Mastering the Art of Tape Reading (Part 1)

What is the Time and Sales Window?

One of the most valuable tools that you can use to confirm or deny or your day trading positions is the time and sales window, aka the “tape”. The tape details order flow or money flow in a particular security by displaying all transactions that have been executed.

While each broker may provide different data points, time of trade, price, size, and condition (executed at bid or ask or between) are common data points displayed by this window.

How to Use the Time and Sales Window


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The two basic principles of any technician’s arsenal are price and volume; understanding the interaction between the two is paramount to successful day trading.

Tape reading involves both, and if used correctly, dramatically increases the odds of your trading working out. Your goal with tape reading is to follow the money. Strong order flow activity at key support and resistance levels will give you clues as to whether the breakout is for real or not.

Trading with the time and sales window requires trading with patience. You cannot go out and buy or short a stock because you see the tape speeding up a bit. You need to be aware of support and resistance levels and also combine the message of the tape with price pattern formations.

The speed of the order flow can be extremely fast and confusing; it requires quite a bit of practice in order to get used to understanding the true message. Remember, every stock is a different story and tends to trade differently.

It is wise to review the way in which the tape trades for a couple of minutes before entering a trade. Reading the tape requires you to train your eyes to scan for changes in character. Let’s discuss a few of these key changes that you should take note of:

Size

Let’s start with size. The size of the orders coming through will help you decide if there is conviction behind the price action you are seeing. When putting on a trade, you typically want to see a flurry of buy or sell orders that have greater than 300 to 400 shares in size.

There is no concrete rule; it is more of a visual cue that your eye gets trained to recognize. Many times I will see great technical setups in stocks that trade low volume. I stay away from these setups as the message of the tape is not as clear, and this lowers my odds of a winning trade. Order Speed

The speed of the orders is another key component to the message that the tape is giving you. Typically, when stocks breakout through support or resistance levels, not only will the size of the orders go higher but you will see the tape start to speed up. This gives you an indication that there is an interest in this stock at this level and that the interest is larger than a couple of small traders buying or selling.

Order Condition

Order condition refers to which side of the bid/ask spread the trade was executed on. When we go long a stock, we want to see many orders being executed at the ASK. Conversely, when we go short, we want to see orders being filled at BID.

Kunal Vakil is the co-founder of www.mysmp.com (My Stock Market Power) which provides free trading articles and videos to investors covering a broad range of trading topics. Prior to becoming a full time day trader, Kunal designed bond trading systems for one of the largest secondary mortgage market participants and provided management consulting services to many top financial services companies.

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