When I trade a stock “off the beaten path” (see my previous blog post), I always have an understanding of where the stock is in its trade along with the broad market. I’m always watching SPY levels and how the SPY trades. This allows me to make a better assessment of the relative strength or lack of in my stock.

I get clues from this that tells me what’s important on the tape or what’s just noise in the stock. Without knowing where I am in the trade and this relationship I would just be lost and prone to handing my money over to someone else that is using GPS. For example, a stock in which I am considering a long entry has just broke out above a decent technical level but the SPY is very close to running into a resistance level up above. I will most likely wait some and not just chase the breakout, figuring that when the SPY hits the level above it should find some selling which could give me a chance to get in better.

The GPS may help me find my way to a better entry and awesome new relevant information to plug into my analysis. If it retraces to the level or even swaps below the level but then quickly takes it back I can use this info to make the trade. I get to gauge how it acts with selling in the SPY and give a better gauge of its RS (relative strength).

I also get to observe or maybe even trade the expected resistance in the SPY and use the action of the SPY to determine if I take the trade or pass on the long altogether by noting the aggressiveness or lack of in the selling. My knowing where the levels are in the market equates to using GPS to avoid getting lost. Without the GPS I probably just blindly buy the break out, get long, and when the SPY hits the level above any selling may cause the stock to retrace and either stop or shake me out.

I’m sure some of you are thinking, but then you missed the break out, what if no selling comes into the SPY? In this case the GPS told me it was the first time into resistance for the SPY so a high probability of finding some sellers there. If it’s the third time in now I am probably long on the break with a high probability of a breakout in the SPY…tape reading and using the GPS my friends.

Let’s say that it’s the first time into resistance and there are no sellers where I expected sellers in the SPY, so no retrace in my stock, now what? Me ..I am using that great piece of information and recalculating all of my probabilities in the trade and working hard to find entry and maybe even bigger than originally planned. That’s tape reading, letting the tape tell me what to do. In my preferred trades of “dime for dollars” missing a small part of the trade doesn’t mean much and most times I can get a higher probability trade with the new information and still great risk reward.

My use of GPS lets me know where the turn may be before I get there, less chance of missing it and getting lost. Tape reading is about using the new information the market is giving you and using it to exploit an opportunity.Jeff Davis    @Shaq48_Trading    [email protected]