The Art of Tape Reading- part 1

Although Tape reading seems antiquated, it combined with charts would still form a lethal combination. I was reading Richard Wycoff's bible when I came across this. Traderji and senior members in experience, please comment.

The Art of Tape Reading

By Clif Droke
Posted: 06/09/2002 Sun 00:52 / ©2002 Publishing Concepts

Tape reading is neither a science nor purely an art, but containing elements of both, we have styled it a "scientific art." Its advantages are numerous, and a knowledge of this lost practice promises to confer upon the trader a marvelous trading tool guaranteed to improve trading performance. Strictly defined, tape reading is the practice of interpreting price-to-volume configurations of listed securities on the various stock exchanges. Since trading volume is an extremely important (and frequently overlooked) element of stock trading, a major premise of tape reading is that buying and selling interest can most readily be identified and measured by looking at a stock's volume at any given time in relation to its trading range. In classical tape reading, price and volume are given equal weighting and each element can never be analyzed without the other.

An old Wall Street axiom, which you are no doubt familiar with, is that "the tape tells all." It simply means that any available information that will have an impact on the outlook for stocks, and for the economy as a whole, will be reflected in advance in the tape. This is because the people who have the greatest insight into "inside events" are sure to try to profit from their advanced knowledge by buying or selling stocks before such information trickles down to the public. By the time news of an important financial or political event reaches the trading public, the insiders who are savvy to the ways of the market, have already taken their profits, leaving the public holding the "bag." Most of us will never have the advantage of being insiders; however, with a firm knowledge of tape reading this isn't necessary to profit from the market. In fact, being able to read the tape means that you can trade right along with the insiders and participate in big moves before the trading public catches wind of what is going on. In order to provide you with a better idea of the basics of tape reading, we have excerpted below several paragraphs from the all-time classic book on tape reading, "Studies in Tape Reading," written in 1910 by Richard D. Wyckoff. Don't let the date discourage you from reading it - it is just as timely today as it was nearly 100 years ago:

What is Tape Reading?

This question may be answered by first deciding what it is not.

Tape Reading is not merely looking at the tape to ascertain how prices are running.

It is not reading the news and then buying or selling "if the stock acts right."

It is not trading on tips, opinions, or information.

It is not buying "because they are going up," or selling "because they look weak."

It is not trading on chart indications or by other mechanical methods. It is not "buying on dips and selling on bulges."

Nor is it any of the hundred other foolish things practiced by the millions of people without method, forethought or calculation.

Tape Reading seems to us: The science of determining from the tape the immediate trend of prices.

It is a method of forecasting, from what appears on the tape now, what is likely to appear in the future.

Tape Reading is rapid-fire horse sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are neglected by the large interests. The Tape Reader aims to make deductions from each succeeding transaction - every shift of the market kaleidoscope to grasp a new situation, force it, lightning-like, through the weighing machine of the brain, and to reach a decision which can be acted with coolness and precision.

It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all.

The Tape Reader is like the manager of a department store; into his office are poured hundreds of reports of sales made by the various departments. He notes the general trend of business, whether demand is heavy or light throughout the store, but lends special attention to the lines in which demand is abnormally strong or weak. When he finds difficulty in keeping his shelves full in a certain department, he instructs his buyers, and they increase their buying orders; when certain goods do not move he knows there is little demand (market) for them; therefore, he lowers his prices as an inducement to possible purchases.

A floor trader who stands in one crowd all day is like the buyer for one department - he sees more quickly than anyone else the demand for that class of goods, but has no way of comparing it to that prevailing in other parts of the store.

He may be trading on the long side of Union Pacific, which has a strong upward trend, when suddenly a break in another stock will demoralize the market in Union Pacific, and he will be forced to compete with others who have stocks to sell.

continued in part II