This is one of the few books on tape reading out there, though recently more books on reading and trading based on price and volume have came out (e.g. Al Brooks).
This book has 3 main sections. The 1st section is a basically talks about how Vadym Graifer picked up tape reading, and how he started out as a scalper that was doing okay and eventually became a successful trader. The 2nd section goes through the techniques of tape reading, essentially key principles on how to interpret price and volume. The last section goes through some examples on how tape reading is applied.
The trading time frame in the book is intraday, not surprising considering Graifer’s background as a scalper. However the same techniques can be applied to longer time frames as well.
The book is pretty well structured and the content is good, though with the prevalence of high frequency trading, the usefulness of reading Level 2 data may have gone down dramatically. Finally, I like the fact that Graifer goes through various common setups and explains the trigger levels and stop placements in a clear manner.
Overall, this is a good book to read for people starting out on reading price and volume.
- Level 2 and Time & Sales, seldom use charts.
- Use Level 2 to see signs of strong bid, thinning ask, and prints at and/or above the ask.
- Euphoria / capitulation
- An acceleration in the price advance, almost vertical movement accompanied by a volume surge, is usually not sustained and indicates the end of this stage of the move (euphoria stage)
- Trend beginning (aggressive accumulation)
- Slow, steady movement upward with consistent volume indicates so-called good buying and means the start of upward momentum.
- Trend confirmation (aggressive accumulation)
- Slow price advance with steady increasing volume indicates continuing upward momentum.
- Shallow retracement trend continuation
- A relatively big volume increase on the price advance with shallow volume on the pullback indicates a continuing trend.
- Decreasing volume reversal
- A slowing pace of buying with decreasing volume indicates that the top of this stage of movement is near.
- Passive accumulation / distribution
- Big buying volume without the price changing indicates distribution and means there is a resistance level (passive distribution).
- Big selling volume without the price changing indicates accumulation and suggests a support level (passive accumulation).
- Passive accumulation and distribution means buying at bids and selling at asks respectively, as opposed to aggressive accumulation and distribution which buys at asks and sells at bids. If the active side becomes too strong, the passive side tends to let go.
- Early distribution usually comes from people who bought early at lower prices. They unload early so that they don’t have to compete with other sellers when if buying dries up.
- If the levels between trade trigger (i.e. entry level) and trade failure (i.e. the stop loss level) is too far, do not move the stop closer to the entry price. Instead, size your position based on the amount of risk you are willing to take.
- Evaluate the risk of slippage (i.e. not being able to transact at the price you want) by looking at the depth of the market (Level 2) to see the gap between price levels.
- Market makers cannot see the stops entered in the system, but they can guess accurately where the popular stop levels are. Pad your stop by moving it a little farther from the popular levels so that you won’t be easily shaken out.
Initial Stop Placement
- Breakout trade – Enter when stock breaks out of range. Place stop below the support level (i.e. the lower limit of the range the stock broke out of).
- Range trade – Enter when stock bounces off the support level. Place stop below the support level.
- Capitulation sell-off – Enter when the stock reverses from a sharp sell-off. Place stop below the low the stock made in the sharp sell-off (i.e. any new low is considered trade failure).
- Trail stops at each new support level
- Draw the channel for the stock trend. Trail stops below the channel.
Determining the Range
- When the market tests the low and high twice and hold, go into range trading mode.
- Buy at the first sign of strength as the market bounces from the low, or short at the first sign of weakness as the high is holding.
- If volume rises on upward movement and decreases on downward movement, you might want to let your profits run by scaling out half your position when it breaks out, and set a trailing stop just below the middle of the range (because if you enter thinking that the stock is breaking out, and the stock comes back into the range, your assumption is wrong and should get stopped out by the midrange).
- Wait for breakout of the range, you can’t trade within it.
- You need to properly select the candidate. Play a stock that is stronger than the broad market for a long trade or weaker (i.e. it drops further than the market) than the market for a short trade. This “relative strength” improves the odds compared to gambling on the market.
- If you play a stock that is in sync with the market, you are essentially playing the market, and not the breakout or breakdown of the stock.
- Don’t select a stock that is negatively correlated with the market.
- In theory you can reverse your position as the market bounces and breaks your stop level, but that is tough to do in reality.
- Double Top
- Enter short position when the price goes below the bottom located between the two tops.
- Place stop above the top.
- Double Bottom
- Enter long position when the price goes above the top located between the two bottoms.
- Place stop below the bottom.
- Avoid entry if the stock spikes sharply right into the trigger level. This tends to produce traps rather than valid breakouts.
- The ideal case is to go slowly approaching the trigger level and breakout orderly.
- The 2nd attempt of a break (of resistance or support) is more likely to fail. The 3rd attempt is more likely to succeed.
- As a stock consolidates and breaks out level by level, each step from one consolidation to the next, should be shorter than the previous one, ideally ~50-75% the length of the previous step. If the length is less than 50%, the trend is likely approaching its end. If the length is more than 75%, the breakout is more likely to fail.
- Trend Reversals
- Don’t short / (go long) on euphoria / (capitulations).
- Wait for the stock to go down to test the support level, bounce up on decreasing volume, then breaks down through the support level before entering the short position. Similar situation applies if you want to go long after capitulations.
Entry Points for Scalping (Long examples, can be applied in reverse for shorts)
- Intraday low on stock that dumps on bad news and pauses
- Intraday high on an uptrending stock that shows signs of a breakout
- Bottom of a pullback on an uptrending stock