Up Cycles and Gap Ups:

As we've accepted the market cycle from overbought to oversold and back again. Coming from oversold we should see extreme reading which cycle back to the opposite extreme its just a matter of synchronizing our selves with this emotional rollercoaster. Coming from oversold readings the numbers or the tape is said to be in an up cycle. When this occurs, prices have a tendency to gap up at the open. Coming from the trough these gaps may fill but as the tape gets stronger and stronger the degree of filling becomes less and less. Day traders struggle to find entry but swing traders know this and are capturing everything the market can give. Same is true in a down cycle, gap downs can be expected when we're coming from overbought.

On our website, GreenRoomStocks.com, we provide traders and investors with an environment to share ideas, learn and discuss new stock trading techniques, and get unbiased stock market commentary and stock picks. We do this by playing a running portfolio of swing trades, posting stock market videos a few nights a week, and though a live stock market chat room

Hilarious Stock Market Music Video!

Not the QQQQ's but a good Stock Market Commentary Video

The market actually looked more bullish that we had envisioned it, but not bullish enough for us to change our thinking on where we are headed in the days/weeks to come. We started the day out with more selling, helped along by terrible showings from mortgage giants Fannie & Freddie, and although they both ended the day with 20%+ losses, the financial etf (XLF) ended the day positive, bouncing off the double bottom we mentioned yesterday. So things are once again looking pretty mixed up, and we are preparing ourselves for more chop, keeping things even long to short, which has been working out incredibly well for us over the past few weeks now, and today was a great day with us cashing out of both a long and a short position, both with gains of over 20% in less than a week. Let's take a look at a few charts:

Technical Analysis of Stock - Stock Market Video

After a great vacation we are back with more daytrading and swing trading stock picks, stock market commentary and investment analysis! Take a test drive on our website today, GreenRoomStocks.com... happy trading!