What is Tape Reading?

When learning to trade stocks or commodities, tape reading is a term that many are
curious about. The art of tape reading goes back to the early days of stock trading during
the early 1900’s. People didn’t have computers to get quotes. They had to call their
brokers who had access to a ticker tape machine. Quotes on various stocks were
obtained by way of a ticker tape machine. The price of the stock, it’s symbol, and the
amount of shares traded were printed on a strip of paper. Very few still read the tape,
but those who do, find that you can gain an edge. It will add precision to your trading.
There are only a few books about tape reading, that were published. They are very old,
and still have theories that are valid today. Tape reading is still a powerful method to use
in today’s modern online trading environment. Tape reading has evolved over time into
what we now call technical analysis.

Basically the ticker tape machine printed, the price of the stock quote and the size of the
trade, or how many shares are being purchased. Not all trades were printed on the ticker
tape, just the major trades like 500 shares and above. In this day and age ticker tapes is
a thing of the past. However, the closest thing to reading the tape is the TIME & SALES
data that most online brokers provide.

Tape Reading To Forecast The Direction of Stocks

What’s important in reading the tape is how many shares are being traded at a given
moment. Large share lots with price moving up would mean heavy buying and there is a
good chance the stock may move up. Large share lots with price moving downward
would mean, heavy selling and price could continue to go down. You have to keep in

mind that size of trade whether it is large or small is relative.

In one particular stock, seeing 1000 shares being traded could be small trades, while in
another stock this could be considered a large trade. Deciding what trades are large or
small is a matter of observation of the norm. Take Microsoft for example, after
observing the Raw Data Time & Sales aka the tape, you can see that in Microsoft’s
trading activity, 1000-3000 share lots are quite normal. Then you could see a trade of
464,202 shares being traded which is fairly large. All of the sudden towards the top,
1,127,279 shares are being sold @ $23.63!!! That trade alone is worth $26,637,602.
That’s what I call HUGE SELLING ACTION.

Tape Reading Reveals Selling Activity

WARNING: Do not just start buying and selling stocks just because you see large
transactions. This is only part of the story. Keep reading.
Along with reading the Time/Sales data, execution of a trade must be coupled with chart
reading. You have to trade at support or resistance levels, or critical prize zones while
tape reading. The key in tape reading is to observe the tape at certain price levels. It may
be at a breakout point, support, or resistance levels or psychological numbers.

Tape Reading at Critical Price Levels

Lets look at a Chart of SPY, this is the ETF that follows the action of the S&P index. We
will give an example of how to tape read the action, to determine if we should buy or
sell.
Tape Reading Will Help You Decide To Buy or Sell
We can see that the uptrend is broken and the price action has bounced of the $124.73
zone. This is has now been determined as an area of support. When trading stocks, we
trade price levels. At the $124.73 price level, we can expect two outcomes: 1) It will
bounce off $124 zone and we will buy, or 2) The price will drop below $124 zone and we
shall short the stock.

To decide whether we will buy the stock or short the stock depends on our interpretation
of what the tape is trying to tell us. When the price hits $124.73, this is when we start to
look at the time & sales data, ie tape reading. You want to observe size of orders that are
being executed, while the quotes are at $124.74. Are the orders abnormally large with
higher prices? For example, you may see LARGE share lots being purchased, then the
stock may rise to $124.99 then share sizes may be smaller, then the price drops again to
$124.74, then LARGE share buying may come in again. This might be a sign that the
market is very bullish at this level and furthur upside is expected. The following day, you
also want to pay attention to the tape. You might see that the next day prices may have
gotten higher to $125 and more large orders being executed.

In a bearish scenario, price action might quote below the critical price of $124.73, and
you might see large lots being sold off as prices get lower. For example, price drops to
$123 and large lots are being sold off at the same time. It may rally up to $124.72, and
another group of large lots of shares are being sold off. Then it may drop to $124.00 and
more large lots are being sold. There also be buying action as well, you may notice that
the buy orders aren’t as large or may be significantly smaller compared to the sell
orders.

Keep in mind, that tape reading is a tool to help you get a “feel” of what is going on in
the markets on a deeper level. This is not one technique to solve all your trading
problems. This should be considered on of the many tools to help you gain precision in
your trading and reduce the likely hood of trading in the wrong direction. Tape reading
is often called an “art” and there are variations of tape reading. Just like technical
analysis, the power of a tool depends greatly on the person who uses it. The best traders
spend a great deal of time just watching the tape, and after many hours of watching,
they are able to notice the most subtle price action that could lead them to large profits
on the stock market