Mike/Bella/Mr. Bellafiore,

First, I can’t thank you enough for all you’ve done for the trading community. I’ve learned orders of magnitude more from the fruits of your efforts than from any other single source since I’ve started trading. You’re doing great things.

My question is about tape reading.

How would you describe the difference between tape action that signals a turnaround from healthy tape action during a trend, where price ebbs and flows naturally, but doesn’t completely turn around? Tape reading alone for a reversion-to-mean style doesn’t seem to yield setups for more than quick scalps. For bigger plays market structure seems to be far more influential. What I’m working to understand is how the two really work together.

I’m also interested in what you would say about jumping in front of big orders in the book. Definitely not cool to jump in front of traders on your desk. But jumping in front of other people’s orders … do you put that into the category of “not real trading”, or “using every tool in your toolbox”? If you factor big book orders into your trading, what information do you get from them?

Bella

The tape can tell us a trend is about to end.  Some tells from the long side are:

a) the buyer disappears

b) a new seller appears on the offer

c) a weak new upmove (“that is no upmove I have ever seen before”)

d) the buying pattern dissipates

e) blow off topping action

If we see the above that can be a Reason2Sell.

I am not a big fan of stepping in front of a big order as the ONLY reason to enter a position.  Combined with strong technicals and I might step in front.  This reason alone is almost never a reason I enter a trade.

Now having said that I do know of and have trained traders who became very good at this- stepping in front of big orders.  This technique worked better in 06 and better still in 03 and better still in 01.  As time has passed this technique has become less effective for most.  These traders saw a big order on the bid that foreshadowed a big buy order and stepped in front.  This is the key.  They did not step in front of EVERY big order.  They stepped in front of the ones that tipped to them the big order would STEP HIGHER and thus the stock would trade higher.  They might buy 3-5k shares of this stock for just spotting an unusual big order and ride it for 25-50c.   They wanted that big order to STEP HIGHER. And they got paid for this play.

So there is money to be made mastering this trade.  There is less than the mid 2000’s.  But it still pays for those who discern the real from the fake big orders to step higher.

I hope that helps.

Bella

One Good Trade