July 5, 2011

Studying the Tape In Stock Trading

Buying and Selling Stocks and operating in the stock market, takes skill and proper timing. One of the most revealing clues and strategies I use, is following the tape. let me give some Example of the Time-Stamp (“The Tape”) That I follow and how it helps me determine when to buy or sell a stock. When I watch stock, I begin following the tape of those that I’m interested in. They show the last Execution price, date and time, and Number of shares. These orders are what make up the charts themselves. I rarely follow charts anymore, because the tape is much more revealing. For example, if an institutional buyer, hedge fund, or big investor is taking a big position in a stock (or selling a big position) they won’t do it all in one day. Usually they do it in the course of a couple of days or even weeks. This is because they don’t want to raise the price on themselves buying all at once or vice versa. I watch orders coming across the tape, and they give me a clearer picture (than a chart) about what’s happening with that company’s stock. The orders of 100, 200, 300’s are usually the public buying. When orders come across that are in lots of 5,000, 10,000, 20,000 and anything larger, that is a strong clue that a big investor is taking up (or selling off) a position. When I see this, I watch VERY carefully and make notes to myself on a notepad. Watching the tape helps me decide what to buy or sell and helps me with timing (when to get in and when to get out).

Learning from the Best Investors

I first learned about studying the Tape from studying the life and career of famous Wall Street Trader, Jesse Livermore. He was famous for Reading the Tape which basically meant that he watched the Time and Sales of each company that he followed. This graphic is an example of a Time Sale of Alcoa and Ford Motors. There are three columns, execution price, number of shares sold (middle) a time the execution was made (left column). The green means the price was higher or the same as the the last execution price, whereas the red means the execution price was lower than the previous one. When institutional buying occurs, big orders can be seen coming across the Tape (the time stamp) and likewise when they are selling. In this example, it looks like investors are buying up Ford and selling Alcoa. The keen investor learns what is happening, watching the orders that appear. Jesse Livermore always said that it is not what investors say that he's interested in (like rumors or opinions), but what they actually DO! This, meant watching the buying and selling and interpreting the execution of orders. Did investors just say they liked a stock or were they actually buying it - this is what Livermore wanted to know. Eventually, he perfected this skill and it ended up making him rich!

No comments: