Thursday, November 22, 2007

What's In the Name, or What Is Tape Reading

Remember Dow theory? It talks, among other things, about waves. Were you ever told that in order to apply that theory you need to go to a shore? Probably not, noone is THAT literal. Well, almost... for some reason the term Tape Reading is being often read THAT literally. "Your book shows charts, not Times & Sales, hence it's CHART reading, not TAPE reading" - you wouldn't believe how many times I heard this. Ah, the way we name things and derive meaning from the names - it can be liberating or limiting, whichever you chose.

It makes no more sense than requirement to read the teletype tape instead of Times & Sales - after all, that was what original tape readers of 100 years ago used. Think about it: where does information on the chart come from? Is there anything to the chart but the graphic reflection of those same prints on the tape? Chart is nothing more than the way to visualize the tape. It's different medium for the same information. Now, which one is more convinient?

- In order to observe the tape (ticker, Times & Sales) you need to stare at it non-stop. Missed bit means gap in the information. Meanwhile chart allows you to look away - information is still there when you are back from the bathroom, just look again.

- In order to see what happened before you started watching your stock you simply look at the chart. With T&S what do you, scroll it back? And visualize all the price and volume changes?

- Try to watch the tape of, let's say RIMM or AAPL or AMZN. Wave of green... wave of red... mix... new wave... Do you buy and sell with each change? Fine if you are a tick-by-tick scalper, but what do you do if you are a daytrader? Or swing trader? What good will the tape do for you? You will have to drop this method of reading alttogether then - but its principles are applicable in any time frame, why limit yourself so severely? What could possibly so wrong with applying those principles to any timeframe you fancy by deploying... gasp... charts?

- Try to evaluate the strain you put on your brain by watching the ticker print by print. Fine if you are 22, full of energy and ambitions and intend to do it for a year or two. But if you are doing it for living, year after year - how long before you burn out? Don't forget, volume and speed at Jesse Livermore times were nowhere near what we have now.

- Ah, but what about classics? Isn't it sacrilege to apply their ideas to modern technology? Well, let's just see... I am opening my copy of Tape Reading and Market Tactics by Humphrey B. Neill - classic enough for ya? Image at the page 35 shows the ticker with purpose of explanation what symbols on it mean. Fine, thumbing along, next image (they are called Plates in the book, for overly literal types - those are not dishes) is at the page 63. Gasp... CHART!! US Steel, daily chart, 27 days in 1930, with closing prices and volume! Okay... what's next? Page 69, chart. Daily. Volume at the bottom part. Page 71, chart. 74, chart. 79. Hey, here is a ticker at the pages 83 and 84, only to illustrate particular moment of what is being discussed in the chapter and shown on two other charts, daily and intraday. That's it. The rest of the book is text and charts. Big sigh of relief - I am not overly sacrilegious.

Conclusion is obvious. Tape reading is a method that can and should be applied by using modern technology and more convinient way to visualize things. It doesn't necessary mean endless watching the tape itself without blinking.

Oh, and in case you are still not convinced - think of what you, if you insist to take terminology at face value, are supposed to do if you want to scalp the market...
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