Tape Reading: Profit Taking

So here we are with the market extended by most short term technical standards. As a day trader what should you be looking for to tell when profit taking is starting to kick in? In this tape recently trending stocks intra-day have had shallow pull backs and stocks that have opened down for the most part have been bought rather quickly. Short side exposure has been mainly scalp type trades that don’t seem to get legs. Lately, you end up taking off shorts with smaller targets while the long side has rewarded those that are able to keep something on(trade to hold).  I have found for day traders that the first day of real profit taking when it gets started is a great day to be active.

Since I use the old fashioned high/low tickers one of the first things I will be watching for is how fast the new low ticker starts moving when a sell program hits the tape. This is the first sign of sellers not hanging out in the offer but getting to work hitting bids. Profit taking once it gets rolling is easily identified by how easy it is to get filled on the bid for longs. Sellers are there to take profits and get out or reduce exposure.  The key for a day trader is to realize that when those first dip buyers come in you have the chance to add or put on a position because once profit taking is under way dip buyers get treated like bottom pickers and become road kill. The beautiful thing about profit taking setting in is that it’s usually a more broad based event and not so stock specific.

This gives you the opportunity to keep adding positions and as they move in your favor get stops in and add some more positions. A trend day down is a beautiful thing to an adept day trader and gives a great opportunity to use a good amount of buying power. Just as it has paid to try and hold a piece of any longs because upside targets seem to be run through with ease these last weeks the opposite holds true once the profit taking mentality kicks in. The longer you trade the more you will realize that the mindset of the traders involved is more important than targets on your charts.  Maybe just maybe,we get a Monday morning gap up that turns into full blown profit taking. I will be watching the action on the bid for clues. You should too.

Jeff Davis    @Shaq48_Trading (twitter)