Tip Toeing Toward Tape Reading

by David Jenyns on September 21, 2007

When embarking on any new business enterprise, the first thing to consider is the amount of capital required. To study tape reading “on paper” is one thing, but to practice and become proficient in the art is quite another. Almost anyone can make money on imaginary trades because there is no risk of any kind the mind is free from the strain and apprehension that accompanies an actual trade; fear does not enter into the equation, and patience is unlimited.

All this changes when even a small commitment is made. Then the judgment becomes warped, and the trader closes the trade in order to get mental relief.

As these are all symptoms of inexperience, they cannot be overcome by avoiding the issue. The business-like thing to do is to wade right in to the game and learn to play it under conditions that are to be met and conquered before success can be attained.

After a complete absorption of every available piece of educational writing bearing upon tape reading, it is best to commence trading in 10-share lots, so as to acquire genuine trading experience. This may not suit some people with a propensity for gambling, and who look upon the 10-share trader as being afraid and a ‘babe in the woods.’

The average lamb with $10,000 in capital wants to commence with 500 to 1,000 share lots he wishes to start at the top and work down. It is only a question of time when he will have to trade in 50-share lots – having lost the majority of his capital in large trades.

To us it seems better to start at the bottom with 50 shares. There is plenty of time in which to increase the unit if you are successful. If success is not eventually realized you will be many dollars better off for having risked a minimum quantity.

It has already been shown by experience that the market for odd lots (100 shares or less) on the exchanges is very active, so there is no other excuse for the novice who desires to trade in round lots than greed-of-gain, or a get-rich-quick mentality. Think of a baby, just learning to walk, being entered in a race with professional sprinters!

Success in tape reading should be measured by the number of points profit over points lost. For all practical purposes, therefore, we might trade 10-share lots, were there no objection on the part of our broker and if this quantity were not so absurdly small as to invite careless execution. Fifty shares is really the smallest quantity that should be considered, but we mention 10 shares simply to impress upon our readers that in studying tape reading, it’s better keep in mind that you are playing for points, not dollars.

As the initial losses in trading are likely to be heavy, and as the estimated capital must be more or less an arbitrary amount, we should say that units of $5,000 would be necessary for each 50-share lot traded in at the beginning. This allows for more losses than profits, and leaves a margin with which to proceed.

Some people will secure a footing with less capital; others may he obliged to put up several units of $5,000 each before they begin to show profits; still others will spend a fortune (large or small) without making it pay, or meeting with any encouragement. As you test out the new waters, you’ll be able to decide which strategy is best for you.

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