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Tape Reading Technique Secrets for Trading Stocks 101 – A Wall Street Insiders View!
Most people who get into stock trading have found that reading the bar is difficult to do and very stressful. As a former Wall Street insider, there is a secret that most retail traders don’t know.
Do not trade any stock that has an average volume of over a million shares per day!
This is her! This is the big secret that most Wall Street insiders use to their advantage. Most retail traders like to trade stocks that are on the most active lists because they are easy to buy and sell and have tight spreads. But there is one big problem with most high volume stocks and they are:
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Institutional order from every direction
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Spread traders/protectors
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Lots of information
Institutional order from every direction
As there are many institutions involved in trading a stock, then it constantly changes the direction of the price. Institutions buy and sell stocks for many reasons that have nothing to do with the fundamentals of the stock. Some examples of reasons why institutions buy and sell shares are:
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Investors buy or sell shares in their fund
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Annual window dressing
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Sector rotations
When you mix all these large orders together then it creates unstable conditions and it makes the tape difficult to read. The direction of the bar changes back and forth on the fly to feel every movement out. Another problem that institutions create comes from placing their large orders on the order desks. Most order desks “work on order” and that means getting the best possible price. This affects the trader because every time the stock looks like it’s going to go in one direction, the order office steps in and stops that move.
Spread traders and hedgers
Spread traders and hedgers are trading to protect another position. Leadership usually does not affect them, so their decisions are based on widespread relationships. An example would be the Home Depot Stock Lowe’s line. If Home Depot was up 3% for the day and Lowes was only up 1%, then the spread trader could sell Home Depot stock short while buying Lows stock. These types of traders are taking advantage of the 2% spread because they know that the stock prices of both of these companies move together and will eventually reverse.
Lots of Information
Finally, it’s just too much information. As a tape reader, you should be able to remember certain price points and how the quotes around those prices behaved. For example, if every time a stock drops to the low of the day and lots of sell orders come in, but an ECN just sits there and soaks up all the selling. In this case, you would buy that support unless that ECN went out of the way and the price dropped that much. A good tape reader learns to remember several price levels and how the order book reacts to those levels. If you are trading a stock that has a lot of volume orders come and go too quickly to remember and read that data.
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