An important tool in the successful trader's arsenal is the ability to read the tape and today I've asked Adam Halpern from IndicatorWarehouse.com to give us some insight into what he sees and how he manages to read the tape. Please enjoy the article, comment below, and check out IndicatorWarehouse.com.
As an experienced trader in the S&P500 going back to the early 90’s, just after the contract was developed, I am constantly watching myself to be sure I am keeping things simple.
When you really stand back and look at the daily S&P500 you have several things that keep reoccurring throughout a trading session. With that being the case, you have to constantly be sure you are not overly complicating the day trading process.
After all, the market can only go up, go down, or move sideways in a choppy fashion. To identify which way it is going to move you have to first learn how the read what is often called “the Tape”. To me, the Tape means the surface bias of the overall stock market at that time when you are preparing to put on a trade.
To do this I watch some simple indexes that are all available on any data vendor service.
The best Tape reading indexes are: The Dow Jones Industrials (DJI), The NASDAQ Composite Index (COMP), the TRIN (TRIN), the Advance/decline line (ADD), and the key banking index (BKX). We offer information on how to read these indexes in our manual for Boomerang Scalp Trader.
Basically, if you see the Dow up over +30-40, the NASDAQ over +15 or more, TRIN holding under .80, a strong A/D line and BKX up 1% or more that is a Bullish Tape. The opposite is a Bearish Tape. However, you need to learn the nuances to get a good feel for the surface bias of the market.
Once you can assess the markets’ surface condition, then you will look to base your scalp trades on how the Tape looks. If the Tape is a strong Bullish Tape then you do not want to take shorts. Trading on the short side with a strong Bullish Tape will only get you knocked around and most likely see losing trades.
If the Tape is very Bearish then trying to buy dips is going to be an exercise in frustration unless you catch an absolute stronger low of that time frame.
Once you can identify the right side of the bias, then just prepare your scalp trades on that side of the market. Very often it is just a matter of taking break outs of recent highs on a Bullish Tape and break downs of recent lows on a very weak Bearish Tape.
Over the years I’ve watched beginning traders struggle over and over putting trades on against the Tape. If you are going to be a professional trader (and why wouldn’t you want to be) then you must learn to read the Tape as a primary part of your daily trading strategy.
Your trades will flow easier, you will get “more bang for your buck” in terms of the trade moving your way in a decisive fashion, and you will normally be able to see a trade come back your way if it pushes against you.