Two Tips On Reading The Tape

First, it is important to pay attention to both the price and the order flow to place the tape into context. AlphaReveal makes it easier to track price with its ability to display only the right most price digits. For new traders, reading off the price like an auctioneer can be one valuable method for learning to track price. Some types of patterns will only start to emerge when price + flow are considered together that won't be evident in the price or flow alone. One such example is when selling order flow builds and builds while price refuses to make a lower low. This pattern is caused by large limit order traders taking all the supply from smaller market order traders. And, of course, this creates a situation where many stop losses build close to the market which often lead to a buying momentum surge.

And, that leads us to our second tip, on strong bullish trend days be wary of shorting into an area we term the "pocket" even if there is strong selling flow. The pocket is an area of support near major pivot lows. AlphaReveal's volume histogram can be invaluable for spotting such longer term areas of relevance. Large limit order traders often "stake" their positions in these zones. As such, they represent high risk areas for traders who attempt to trade against them. There are lower risk trades then shorting with the selling flow in these areas. For example, a trader can buy against the flow on the anticipation that the flow will reverse while remaining flexible should that plan not play out. Another trade that should have a higher probability is to wait for the selling flow to reverse and buy into the momentum run higher. A third trade that can work very well is to short but only after the large limit order traders have been clearly overrun and the pocket has broken.

Tuesday, June 18, 2013 12:27:00 AM


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