Tape Reading 101

Most new traders get fixated on trying to master tape reading right from the start. I will be totally up front with you now as well…

The truth is, with tape reading there is no substitution for experience. Hours upon hours sitting in front of the screens staring at the tape fly will truly help you gain an edge with reading it. However, there are some basic things that before you take a dive into tape reading you should know to look out for that will help you speed up your learning curve and spot imbalances from the get-go.

  1. Pay Attention To The Speed of the Tape

Watching the speed of the tape and recognizing if there are more buy orders than sell orders at different key levels (support and resistance) can help you identify how much momentum there is on the buy or sell side at that spot. If the tape starts flying with a flurry of green prints with big size at a resistance level, it is more likely to break out. If it is moving slower at a resistance level and you do not see many buy orders filling on the Time & Sales, then that breakout may be a fake out. Always be looking at the size on the Time & Sales that is going through and speed of the tape at different key levels on the chart.

  1. Focus On The Tape At Key Levels

Focus on the tape at key support and resistance levels. Those are potentially inflection points in the chart and watching to see shifts in supply and demand indicated by the tape and level 2 at those levels will give you the best indication of the stock’s next move. Are buyers taking control at a support level or are sellers? Are sellers taking control at a resistance level or are buyers?

Watching the tape in between support and resistance zones can just be noise and distract you. Focus on it as you approach key zones that the chart must defend in either direction.

  1. Watch For Big Orders on the Bid/Ask

By reading the Level 2, you can see people come in with size, try to prop the bid or ask, and throw out spoof orders to push the stock in one direction or another. Now, there can be a ton of noise on the Level 2 and a lot of fake orders. The key to using it effectively is to pair it with the Time & Sales, and see what orders are going through and getting hit at certain key levels on the chart with size on the bid or ask.

For example, let us say a stock keeps slamming into $3.00 and the chart shows there is resistance there. Let us also assume that we spotted a seller with 20k shares that has been flashing size on the ask jumping around from $2.95 to $3.05. That means there is likely someone wanting to sell some big size around $3.00, and once that seller clears out the stock should be able to go up afterwards.

Now, let us say we observe on the Time & Sales that blocks of buy orders are being executed, and while 20k share order on the ask drops to 18k, then 16k, then 14k, etc. We now can conclude that that seller is real and trying to unload shares at that key level, and time a long entry as that order gets chipped away.

  1. Record and Slow The Tape Down

This is probably one of the most useful ways to learn to read the tape like a pro. Recording the Level 2 and Time & Sales of the top 2 or 3 top movers each day and then reviewing them after the bell at half speed will help you identify patterns, see block orders you may have missed, and just overall gauge how the stock reacted because of the incoming order flow. By recording and slowing the tape down, you will be able to process things easier, recognize patterns, and soak up key concepts you may have missed before during the market hours. Think of this as like watching game tape if you were a basketball player.

As always, practice makes perfect. Make sure to take these tips into account and keep studying!

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