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Tape Reading from Level One

 
 

 


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MTrader Class (C) copyright MTrader

March 17, 2004
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by Shawn Wolff (Gimmie)

[09:40] <Gimmie> we have been talking about finding tops and bottoms..
[09:41] <Gimmie> and in my previous classes.. I stressed the importance of first knowing when to look for a bottom... before knowing how
[09:41] <Gimmie> and last class.. I started going over the level one quote screen a bit
[09:43] <Gimmie> because we are dealing with strong momentum a lot of times.. charts are often lagging too much to really time an exact bottom on a volatile stock
[09:43] <Gimmie> they will show you what has happened in the last one minute at best...
[09:43] <Gimmie> but a lot can happen in one minute
[09:44] <Gimmie> so to time a top or bottom.. that is often too late...
[09:44] <Gimmie> we need a more immediate look at the current market within a stock...
[09:45] <Gimmie> what is going on at that very moment...
[09:45] <Gimmie> Two ways to see this...
[09:45] <Gimmie> 1. Level Two...
[09:46] <Gimmie> which will show you.. not only who is trading it presently.. but who is lined up "wanting" to trade it...
[09:46] <Gimmie> which can be valuable... can also be misleading though
[09:47] <Gimmie> and it appears very busy.. because there is even more going on than the trades that are actually going through...
[09:47] <Gimmie> so it can be very confusing...
[09:48] <Gimmie> it requires a lot of practice learning to read it.. like anything else..
[09:49] <Gimmie> 2. Level One.. or Time and Sales...
[09:50] <Gimmie> these are the trades that are going through.. in the order they are going through...
[09:51] <Gimmie> and this is the method I am going to talk about today...
[09:52] <Gimmie> and tomorrow.. and probably for a few days.. until its clear what I am talking about
[09:52] <Gimmie> and someone finally says.. Oh I get it now
[09:54] <d> i see :)
[09:54] <Gimmie> Ok... for any stock..
[09:54] <Gimmie> not yet d !
[09:54] <Gimmie> :-)
[09:55] <Gimmie> OK.. for any stock.. we really only have a handful of limited information
[09:55] <Gimmie> we know that stocks move because people buy or sell them...
[09:55] <Gimmie> and we are trying to predict what those people will do in the future...
[09:56] <Gimmie> but we cant see them.. and we cant see what they intend to do..
[09:56] <Gimmie> we can only see what they are presently doing...
[09:57] <Gimmie> and we can try to predict what they will be doing.. based on past patterns of behavior
[09:58] <Gimmie> that is the tracking part...
[09:59] <Gimmie> the knowing when part...
[10:00] <Gimmie> the information we have is.. Price... Volume.. and Time
[10:01] <Gimmie> In level one.. we can see what they are presently doing...
[10:03] <Gimmie> So lets go over the level one screen.. and see how to identify the price.. volume...and time..
[10:04] <Gimmie> because what they are presently doing.. is our last clue to what they will be doing in the future..
[10:05] <Gimmie> which becomes our last confirmation.. of whether or not they are following the patterns
[10:07] <Gimmie> So.. one our screen.. first up is Trade Volume
[10:07] <Gimmie> this is the volume of the last trade made...
[10:09] <Gimmie> Next is Last Price
[10:10] <Gimmie> That is the price of the last trade made
[10:10] <Gimmie> these two combined... are like a time and sales list...
[10:10] <Gimmie> only you can only see one trade at a time.. going through as it is made
[10:11] <Gimmie> So they are blinking constantly... and changing
[10:13] <Gimmie> The next row on my screen is the Bid.. and the next after that is theAsk
[10:13] <Gimmie> these four columns.. are the heart of your level one tape reading...
[10:14] <Gimmie> from these four columns.. you can tell..
[10:15] <Gimmie> the direction of a stock... the pace of trading... and to a great extent how thin the levels are...
[10:15] <Gimmie> First lets talk about the pace...
[10:16] <Gimmie> we want a steady pace of trading... that means we want to see steady blinking in the Last Price and Volume columns
[10:16] <Gimmie> why ?
[10:16] <d> action?
[10:17] <Gimmie> because... it adds a lot to the predictability of the trade.. and the liquidity
[10:17] <d> yes
[10:17] <Gimmie> remember.. we cant see all the people we are trading with
[10:17] <Gimmie> we cant see how many people are sitting there "intending" to trade.. who havent made a move yet
[10:18] <Gimmie> our only way to measure their interest.. is how many are currently there trading the stock
[10:18] <Gimmie> so if we see a large price movement.. to a predictable barrier... how will we know whether or not anyone will take the bait ?
[10:18] <Gimmie> we dont...
[10:19] <Gimmie> we have no idea who is even watching with us
[10:19] <Gimmie> but if we can see them visibly actively trading... we know they are there... we know they are watching... we know we are not alone
[10:19] <Gimmie> so the chances of someone out there responding to the barrier.. is much greater..
[10:20] <Gimmie> say a stock moves down from 12 to 10... in two minutes... with lots of volume....
[10:20] <Gimmie> for no reason.. no news...
[10:21] <Gimmie> the counter-reaction will be much more predictable.. than if that same stock moved down from 12 to 10.. in 2 hours.. with very low volume
[10:21] <Gimmie> low volume says.. no one is playing it
[10:22] <Gimmie> if no one is playing it.. how can we tell that they will play it in the future.. even if the barrier is compelling ?
[10:22] <Gimmie> we cant
[10:22] <Gimmie> not predictably
[10:23] <Gimmie> it needs that whoaa factor...
[10:24] <Gimmie> whooaa.. look at that!
[10:25] <Gimmie> if thousands of people see the same thing... and we know they are there seeing it.. because they were just there trading it a second ago...
[10:25] <Gimmie> we can more confidently expect a reaction from them
[10:26] <Gimmie> kidn of like.. if a tree falls in the forest and no one is there to hear it.. does it make a crash.. or however that goes
[10:27] <Gimmie> so our Last Trade Volume.. and Last Price columns...are our clue to how active they are...
[10:27] <Gimmie> we want steady blinking...
[10:27] <Gimmie> actually we can see this in the Last Price alone.. but the purpose of the Volume is this
[10:28] <Gimmie> we want lots of active traders.. so we want lots of smaller trades...
[10:29] <Gimmie> if the total volume for the day is 1 million.. and you happen to see that there were four 200K block trades...
[10:30] <Gimmie> that makes the volume a bit misleading.. making you think the trade is more liquid than it is
[10:30] <Gimmie> more active than it really is
[10:30] <Gimmie> useful early mornings.. and pre-market
[10:30] <Gimmie> also...
[10:31] <Gimmie> say the market is tanking... 5 days in a row.. and we get this capitulation one afternoon
[10:35] <Gimmie> then.. we start to bottom...
[10:35] <Gimmie> if you see a lot of big blocks passing through in the Last Trade Volume
[10:35] <Gimmie> like.. 100K blocks or more
[10:35] <Gimmie> things that normal people cant afford
[10:36] <Gimmie> you know that institutions are moving in
[10:36] <Gimmie> may be some sort of buying program or something
[10:36] <Gimmie> its just a little clue...
[10:37] <Gimmie> OK.. so thats how we just the Pace of trading.. from the steady even blinking
[10:37] <Gimmie> anything in our sector leaders list.. with good average daily volume.. will not be a problem... will usually have good pace..
[10:38] <Gimmie> but the pace.. is the first sign of a direction change...
[10:38] <Gimmie> imagine a freight train changing directions.. they are too big and heavy to stop and turn on a dime
[10:39] <Gimmie> a freight train of stock momentum is the same...
[10:39] <Gimmie> so say a stock is moving up after open...
[10:39] <Gimmie> we will see active pace.. active trading volume.. active blinking... and price movement moving up
[10:39] <Gimmie> as it nears a top... we start to see a slowing...
[10:40] <Gimmie> not only in the price movement.. but also in the pace of trading...
[10:42] <Gimmie> Imagine someone offers you a 1969 Corvette in mint condition.. for 1000 dollars..
[10:42] <Gimmie> you would fall all over yourself to accept the offer...
[10:43] <Gimmie> probably
[10:43] <Gimmie> 2000 dolllars you would still jump
[10:44] <Gimmie> they can be worth up to like 100K
[10:45] <Gimmie> so.. at 10K.. still jumping...
[10:45] <Gimmie> 50K.. hmm.. still jumping.. but not as enthusiastically
[10:45] <Gimmie> 70K.. I want to look it over well and have it appraised...
[10:45] <Gimmie> 80 K.. hmmmm.. not sure...
[10:46] <Gimmie> the higher it goes.. the more hesitant you become.. the less anxious...
[10:46] <Gimmie> so the speed of your jumping slows down...
[10:46] <Gimmie> pauses...
[10:46] <Gimmie> the same with stocks..
[10:47] <Gimmie> so nearing direction changes... we usually see...
[10:48] <Gimmie> a pause in the price...
[10:48] <Gimmie> and a pause in the number of trades per minute.. the pace...the number of people jumping at the offer...at that price
[10:49] <Gimmie> The next thing that the Last Price will tell you... besides the pace...is the direction of the price...
[10:50] <Gimmie> The last price is.. the last trade made.. and its usually red for sells and green for buys...
[10:51] <Gimmie> ok this part can be confusing...
[10:51] <Gimmie> because.. actually
[10:51] <Gimmie> for every buy.. someone is selling it right?
[10:51] <Gimmie> we tend to think of a stock that is climbing.... as getting more buying than selling
[10:51] <Gimmie> but its not quite that cut and dry...
[10:52] <Gimmie> its actually the intensity of buying that is increasing.. the demand to buy.. vs the demand to sell
[10:54] <Gimmie> so every green trade.. actually respresents a trade made at a higher price than the last
[10:54] <Gimmie> but for all practical purposes.. lets just say buys are green
[10:54] <Gimmie> because thats usually what is going on
[10:56] <Gimmie> OK.. now imagine.. the Last Price column.. is a freeway... and you are sitting in a lawn chair alongside the freeway... and you are staring straight ahead... so that you can only see one car at a time
[10:57] <Gimmie> as they fly by
[10:58] <Gimmie> but on this particular freeway.. there are only green and red cars
[10:58] <Gimmie> your job is to watch the cars as they wizz by.. and take a mental note...
[10:59] <Gimmie> kind of count in your head.... keep a mental ratio.. of how many green cars and how many red cars
[10:59] <Gimmie> but this isnt all that hard.. because these cars tend to run in herds...
[11:00] <Gimmie> So.. our stock has fallen from 12... and the pace of trading is pausing.. and it is nearing 10
[11:01] <Gimmie> on the way down.. we see... red red red red red red red red red red red red red red red red red red red red red red red red red
[11:02] <Gimmie> as we near 10 though.. we see something more like.. red....... red...............red..............red.............red
[11:03] <Gimmie> then... as the price starts to stall... the freight train is slowing down...
[11:03] <Gimmie> its thinking about turning and changing directions...
[11:03] <Gimmie> red..... red......red...........green............red....
[11:04] <Gimmie> as it nears the bottom... the ration evens out..... red.. .. green...... red....... green....... red........green...
[11:04] <Gimmie> ratio
[11:05] <Gimmie> then... as it starts to change direction... the greens start taking over..... green........ green...........green...........green..........
[11:06] <Gimmie> and as it heads back up.. off 10.. and starts climbing.... momentum builds.. and we start to see.... green green green green green green green green green green green green green green green
[11:06] <Gimmie> the point is that... the ratio slows... evens out.. then changes.....
[11:06] <Gimmie> and you can visibly see this...
[11:07] <Gimmie> now the price....
[11:08] <Gimmie> ok.. imagine you are in a stock... its topping at 12... and you want out... and you are scared you arent going to be able to get out
[11:09] <Gimmie> what would you do ?
[11:09] <Gimmie> you would most likely send a limit below the bid
[11:09] <Gimmie> try to cut in at the front of the line
[11:09] <Gimmie> sacrifice a few pennies to get out first...
[11:10] <Gimmie> so say you sell at 11.99....
[11:10] <Gimmie> your neighbor dan.. is in the same stock.. and was also thinking about getting out at 12...
[11:11] <Gimmie> he sees that sell though below the bid at 11.99.. and it suddenly makes him nervous
[11:12] <Gimmie> he sees you cut in line.. and he is afraid he wont be able to get out... and the price is falling
[11:13] <Gimmie> so... he cuts even lower.. at 11.98
[11:13] <Gimmie> others see that as a sign of weakening.. and they start cutting lower too... and soon the stock is falling in price.. as the demand to sell grows
[11:14] <Gimmie> and it all started with you.. at 11.99
[11:15] <Gimmie> as a stock is falling.. red red red red red....
[11:15] <Gimmie> we usually see the red trades at or under the bid...
[11:17] <Gimmie> now lets say though... that its fallen from 12 to 10
[11:17] <Gimmie> red bid red bid red bid red bid......
[11:17] <Gimmie> red rum red rum...
[11:18] <Gimmie> just kiddin...
[11:18] <Gimmie> the shining
[11:18] <Gimmie> as it nears our "barrier"..
[11:18] <Gimmie> 10 is our barrier for whatever reason... whole number.. pivot.. pattern...
[11:19] <Gimmie> as it nears our barrier.. we see.. first the pausing in the pace and rhythm of trading.. and the pace of the price downtrending....
[11:19] <Gimmie> next we see a change in the ratio of greens to reds...
[11:21] <Gimmie> red bid 10.05.....red below bid 10.04.... red bid 10.05.. red bid 10.05...red below bid... 10.04... red bid 10.04.. red bid 10.03... red below bid 10.02.. red bid 10.02... red below bid 10.01... red bid 10.01.. red bid 10............. red bid 10......... red bid 10...........
[11:22] <Gimmie> red bid 10......... red bid 10...........green ask 10.01..... red bid 10..... green ask 10.01...... evening out....
[11:22] <Gimmie> pace slow...
[11:23] <Gimmie> stalled... at 10.00.... 10.01....
[11:23] <Gimmie> then.. what do we see next ?
[11:23] <Gimmie> suddenly.. an anxious buyer....
[11:23] <Gimmie> above the ask 10.02
[11:24] <Gimmie> the first person to become anxious about the other direction....
[11:25] <Gimmie> and the ratio changes... green ask 10.01.. green ask 10.01.. green above ask 10.02.. green ask 10.01.. green above ask 10.02.. green ask 10.01..
[11:25] <Gimmie> Thats the time to make your move....
[11:25] <Gimmie> they are leading the trade up....
[11:29] <Gimmie> so we have.. 1. nearing a barrier....2. pace of trading slowing.. 3.. pace of price movement slowing... 4. ratio of buys to sells evening out.. 5. ratio changing... 6. indicator stocks leading the direction.. 7. trade or two above ask or below bid.. leading the new direction
[11:29] <Gimmie> any questions ?

     

 

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