Question:
Hey SMB Prop Traders,
Keep up the hard work I have a lot of respect for what you guys do. I’m currently heavily engulfed in learning the in and outs of trading before committing to any positions. Something that has been playing on my mind since reading an article in the Australian Financial Review regarding EFT transactions is how as a trader can you determine the true trading volume without the institutional edge. For instance EFT transactions have increased dramatically from 3% for July to 10% for August across the investment banks (predominantly goldman sachs). This may seem deceptive for the everyday tarder as low trading volume may not be the case with high EFT volume off the market and away from the public eye. Do you have any insights as to decipher the trading volume? and how closely should it be tracked given its mystery?
Bella Responds
You are not the first person to have difficulty reading the order flow with an ETF. There are many times when you cannot. Let’s focus on when the tape does give us an edge.
1) Spot much more volume being done at the same price than other levels. If next the ETF breaks in the direction of the intraday trend then this is a high probability trade. If 50k shares are done every penny and then 500k share and done at the same price, now you have an important price from reading the tape. So much volume being done at the same price may signal a large order has entered the market.
2) On the Open the tape is easier to read. A held bid after an ETF has gapped up on the open, with fresh news that will move your ETF, is a trading play to consider so you do not miss an opening drive.
3) A fresh news event that moves your ETF will leave a tape that tends to trend better and is easier to read.
4) If you spot strength on the tape near a support level or right above a previous resistance level, this is an excellent trading opportunity.
5) Follow the order flow in the last hour as stocks are much less likely to reverse.
We rarely make trades based solely on the order flow. We make decisions by combining intraday fundamentals, reading the order flow, and technicals. For certain trades the tape receives a healthy part of our decision making, and for others a much smaller slice. Please keep this in mind when you use the tape to make trading decisions.
Reading the Tape is a skill. While I offer the points above to point you in the right direction, you cannot develop the skill by reading this blog. Now it takes a great deal of practice, critical feedback, and sustained energy working on this skill from you.
Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley Trading)
