origins

Tape reading began in the late 19th century, when merchants used a ticker machine that is very similar to the ticker seen scrolling at the bottom of major business and news channels today. The first tape reading involved watching the price volume closely, trying to determine which side, the buyers or the sellers, was in control. The same is true of today’s tape players, though most have switched to a Time and Sales window instead of a ticker. It’s the same basic idea, just displayed in a different format with more information.

Basically, the tape shows how many lots were filled at a given price and whether they were filled by bid or ask for a given market. Now, although tape reading is possible in several different markets, I have found e-Mini futures contracts to be excellent due to their high liquidity. Each contract in the e-Mini futures trades at a different volume, so for consistency, I’ll talk specifically about the mini S&P 500.

The public against the professionals

Volume is the most important factor when reading tape. By volume I mean the number of lots that are being filled.

Most public traders enter the market with only one or two lots. Professionals who trade for a living will use anywhere from a few lots up to a few hundred lots. Universities, corporations, banks and other large institutions will be trading hundreds and even thousands of lots (note that we are talking about the mini S&P 500) at a time. The audience is made up of all different types of merchants. Some take the market seriously and use a system or strategy, while many others imagine the market as a casino. It is well known that those who trade these huge amounts of money are simply not playing the market. When they take a position, they do so for a very valid reason. What group of merchants would you trust?

Tape Interpretation

It is very difficult to explain the tape without seeing it live. In general, these are the things to look for:

• Which side of the market has the largest volume?

You should always pay attention to this, as it is the most important aspect of tape reading. Throughout the day, keep track of where the big players are putting their money (100 lots or more). If you look at your Time and Sales window and see nothing but traders buying the market with lot sizes like 238, 120, 120, 495, 644, 80, 310, 176 etc. while there are only a few sellers With lot sizes like 58, 100, 63, you know that the short-term pressure is on the buy side. The same is true, only in reverse, when determining selling pressure.

• As the price approaches the high or low of the day, does a significant amount of volume enter the market?

For example, you see that the price is a few ticks away from the daily low at 1523.50. Suddenly, he sees a few lots of 400+ sell in the market at 1523.75, and then a lot of 1000+ sells for 1523.50 and the price goes down. Many of the public traders at this point may buy the market, hoping to get a double bottom; reading the tape, we see that the real intent of the market is to make new lows. If you see a big player buying the high of the day, expect the price to reach new highs.

Experience

In the end, tape reading is more of an art than a science. It’s not hard to learn, but to feel it, you need to watch it live as much as possible during normal market hours. The more experience you gain with the tape, the more accurate your calls will be.

I wish you much success in your trading!