Beginning traders often have a narrow view regarding the process of trading and tend to focus on technical indicators while ignoring other important information. We feel a better approach is to become a specialist in the markets one trades. A specialist understands the sentiment, macro economic, and technical factors that influence their markets. A specialist knows the type of traders who are likely to be present in their market at any given time.
One of the specialists most powerful techniques is to combine tape reading, a form of process based trading, with hypothesis (hypothesis based trading). For example, the specialist day trader may start the day off with a hypothesis that the market is likely to move one way or the other based on recent global macro news, sentiment, other time frame data, or other factors. Because the specialist tracks their market and the factors that drive it on a regular basis they usually have a good idea of where it is going before the market even opens. But, instead of placing the "higher risk trade" the specialist tape reader waits for the market to open and drills down by reading the tape to see whether or not the market's action is actually supporting their original hypothesis. The specialist additionally benefits from having a stronger context to interpret the tape.
Let's imagine that the specialist starts the day off with a hypothesis that the market will trend lower due to recent global economic news. The specialist next drills down and reads the tape. There are several possibilities that may unfold:
Case #1 Abnormally Strong Tape
The tape is not supporting the hypothesis. The specialist has the option to discard the original hypothesis and formulate a new hypothesis or optionally the trader may stick with the original hypothesis and wait for the tape to become more supportive.
Case #2 Abnormally Weak Tape
The tape is supporting the hypothesis. The trader now has additional confirmation to place a trade and, importantly, useful information on how to place that trade. Because the tape is weak the trader knows that a conservative limit order is less likely to be filled.
Case #3 Mixed Tape
The tape is mixed. The trader may skip the trade, wait for more supportive conditions, or attempt to get better pricing with the knowledge the trade is a lower probability.
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