I came across this article by Linda Raschke on Tape Reading which had some good takeaways.
There is a good summary sentence:
In conclusion, tape reading is not watching every trade that passes by (a monotonous task) but rather keeping an eye out for unusual impulsive action, unusual volume, or just observing the way the price trades at significant levels. Each price swing has forecasting value as to what the next most immediate move should be. We then follow the price action to see if that move plays out.
Instead of being concerned with every single tick, the key is to focus on price action near specific reference points:
- Pivot points that the whole market can see
- Significant levels (e.g. S&P levels that are multiples of 10)
- Resistance/support levels
- Previous day’s high/low (look to exit profitable trades at these points in sideways markets)
- Today’s open (when the market is strongly trending)
The market tends to have continuation moves at least 2/3’s of the time when there is an impulsive action near a reference point, i.e. the market moves rapidly in a series of ticks in one direction without a tick in the opposite direction.
Another way to use tape reading is to look at price action to see the market’s response to news, compare that with what you anticipate the market should do, and make your decisions accordingly.