Tape Reading-Introduction

What is tape reading?
Tape reading is the art of studying pure price action in real-time, based on the data fields in the Level II box. Using the tape you are able to gauge player’s psychology and imbalances in supply and demand to formulate trades. Tape reading is a leading indicator because it analyzes current: bids, offers, and volume transacted at a given price (collectively known as “order flow”) as they happen, unlike charts and studies, which are derivatives calculated from order flow data and displayed after the fact. Bids, Offers, and actual transactions are what happen NOW. Charts, MACD, RSI, are created later. They are the history of price action.
Because you see the characteristics of buying and selling as it happens, developing this skill will improve your entries and exits, minimizing your risk and maximizing your reward by allowing you to catch larger moves using smaller stops. Tape reading is a tool that will put you ahead of many other traders who think technical analysis is the only skill they should know, giving you access to more plays that charts simply don’t show you. With tape reading you will be able to determine where the stock is going to move 70% of the time.

Why is tape reading important?
Because it gives you an edge, an additional tool to improve your entries, exits, and trade management.
Back before charts were actively used, most intraday traders would trade by using their skills of reading the tape, and reading the tape only. There were no charts or indicators for them to use. The last thing tape reading gives you an edge to combat the algorithms and HFTs prevalent in today’s trading environment.

What can you se e on the tape that you can’t see on the charts?
Bar/Candlestick charts depict a range of price action defined by the open price, range, and close price, over a specific interval of time, or in the case of tick charts the price action over a specified number of transactions. What the individual bars don’t tell you is how bids and offers acted at a given price, or the specific volume transacted at a price, within the time-frame (or transaction count in the case of tick charts) of the individual bar. By reading the tape you can see the active buyers and sellers and see what levels they are participating at by watching the supply and demand they seek. You can follow a certain buyer and recognize the pattern in which he is accumulating the stock. The same goes for sellers. With tape reading you can feel how the market is taking your orders and have a sense as to whether a certain stock is weak or strong. For example: if a stock looks weak on the chart but it is very difficult for your bid to get hit then that is a clue that there is not that much selling happening, so the stock might not be that weak after all… but more on this later. Finally, charts are showing you past data… granted charts are valuable, but when you mix tape reading and technical analysis you will have an edge many intraday traders do not possess.
How tape reading is an art and not a science Tape reading is not a science. It is not like learning how to do an experiment, and then being able to repeat the experiment with success adinfinitum. Because trading is a probability driven activity, and different stocks have different “personalities,” tape reading is something you learn over long periods of observation and personal experience. The more you watch the tape, the more you will be able to identify certain patterns. The basics of tape reading are very simple, but after you understand the foundation of tape reading you will only get better over time.

How doe s tape reading affect efficiency with entries and exits?
We defined the difference between the tape and charts in an earlier question. The granularity of real-time data on the tape, because it allows you to analyze “intra” bar data. It also allows you to choose entries and exits, with finer granularity. You don’t have to wait until the next bar on the chart to make a decision, which could both reduce your profit potential and increase your stop risk. Here is an example of using the tape to get long at a great entry:


In this chart, you can see that GMCR gapped up big on news over the weekend. By using just the charts, your entry would have been long at $34.15 when it broke the high or even $33.96 when it broke the mini range. By using the tape to find an entry you would have noticed there was a held bid and accumulation around the $33.50 level. You could have gone long at $33.51 with a stop at $33.44 (or when the bid dropped and offer held below 50c). That would have been a great entry and tighter risk using the tape instead of getting long at $34.15 or $33.96 risking about 50 cents. Also, your risk reward ratio is heavily skewed in your favor using the tape.

How doe s tape reading lower risk?
A good example is the one above on GMCR. By using the tape you can spot accumulation (held bids) or distribution (held offers) and go long (just above a held bid) or go short (just under a held offer), using a break of the held level as your stop. If you are looking to buy in an uptrend, or add to your position, but do not want to chase you can look for a held bid to get in, and the subsequent failure of the held bid to get out, keeping you from taking on unnecessary risk. Below is an example of lowering your risk while finding great entries and exits:

ASTM was in play after a trading halt, and subsequent re-opening, moving down sharply, we don’t usually play stocks that are/were halted but this presented a great risk reward situation to enter a trade. Although ASTM is a cheap stock (we don’t usually trade sub $10 stocks either) there was a great opportunity to trade it. ASTM opened up after the halt and dropped sharply. We looked for a great entry to short while keeping our risk low. ASTM bounced and started to hold an offer around $3.60. Also, when the offer was being held another big offer showed up. You can’t see that on the chart, but you can, if you know what you are looking for, see it on the tape. We got short and waited for the offer to get filled to get out. Our risk was about 3c if we saw the order decrement quickly we would have hit it also and not waited for it to get filled. Some of the order got filled but not quickly then the stock dropped. The stock kept dropping and the offer kept stepping lower. Finally the remainder of the order was filled around $3.15 where we exited. Not a bad trade risking a few pennies to make about 45 cents.

How doe s skill at tape reading improve understanding chart patterns?
Tape reading will improve your understanding chart patterns because you will be able to see the supply and demand dynamic in real time. A prime example of this is GMCR from above. GMCR showed some technical support and you saw there was accumulation on the tape, a great set up to get long while keeping your risk tight. Also, with tape reading if a stock reaches a significant long term technical level you can spot on the tape how it’s reacting to it and play it from there, all by seeing what the buyers and sellers are doing real time.

How do you improve tape reading skills?
Improving your tape reading skills will take time. You will only get better by watching the tape. You will understand and see more things on the tape 3 months from now than you will see today. To help accelerate the learning curve you can watch video recording of your trades or watch video tape from the Bidhitter.com library of trading tapes. It is easier to spot something on the tape when you are not in a trade and the market is closed. As I said before, the best thing to do to speed up the improvement process is to screen record your trades, and then review them after the close when you are not under the stress of the trading market, and to tap into the Bidhitter.com video library of recordings.Trading the ope n with only reading the tape Trading the open with just charts is difficult because actionable levels for the day have yet to be defined.
Granted, you have previous technical levels from other days and time-frames but your edge on the open will most likely be on the tape. Intraday traders make most of their money on the open and the close because those are the times when the market and individual stocks move the most and have the most volume during the day.
By knowing the Market Maker box you can find key levels, almost predicting where the chart will go, and find good entries for longer-term trade s.
With the Market Maker box you will be able to find key levels where significant volume has been done and trade off those levels while keep your risk tight. If a certain level has done a significant amount of volume and doesn’t break it, then you have spotted a great entry to trade with a core while scalping around it to lower your risk and make some quick chops when you spot them on the tape.

 

Tape Reading in Day Trading

Tape Reading, reading from the tape, it’s one of daytrading strategies, which deepening can help in maximization of your profits and to reduce losses. It is trading strategy, which is well-suited in day trading investments on the stock markets.

It is worth to emphasize that reading from the tape enables to capture specific setups (systems, which it is possible to compare to the formation from technical analysis) up to trading, both long and short positions. Analysis of the tape is also useful in the decision making to close the position earlier (than e.g. it would result from technical analysis).

On which markets it is possible to use Tape Reading?

Tape reading is possible on markets, which provide so-called market depth. Market depth shows what orders are on the value, at what prices and in what sizes of position.

The best examples are stock exchanges, where using reading from the tape is possible. The largest stock exchanges in the world are US NASDAQ and NYSE. And similar to them are European stock exchanges: NYSE Euronext, LSE or German XETRA.

What tools are used in Tape Reading?

In order to use Tape Reading, the trading platform must provide tools used in this strategy: window of quotings (so-called Level II) and transaction window (so-called Time and Sales).

Time and Sales – transaction window

Transaction window, i.e. so-called Time and Sales Window, called by traders a tape or pass, is a basic sources of information about concluded transactions on the market.

Amongst information concerning individual transactions we will read:

  • transaction time

  • price

  • size of orders

  • on which ECN was concluded transaction

Below I present the transaction window:

Tape reading

Level II – market depth

Market depth, i.e. so-called Level II, informs us about the prevalence of demand and supply on a given instrument. Analysis of appearing orders enables to support the investment decision. The study of placed orders on Level II window enables to search for repeating setups. It is possible to compare it to finding formation of technical analysis on the graph; in the same way we seek repetitions on Level II window, which in a determined period had appropriate effectiveness of profits.

Below I present the market depth:

Tape reading

What information can be read from the market?

Taking into account the data, which it is possible to read from tools mentioned above, the foundation of decision making is based on a price and volume of the transaction. These two factors, combined with determination of the probability level of determined setup recurrence, enables to effectively increase the number of successful transactions. And the effectiveness of transaction decides about your success on the market.

Traders focus on analysis of tools mentioned above in terms of evaluation:

  1. Size of orders

  2. Prices of placed orders

  3. Spread, and consequently the risk with entering positions

  4. Volume

  5. Execution of orders

  6. Size of executed orders

  7. Time of placing orders

Analysis of above factors, allows for proper selection of companies in terms of opening the position. An aim is to reduce the risk only to those companies, where specific strategy that uses tape reading is most likely to occur, with limited risk associated with opening the position.

Summary about tape reading

As in all trading strategies, also in tape reading, the basic features are most important for trader, i.e. patience and consequence. Waiting for a specific play on the market often is gripping, which may constitute a problem for active traders, who hate situations when don’t have opened position on the market. This leads to situation, when trader tries to warn building setup, so he enters the market in a bad moment or the entry turns out to be completely bad (because of final setup use). In every strategy, it is necessary to act very precisely and scrupulously. It is no different in Tape Reading.

Reading from the tape in quite strong harmonizes with using basic formations of the technical analysis, i.e. supports and oppositions in connection with volume rate. Most of information, which result from analysis of the tape, it is possible to relate to analysis of supports and oppositions on the graph; however they allow with prejudice to find these levels, before it will occur on the graph. Peculiarly, this regards lower intervals: 1, 3 or 5 minute candles.

Analyzing the tape in the initial period of this method can be quite frustrating. Transactions on US stock exchanges, where tape reading is the most effective (due to the level of liquidity and the number of companies listed on US stock exchanges) are concluded very quickly. Compared with the Polish stock exchange, often it is possible to be under the impression that these transactions are carried out as an accelerated video cassettes. This fact, in the first period of behavior analysis may discourage. However, it is necessary to remember that in every profession, a time and practice are needed in order to draw conclusions and to make quick decisions based on what can be seen and read from the tape.

In the next section of articles, I will present ways to using Level II and TAS during trading on stock exchanges. There will be also described ways of reading the information from the market.

Trading with an Efficient Market Filter

The probability of our long term success as traders increases when we trade with the prevailing market trend. This means when trading stocks we should be buying when the overall market is rising and / or shorting when the overall market is falling. In order to filter trading opportunities therefore, we need an efficient way of determining the current market regime. In this article we’ll focus on defining a market regime filter for use when trading large cap US stocks, so our proxy for the overall market will be the S&P500 Index.

When defining a market regime filter, we’re looking for a measurement with the following characteristics:

  • Ability to discern a bull market from bear market
  • An indicator than can oscillate between the two regimes
  • Reactive enough to signal bear markets early and to identify bull markets quickly
  • Stability, in that it doesn’t whipsaw too often
  • Low number of false positives
  • It should also conform to the KISS principle.

So, as you might be able to tell, any oscillator which is able to measure and switch between the market being bullish or bearish will be a candidate for the job. There are of course many indicators that would fit that bill, but we have to start somewhere, so here’s three that we’ll try.

  • Index close price against a simple moving average
  • Dual moving averages crossing
  • Moving Average Convergence Divergence (MACD) against its zero line

And here’s our ground rules for testing:

  • Simulate a Buy in the index when the filter turns bullish
  • Simulate a Sell in the index when the filter turns bearish
  • Apply to the S&P500 Index ($SPX)
  • Weekly timeframe
  • In-sample period 2001 – 2010 inclusive
  • Optimize for Compound Annual Return to Maximum Historical Drawdown ratio (CAR/MDD)

Simple Moving Average

Possibly one of the widest known methods of filtering for market regime is checking whether the close price is above or below the 200-day simple moving average. It’s reputedly even used by many professional fund managers, but how does it really stack up?

The first thing to recognise is that the period on the MA is going to be key. Here’s a 40-week MA (in green) [approx 200-day] compared to a 120-week MA (in blue). You can see the 120 period is more stable, but slow to react, whereas the 40 period is much faster to react but is more choppy and creates many more false positives.

MA40-120

 

So we’ll run an optimization on the lookback period and see what comes up best. Here’s the result of looking at all lookback periods between 25 weeks and 120 weeks, against the CAR/MDD produced.

SMA Test

The first thing to notice is the very low numbers and the very high numbers produced the worst results. But there is a range of decent results in the 70-95 range. Notice 40-weeks, the one supposedly most discretionary traders rely on, is one of the poorer results.

When selecting a value to use, we rarely want to select the number one best result from the optimisation, as it’s often an outlier and the result of getting lucky, so we’ll take one of the nearby results that has other similar level results around it. For the purposes of this test, I’m going to use 75-weeks and compare it to a Buy & Hold baseline.

SMA Results

Clearly it has done a better job than Buy & Hold (yes the index really did make a loss over the 10 year in-sample period!). In particular the filter has managed to minimise drawdown, which is always desirable, and it has done so with a low number of turnovers which is also good.

So, let’s now move on and see if the other methods are any better or worse.

Dual Simple Moving Averages

By using dual moving averages crossing, we will be eliminating some of the noisiness of using the bare close price in the above test. That you would think should lead to a more stable indication. The question of course is whether the cost of any increase in stability will be a decrease in responsiveness and more lag. We’ll run an optimisation on a range of values for both MAs and compare the results. This time because we have two parameters, the chart becomes three dimensional.

dualmaopt

Clearly the results themselves are quite noisy, with a number of sharp peaks, indicating outlying results. So, again we’re looking for an area of stability, or so-called “high plateau” where there are a group of similarly good results nearby. The area I’ve highlighted with the white circle is about the best pick of the bunch, so we’ll select a pair of parameters from in there. I’ll select 10 and 53. Let’s see how that compares to the previous method.

table 3

As you can see it produced the same max drawdown as the simple moving average, but with less gain and more turnover, leading to a (slightly) lower return to drawdown ratio.

MACD

The MACD is well known as an oscillator, so it could be ideally suited for our purpose. It is also made up of two underlying moving averages, so it’s already smoothed. We’re not concerned with the MACD Signal Line here, we’re only interested in the MACD line being above or below zero to signal bull or bear market conditions respectively. The two inputs to the MACD are the lookback periods on the Fast and Slow EMAs that make it up, so let’s optimise for both those numbers.

macdopt

This time we have a reasonably smooth result. There are still some outlying spikes, but also some stability across a range of parameter values. This is encouraging. The results are zero in the back corner, but this is because the Fast EMA period has to be less than than the Slow EMA period to register any result at all. There does appears to be a good spread of similar values in the white circle, so let’s pick a pair from there and compare that to the other methods. Let’s take 20 for the Fast EMA and 34 for the Slow EMA.

table 4

Here you can see it turnovered fewer times than the first two methods, and although it picked up the highest return, but the additional lag meant it also incurred the largest of the drawdowns, leading to a lower CAR/MDD.

Side-By-Side

Here’s a side-by-side comparison of the in-sample outcomes against $SPX for the chosen parameter pairs for each of the methods.

in-sample

As you can see on the chart and in the results, they all do a reasonably similar job, so before deciding, it might also be worth taking other considerations into account, such as consistency of results for example.

Finally, we’ll take a wider look at the best candidate, ie being long when the SPX weekly close price is above its 75-week MA.

smachart

On a chart as you can see it would have kept you on the long side for most of the recent bull market, although there have been a few false positive crosses to the downside along the way.

Looking at how the performance of the index would have gone applying the SMA filter:

oos

Clearly it wasn’t fast enough to react to the 2011 market correction, and so it’s maximum drawdown has increased in the out of sample period, but otherwise it would appear to have performed in line with expectations.

Summary

Just based on this limited test, it appears something as simple as a single simple moving average can be useful as a market filter, although as we have found, using the common 40-week lookback period has been sub-optimal historically. Longer lookback periods it would seem, appear to work better. However, the out-of-sample performance perhaps does raise some concerns about the filter’s ability to protect against a more volatile market.

There are of course many more indicators we could look at, and you should do so before deciding on which is the best filter for your own purposes. For example other types of moving averages, EMAs, WMAs etc. or other types of oscillating indicators, such as RSI or Stochastic could be considered. What about even the MACD Histogram? If you have any ideas of your own, leave it in the comments below and we could test them in a future article.

Remember of course, this is not a trading system in itself, merely a building block that could be used as part of a system.

  • About Author :- Alan Clement is a Certified Financial Technician, Quantitative Analyst, Trading System Designer and Private Consultant with over 20 years experience in the financial industry. More on this http://bettersystemtrader.com/063-market-regimes-with-alan-clement/

Remote Trading on US Stock Markets

What’s the difference between Remote Trading and a job in the prop trading offices

Remote Trading is still trading for the proptrading company, but in this case to own financial risk and without the owner of the branch. You trade directly for the head office of proptrading company with the own financial security.

You trade directly for the head office of the company or subgroup, which cooperates with it. Such subgroup is Global Markets www.tradingglobalmarket.com. In each of these cases you are sure of receiving a great payout. In case of subgroup dedicated to the given market (in this case us) you have a full support in local language and a lot of extras .

However, the key is that as a remote trader you take the financial risk. You have your security in a form of “performance bond”. In case if you lost in a unique situation more than you have on performance bond, you will have to cover this difference.

Although, in those companies are departments of the risk management, which guard maximum level of performance bond, there may appear unpredictable situations.

What the prop trading company provides?

There are certain differences between what the proptrading offices provide, and what do you receive as a Remote Trader.

  1. Trading Capital – so-called buying power

You have good trading strategies, but for example you don’t have a capital. Buying power offered by the proptrading company will provide it for you. Buying power, i.e. capital, which you can use in trading. Here I emphasize that this aren’t the customer’s money of the company, etc. The company doesn’t accept any deposits from people from the outside. Therefore, you don’t manage money of third parties.The remote trader provide a certain amount as risk capital(usually small) to cover future losses and technology costs.

  1. Commission rate

You are an active daytrader, carrying out a few/several or dozens of transactions within a single session. In such a case you start calculations. Where it will be cheaper? In case of Remote Trading – commission level depends on the volume generated by you.

  1. Payout split

In case of Remote Traders, payout split is usually on a level of > 80%. Everything depends on whether you have a trading history. Your average monthly profit is significant and on it the offer is based, which you can receive for the given moment.

  1. Charges for data/platform

Traders in proptrading companies are treated as pro traders, i.e. they pay for stock market data in a professional form. Therefore, all quoting cost about 300$

  1. Trading position

As a Remote Trader for trading position you must take care yourself. Apart from the computer you must pay attention to stable Internet connection.

  1. Development/trainings

Remote Trading is directed above all to experienced traders. Therefore, companies don’t offer trainings or courses for people who wish to open an account.

Do you want to be a Remote Trader?

Remote Trading is not for everyone. In case of companies, which offer a possibility of remote trading – most requires interested parties – so-called track record i.e. trading history.

Alone for a few years I did similarly in my group. Then I decided to open also to completely green persons. I stated that if somebody strongly wants, and succeeds – why not to give him a chance?

Not everyone has so close to the proptrading offices, in which they can start. In such case, the possibility of trading as a Remote Trader is perfect. However, remember that being a remote trader – you are your own boss. Hence, no one will stand over you with a whip and guarded whether you are cutting losses out, whether you hold on to your assumptions. Through this stage you will have to go alone.

Somebody may say that Remote Trading takes traders from proptrading offices. Yes, it’s true. But such is the market. It’s the same as traders change accounts in brokers, because one has a better offer from another. It’s similar on this market. In my perspective – I traded for a few years in the office, I let the company earn. For me transition to remote trading or trading at the broker it is the only option for definitely better payout i.e. profit distribution.

What is the difference in payout split

Thanks to prop trading, traders are able to receive payout up to > 90% of results, rather than 30-50 % as in proptrading offices. I provide this level from 80% with a lack of trading history. A considerable difference, isn’t it?

What agreement is concluded in Remote Trading?

It is usually so-called Trading Service Agreement. You sign it directly with the proptrading company. Based on this agreement, you receive conditions that you negotiated on the basis of your experience. Formalities in addition to signing the contract apply to signing the next “Exchange agreement” for quotes and access to markets. After all that remains transfer – and expectation for your account activation.

Settlement of taxes

In proptrading offices the owner usually employs traders on different type of the agreement. In case of remote traders, the agreement is signed directly with the head office of the company. All settlements are on the head of trader. He must take care of tax settlements. Most often remote traders have their business activities.

Remuneration

Remote Trader earns only % from generated profits. Companies don’t pay the base salary.

You have experience in U.S. markets

In this case, the terms of cooperation may be even better. Personally, when I receive so-called track records (i.e. history of trader results) I see clearly – what are the trader’s slides of capital, risk and stability. In case of good track records, we negotiate even better deal for trader.

Remember that proptrading companies differ from brokers, that they are interested in traders. The aim is to take the last cent provided that you carry out turnover. The most valuable are traders who generate profits, best stable. Do you see the differences in relation to the broker?

You don’t have experience in U.S. markets

In this case, I think that it is worthwhile for beginning to reduce the risk. Learn to trade; develop your strategy – with smaller risk. Don’t try to earn a lot of money right away.

It is not a casino.

Start with 100 shares, which constitute the minimum size of position. Reduce your daily losses to e.g. 50$, or maybe to 30$.

Reduce the risk – do not trade on expensive companies, with high volatility, high spread.

In this case, the terms of cooperation can be standard on the start. In relation to the fact that you don’t have trading history, the company isn’t able to determine to determine the risk to which you expose them and your potential.

How much time is it worthwhile to devote when you don’t have experience?

Everything depends on how much loss you can afford and how much free time you have. Just as in the proptrading offices, I think that a period of 4-6 months is appropriate, maximum 8 months. If at that time you won’t start to generate profits, you should find yourself a different job or try on other market.

It happens that I beginning the cooperation with remote traders, who give up after a few sessions or 2 weeks. In my opinion, it is too short period to check and assess own potential.

As a Remote Trader must I pay some funds?

Yes, as remote trader you have your own financial security. The same as when you open the account at the broker. However, you don’t trade with these funds, they constitute so-called performance bond. This is security up to obtained Buying Power – i.e. real funds, which you can trade on the stock-market.

Is it only daytrading? Whether they are possible overnights?

In case of Remote Trading, there is possibility to use overnights. However, in this case a greater financial security is required. Such a possibility is usually offered to traders, who have already experience and trading history.

If you don’t have an additional agreement, which enables you to use overnights, in such a case when unhappily you won’t manage to close the position – you must be aware that payment for leaving position overnight will be charged (rather small) and the company takes over the entire profit, but the loss is on you.

 Pattern Day Trade Rule

Trading as a part of Proptrading Company, we avoid Pattern Day Trade Rule. Thus, trader is not forced to hold the capital of min. 25 k$. Of course, this doesn’t mean that such or larger security traders a part of proptrading company don’t have. However, at the beginning it is possible to start from 2 k$, which in relation to 25 k$ constitutes a big difference. More to this subject you can read in the article: Pattern Day Trader – what consists of and how to avoid it.