A Lesson in Tape Reading for the Novice

by David Jenyns on September 17, 2007

Tape reading is a skill that not many have the patience to learn — or the ability to learn well. Not much has been written on the subject, and this series of articles aims to fill a knowledge gap. For those willing to read closely and learn, there is great profit to be had by successfully predicting and mastering the movements of the market.

One cannot become a tape reader by giving the ticker absent treatment; nor by running into his broker’s office after lunch, or seeing “how the market closed” from his evening newspaper.

He cannot study this art from the far end of a telephone wire. He should spend 27 hours a week or more at a ticker, and many more hours away from it studying his mistakes and finding the “why” of his losses.

If tape reading were an exact science, one would simply have to assemble the factors, carry out the operations indicated, and trade accordingly. But the factors influencing the market are infinite in their number and character, as well as in their effect upon the market, and to attempt the construction of a tape-reading formula would seem futile. However, something of the kind (in the rough) may develop as we progress in this investigation, so kindly keep an open mind because we have many secrets, tricks and tips to reveal that are not in the pocket of the average day trader.

What is tape reading?

This question may be best answered by first deciding what it is not.

– Reading is not merely looking at the tape to determine how prices are running.
– It is not reading the news and then buying or selling “if the stock acts right.”
– It is not trading on tips, opinions, or information.
– It is not buying “because they look strong,” or selling “because they look weak.”
– It is not trading on chart indications or by other mechanical methods.
– It is not “buying on dips and selling on peaks.”
– Nor is it any of the hundred other foolish things practiced by the millions of people without method, planning or strategy.

It seems to us, based on our experience, that tape reading is the defined science of determining from the tape the immediate trend of prices.

It is a method of forecasting, from what appears on the tape now in the moment, what is likely to appear in the immediate future.

Tape reading is rapid-fire common sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are being neglected by the large investors.

The tape reader aims to make deductions from each succeeding transaction every shift of the market kaleidoscope; to grasp a new situation, force it, lightning-like, through the weighing machine of the mind, and to reach a decision which can be acted upon with coolness and precision.

It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all.

A day trader is like the manager of a department store; into his office are submitted hundreds of reports of sales made by the various departments. He notes the general trend of business whether demand is heavy or light throughout the store but lends special attention to the products in which demand is abnormally strong or weak.

When he finds it difficult to keep his shelves full in a certain department or of a certain product, he instructs his buyers accordingly, and they increase their buying orders for that product; when certain products do not move he knows there is little demand (or a market) for them, therefore, he lowers his prices (seeking a market) to induce more purchases by his customers.

The art of tape-reading is arcane, to be sure, but with practice, diligence and persistence, one can master the skill to make a great profit.

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