Tape Reading

Sometimes it is nice to reexamine a simple concept when there appears to be overwhelming volatility in the markets. Mechanical systems and patterns are helpful and even necessary for the structure they impose in organizing data, but even Richard Dennis in his original course discussed ways to “anticipate” entry signals, exit trades early, and filter out “bad” trades.

Learn to follow the market’s price action and read the signals it gives. This can become a strict discipline in itself and the result will be greater confidence that a trade is or is not working.

Tape Reading

“Trading technique is simply the ability, through study, observation, and experience, to recognize the signals in each of the several phases of market movement.”
- George Douglas Taylor

Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind.

Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways. (Markets do not always have to be going somewhere!) It is also fairly easy to watch a price go up and then tell when it stops going up – even if it turns out to be only a momentary pause.

I’ve known hundreds of professional traders throughout my career. I don’t want to disappoint you, but I know of only two who were able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA’s who are running a money-management program with “OPM” – other people’s money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment – even if just to move a stop up or down.

If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, “The only truth is the current PRICE.” Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

Watching price action can actually be very confusing if you go about it like a ship without her sails up in an ocean squall. You will get tossed back and forth with no sense of direction and no sense of purpose. There are two main tricks to monitoring price action. The first is to watch the price relative to another “reference point.” This is why many traders use a “pivot point” – and it works! It is the easiest way to tell if the market is moving closer to or further away from a particular point. This is also why it is often easier to get a “feel” for the market once you put a position on – your “reference” point tends to be your entry price.

Some reference points, such as a swing high or the day’s opening price, will have much more significance than those points involving some type of calculation. (Some numbers might have special meaning for those who calculate them, and who am I to argue if they work.) I like to concentrate on pivot points that the whole market can see. To sum up so far, when watching price, we want to know the following: how fast, how far, and in which direction. It takes two points to measure these things. One will always be the current price, the other a pivot point.

* Do not watch price for the sake of watching price. Watch price with the intent to do something or to anticipate a certain response!

Responses

“The study of responses … is an almost unerring guide to the technical position of the market.”
- Rollo Tape (Richard Wyckoff), 1910

Video-How to Spot a Trend Just From the Price Action

Price Action as i always say is offering a tremendous amount of information and signals that is worth it to study and understand .. in the next video i would like you to see the swing highs and swing lows illustrated on the chart just to train your eyes about that kind of charts and be more accurate in determining the correct trend .. 


Remember that Price Action Trading needs real practice for long time so, be patient and spend enough time .. 

Update: Another Video about Price Action

Price Action Trading Method

Swing Highs and Lows

The first thing that we need to recognise is what is a Swing High and Swing Low. This is probably the easiest part of price action and bar counting although the whole process gets easier with practice.

I define a swing high as;

     A three bar combination
     A bar preceded and succeeded by lower highs


I define a swing low as;

     A three bar combination
     A bar preceded and succeeded by higher lows


Market Phases
There are only three ways the market can go;

• Up
• Down
• Sideways

With the swing high/low definition now in mind we can start to build some layers on to the chart to identify these market phases and start to do a simple count of these swing highs and lows.
In short

• The market is going up when price is making higher highs and higher lows
• The market is going down when price is making lower highs and lower lows
• The market is going sideways when price is not making higher highs and higher lows OR lower highs lower lows

This may sound like child's play and a statement of the obvious but you will be surprised at how often people will forget these simple facts. One of the biggest questions I get asked is, which way is the market going? By doing a simple exercise you can see which way that price is going and decide on your trading plan and more importantly timing of a trade.
What do I mean by timing? It may be that you are looking for a shorting opportunity as the overall trend is down but price on your entry time frame is still going up (making HH's & HL's). There is, at this stage, no point in trying to short a rising market until price action start to point down (making LH's & LL's. More on this shortly).

Bias Changes

A Short or Bearish Bias Change occurs when the following sequence develops.
HH>HL>LH>LL>LH The bias change is confirmed when price moves below the las lower low made as highlighted on the chart.
Another way of saying this is 123 reversal and you are trading the pullback as your entry trigger (Red Line).
There are a few variations of this pattern but this is quite simply a price action bias change in its simplest form.

A Long or Bullish Bias Change occurs when the following sequence develops.

LL>LH>HL>HH>HL The bias change is confirmed when price moves above the last higher high made as highlighted on the chart.

Another way of saying this is 123 reversal and you are trading the pullback as your entry trigger (Blue Line).

There are a few variations of this pattern but this is quite simply a price action bias change in its simplest form.

Trending Price Action

After a bias change has been seen and confirmed, one of the phases that the market can then take is to start trending either up or down depending on the bias change previously.
In the chart below we can see what price ideally looks like when price is trending up and trending down. Each phase shows price making HH's & HL's on its way up and LH's & LL's on its way down.

Ranging Price action
Now this is where the chart can become interesting. By using the price action counting of the swing highs and lows we can know at a very early stage IFprice is going to start to develop range bound activity.

• Price is not making new highs OR new lows

I don't mean all time highs/lows or new day/week/month highs/lows... just simply a new chart swing high or low. Price will start to stall and not make a new swing high/low and typically will stay contained within the last swing high and low that was made on the chart. Isn't that a simple definition?

Range rule definitions

• Price doesn't make a new high or low on the move
• If price stays contained within the last swing high and swing low to be made, price will remain range bound until it makes news move highs or lows.
• Price confirms the range when a lower high and a higher low is made within the previous swing high and low.

In the chart below you can see that from the left side of the chart price is making LH's & LL's all the way to the first blue arrow which in real time would be the latest lowest low. Price then moves higher to make a HH. These two swing levels have been highlighted.
At the point of the chart, in real time, price needs to either start moving higher past the last swing high (red Arrow) making a new high OR move lower past the last swing low (blue arrow) making a new low. Until either of those things happens price will most likely remain range bound. In this example that is what happened.

Range considerations
Some considerations for identifying ranges at an early stage in real time are;

• That price could be creating a pullback or bias change and as the chart unfolds for you a new high or low could be made voiding the potential range.
• There are several definitions of a range one of the more common ones is that you are looking for a double touch of support and resistance. For me this is a little too late in the game as price may not create the double touch as in the example above. With this price action method you can identify the possibility of a range developing VERY early without having to worry IF price does or does not give you the double touch. As you can see with that definition you would interpret that price is not range bound at all but, you can clearly see visually that price is moving sideways without any definition.

What you should have learnt from this short article A simple rule defined method to identify swing highs and lows How to use this swing high/low definition to interpret price action market phases How to identify a bias change How to identify trending price action How to identify Range bound price action Bias Change pattern variation In the below images we can see the pattern variation and compare them to the outlined pattern above.  The only main difference is that you are looking for a breach of a previous swing high or low as the first qualifier to indicate a potential bias change. Acronyms used HH - Higher High HL - Higher Low LH - Lower High LL - Lower Low By Philip Newton