This is a question I get asked a lot. With so many new indicators that supposedly give you an edge in trading Tape Reading has proven to be a time test, real time, method of successfully and profitably trading markets.
The biggest advantage from tape reading comes from being able to interpret intraday data in real time. This isn’t a skill that everyone has. It requires a rock solid education program or mentor to go into detail on what specifically to look for.
Tape reading allows you to measure emotional intensity of market participants, which can give you a broad trading edge in longer term market strategies. Emotional intensity can vary from market to market. In the case of large macro events that move world markets such quantitative easing as well as the housing crisis, these events tend to have a long lasting effect on the markets.
In his book, Predicting Market Trends, Alan Farley describes historical events of tape reading. In the 1990s, 50-cent bid-ask spreads forced tape readers to abandon simple tickers and focus their attention on market depth screens, commonly known as Level II. This practice printed money in the first few years because it read supply and demand accurately, showing the standing orders of big players as well as which market makers or axes were in control of the security’s direction in that session. The SEC’s pattern day trading rule then came along in 2001, triggering an exodus of capital from equities into CME Globex index futures. In turn, those instruments have taken on enormous power, moving thousands of securities at a time
Many tape readers abandoned Level II in the next few years, instead watching index futures for clues on broad equity impulses. Level II lost more adherents in 2007, with the adoption of SEC’s Regulation NMS, which opened the door to high frequency trading computers (HFT), dark pools and other algorithmic code that now captures more than 70% of equity volume. Tape readers have adapted well to this electronic environment and now watch a broader array of market inputs than at any time in history.
To conclude, tape reading still does apply to today’s market. Traders readers utilize background data during the market hours to gain an edge and react to change before price movements push other traders to act.