I received this question from an SMB DNA Student on Tape Reading and will answer in this blog post.

Bella,

I am working on documenting what I should be looking on the Tape and came up with a list after reading your 2 books (some of them are the same observation). My first question is whether I miss something:

Each week we'll send you 2 to 4 videos filled with prop trading secrets you can't find elsewhere.

          Also, I know that markets are not black and white and not all these observations will happen in tandem. So my 2nd question is which of these are more important? I believe these are the most important (in order). Can you share your opinion?

1. Holds
2. Step Up
3. HL’s and LH’s

Thanks

FB

@MikeBellafiore

This is excellent work by you here.  I just love how you break down potential signals from Reading the Tape to inform trade decisions.

I do want to put Tape Reading in context.  We want to make sure we are in the right stocks, Stocks In Play.  We want to make sure there is a catalyst for us to be watching the stock.  It is preferable if our longer term and intraday technicals are aligning.  RVOL and VWAP often are used to help inform our trade decisions as well.

We think of trades in PlayBooks.  We want to put together news, technicals, and the tape to make trade decisions.  We want the tape to confirm the setup in our PlayBook is more likely to work.

So there is not one signal from Reading the Tape that is most important.  There is the signal that confirms that your setup in your PlayBook is more likely to work.

Let me offer some examples.

1. Say you wanted to fade NLSN on the open for a Gap, Squeeze and Fail PlayBook trade.  Your thesis is the stock is gapping up too much on the news.  Your trading pattern is a squeeze on the open and a top put in.  Next you want to SEE IT.  To us this means you want to see heaviness on the tape.  You want to see resistance on the tape.

We saw that on the Open around the 25.65 area.  The offers were heavy and the stock was not lifting this area as it had all other areas on the Open.  Now we have a setup in our PlayBook and we SEE IT on the tape to put together a short trade.

2. ROKU reported with solid earnings and was a Stock In Play last week.  Let’s say you wish to play this for a momentum trade on the open.  A momentum trade is in your PlayBook.

ROKU opens and 54 holds the offer, with a buyer paying the offer with velocity.  This paying of the offer with velocity is a bullish signal as you outline above.  ROKU pulls in 50c but then retests 54.

You remember the velocity of how the offer was paid on the open and wait until the seller lifts.  He does and you pay the offer playing for momentum to the upside.

Here again you are finding a news catalyst, spotting a setup in your PlayBook and then waiting for the tape to confirm the buy.

Think of the tape as an important indicator you use to make informed trade decisions to trade your PlayBook.  And you wish to see the tape give you signals depending on the setup in your PlayBook you are trading.

*no relevant positions