origins

Tape reading began in the late 19th century, when merchants used a ticker machine that is very similar to the ticker you see scrolling at the bottom of major news and business channels today. The first tape read involved looking closely at price volume, trying to determine which side, the buyers or the sellers, was in control. The same is true of today’s tape players, although 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 with the bid or ask for a given market. Now, although tape reading is possible in a number of 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 the tape. By volume I mean the number of batches 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 to a few hundred lots. Universities, corporations, banks and other large institutions will trade hundreds and even thousands of lots (note that we are talking about the mini S&P 500) at a time. The public is made up of all different types of traders. 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 stand, they do so for a very valid reason. Which group of merchants would you trust?

Interpretation of the tape

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 most 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 (100 lots or more) are putting their money. 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 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, is there a significant amount of volume entering the market?

For example, you see that the price is a few ticks away from the low of the day at 1523.50. Suddenly, he sees a few 400+ lots sell on the market at 1523.75, and then a 1000+ lot sell 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; As we read the tape, we see that the true intention of the market is to make new lows. If you see a big player buying the high of the day, expect the price to hit 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!