We left off of part one of the series by discussing the ‘edge’. The edge is basically what works for you consistently and profitably. It is your system, and it’s different for everyone. You don’t necessarily need an indicator to see the trend because a chart is usually enough. A system doesn’t have to be cumbersome, incomprehensible, or basically, complicated and otherwise a failure. There is a certain simplicity you arrive at after a series of complications.
This particular style of tape reading involves more with the reading of certain visual formations vs. analyzing numbers. In addition, these visual patterns work the very best with the intraday time frame. Since we want to utilize trending days for each individual stock, neutral range-bound days should be ignored. The probabilities significantly decrease on non-trending days.
The principles of tape reading basically match up price movement to crowd behavior as a ‘rate of volume’. Through this, traders can see when the ‘footprints’ of a stock are made. These traders will be aware of when the majority moves into a stock that is presently dominated by the minority. Why tape reading is a lost art is beyond me. In fact, most trading systems don’t even incorporate it, despite the fact that it stood the test of time for 400 years, give or take.
Trading wisdom states that the majority is usually wrong. Well, that depends. Tape reading is based on a handful of stock operators taking the money from the majority. We make money from the imbalance of buyers and sellers that is created. This is how trend reversals and explosive moves occur. The question is, “Are you the first one on the scene when the imbalance takes place”?
The important thing is to get there before the real breakout occurs, the path of least resistance. Consider this: not many people get in on the first sign of a major move. As more people become aware of the pending move, they accumulate shares. Then more people get in. Aggressive buying hits the stock and everyone wants to get in on the action. Keep in mind that that every buyer now is a potential seller. Finally, distribution takes place and the losers are left holding the bag. We all see it everyday.
How does the accumulation & distribution work with tape reading? The minority (you) watch how the other minority players are acting and then wait for the majority to create the mass movement. Typically, smart money can be identified by price movement when it is a slow, gradual movement with slow and steady volume. The general public’s price movement can be viewed as euphoric with parabolic spikes in both price and volume to the point of exhaustion and instability.
There are six principles,k and I utilize all of them for my various day trading strategies:
1) Capitulation/parabolic exhaustion (long/short)
2) Beginning of a trend (accumulation-aggressive)
3) Confirmation of a trend (accumulation-aggressive)
4) Continuation of a trend (retracement-shallow)
5) Reversal (decreasing volume)
6) Accumulation and distribution (passive, non-aggressive)
1. Capitulation/parabolic exhaustion (long/short)
There is a pure acceleration in price movement with a massive surge in volume. Price usually advances/declines the most in the shortest period of time here. However, this move is usually unsustainable and can produce devastating sell offs or sharp bounces. This applies to both up and down price spikes. These moves usually last for only a few minutes, or even seconds, and they are the hardest to master. The key is identifying the price and volume and the accompanying imbalance in the accumulation/distribution through observing price and volume.
Usually, you see what I call “volume mountains”. Yes, I call them that because they look like mountains. How do you know when to get out entirely or scale out and piecemeal your exit? We’ll get in more detail on these ‘mountains’ in the future perhaps, but we’ve all see them.
2. Beginning of a trend (accumulation-aggressive)
This is a completely different idea than the one above. It is the steady, upward movement of a stock with consistent volume that usually precedes more serious momentum. There is consistent buying going on, with ‘consistent’ being the key word. There is not enough to attract everyone else, thus giving the stock an appearance of ‘floating’. The key here is to scale in on each intraday breakout until you see signs of distribution. More on this on the future.
3. Confirmation of a trend (accumulation-aggressive)
This is a slow advance in the price movement with increasing volume, which makes it another momentum signal to pay attention to. The trend is beginning to draw the attention of the majority but is not yet ready to experience a full-scale momentum move. This precedes a powerful price move. What follows is the euphoric, sometimes idiotic, action of the majority. We’ll discuss how to catch these in a future article with examples.
4. Continuation of a trend (retracement-shallow)
This is marked by a huge price increase, but with low volume. This is a classic pullback or short consolidation. You already know what these are and I don’t have to explain them.
5. Reversal (decreasing volume)
Buying has slowed down and distribution is imminent = GTFO. The buying is drying up and this is your last chance to get out before you turn into a bagholder. Volume is especially important here. I will cover examples and models of how volume acts here in the future. Bottomline, volume indications help us determine our actions since price action is not as relevant or important as volume here.
6. Accumulation and distribution (passive, non-aggressive)
Large volume of buying with no price change typically tells me that there could be a shadow resistance level with a quite a bit of overhead supply. Most of the time though, the resistance is defined by identifiable resistance lines and even better, moving averages. I sure love those moving averages. This principle identifies ‘stand offs’ on both sides and I would be extremely cautious here. Of course, more on this and the others later on in the series.
For expert tape reading, I highly encourage you to refer to Vadym Graifer of RealityTrader.com. I spoke with him personally and he’s an intelligent and great guy.
Here is his bio:
Vadym is the author of Techniques of Tape Reading (McGraw Hill 2003), How to Scalp Any Market (2005) and Master Profit Plan (2005). Vadym is a frequent featured speaker at International Trader’s Expos and Financial Forum Conferences.
He is the founder of RealityTrader.com, a hands-on training company, working with a global community of individuals to achieve high levels of trading success.
Vad is a professional trader and an international private trading mentor responsible for turning around the trading careers of thousands of trader. He has also published articles and interviews in industry magazines, corporate product newsletters and trading forums.
For more background information on Vad, please see excerpts from Vad’s book (Chapter 1, Chapter 2)If you enjoy the content at iBankCoin, please follow us on Twitter
“The question is, “Are you the first one on the scene when the imbalance takes place”?!! ”
I AM !!! $NLS $GKK WINS!!!
ANOTHER GREAT POST!!! Thanks J!
you’re doing great steve. keep it up
Clear, concise and not too many big words. = Perfect!
great post, CA!
Keep it up TA. Thanks!…ya and I voted for ya too! LOL
Awesome. Thanks CA.
lam.to, cum.to, cas.to, ngx.to, npi/un.to, cnq.to, bnk.to, are.to
Bought CUM.TO @ 2.35
bought NPI/UN.TO @ 12.45
I don’t trade the Canadian mkts, but good luck today
I realize 99% of the people on here don’t trade the TSX. Just putting it out there “in case”.
You’d be surprised. there are a lot of Canadians reading iBC.
also bought ARE.TO @ 14.65, RBI.TO @ 17.78
Great material John! Your showcase of trading knowledge is admirable. I have added you to my bog roll, if you don’t mind.
Thank you for that
Do you use any intraday moving averages or are your targets always set on the daily?
i don’t need intraday ma’s. Targets on the daily tell me if a stock can keep running or not.
Long LEE @ 4.51
Sold @ 4.60
That wall at 2.37 needs to go
Bought TTIL @ 1.85 for a swing
rising MFI and declining ATR,…with a nice X-over in MACD,….nice pic and timing!
Bought WLC.V @ 2.13
Buzzkill,…who provides ure scan data,..(i,.e. stockcharts?)
I use a customized scan on stockcharts. I also like the technical screener at stockhouse.com.
really nice to see someone active in the TSX,…ure picks are very interesting,…stockcharts seems to be really popular,…i also like Finviz,…although they only focus on the Amercian exchanges. I’ve not used stockhouse,…will give it a try.
Stockhouse is pretty good for a free scanner. You can scan for all North American exchanges and select technical screeners, bullish/bearish, price, volume, etc…. It’s worth checking out.
Sold ARE.TO $14.31 – not going my way.
Bought OEX.TO $2.88
Charts Gone Wild is tonight at 10PM EST on http://www.stocktwits.tv
HAVE YOU READ TECHNIQUES OF TAPE READING BY VADYM GRAIFER. YOUR MATERIAL IS EERILY SIMILAR
yep. it’s also a compilation of various other works put into one+common knowledge among CMTs.
It’s the outline and flow dude…or else I wouldn’t have noticed.
Also, if I hadn’t been re-reading it this week. Well, plagiarism is the highest form of flattery. Nothing new in the universe anyway
it’s all the same shit. nothing new in ta except indicators
Yep…nothing new under the sun…. dude, what I am saying is, while concentrating the content of the book in a very short article, why not give your readers a reference – worthy read, and straight forward indication of the source…you thought it worthy, your readers will too
Vadym and I talk on Skype fyi…