This question may be best answered by first deciding what it is not.
- Tape Reading is not merely looking at what the tape to determine how prices are running.
- It is not reading the news and then buying or selling “if the stock acts right.”
- It is not trading on tips, opinions, or information.
- It is not buying “because they look strong,” or selling “because they look weak.”
- It is not trading on chart indications or by other mechanical methods.
- It is not “buying on dips and selling on peaks.”
- Nor is it any of the hundred other foolish things practiced by the millions of people without method, planning or strategy.
It seems to us, based on our experience, that Tape Reading is the defined science of determining from the tape the immediate trend of prices. It is a method of forecasting, from what appears on the tape now in the moment, what is likely to appear in the immediate future. TapeReadingis rapid- fire common sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are being neglected by the large investors.
The Tape Reader aims to make deductions from each succeeding transaction — every shift of the market kaleidoscope; to grasp a new situation, force it, lightning- like, through the weighing machine of the mind, and to reach a decision which can be acted upon with coolness and precision. It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all. A day trader is like the manager of a department store; into his office are submitted hundreds of reports of sales made by the various departments. He notes the general trend of business — whether demand is heavy or light throughout the store but lends special attention to the products in which demand is abnormally strong or weak.
When he finds it difficult to keep his shelves full in a certain department or of a certain product, he instructs his buyers accordingly, and they increase their buying orders for that product; when certain products do not move he knows there is little demand (or a market) for them, therefore, he lowers his prices (seeking a market) to induce more purchases by his customers. A floor trader on the exchange who stands in one crowd all day is like the buyer for one department in a store — he sees more quickly than anyone else the demand for that type of product, but has no way of comparing it to what may have strong or weak demand in other parts of the store. He may be trading on the long side of Union Pacific stock, which has a strong upward trend, when suddenly a decline in another stock will demoralize the market for Union Pacific stock, and he will be forced to compete with others who have stocks to sell.
The Tape Reader, on the other hand, from his perch at the ticker, enjoys a bird’s eye view of the whole field. When serious weakness develops in any quarter, he is quick to note the changes taking place, weigh them and act accordingly. Another advantage in favor of the Tape Reader: The tape tells the news minutes, hours and days before the newspapers, and before it can become current gossip. Everything from a foreign war to the elimination of a dividend; from a Supreme Court decision to the ravages of the bollweevil is reflected primarily upon the tape. The insider who knows a dividend is to be jumped from 6 per cent to 10 per cent shows his hand on the tape when he starts to accumulate the stock, and the investor with 100 shares to sell makes his fractional impress upon its market price. The market is like a slowly revolving wheel: Whether the wheel will continue to revolve in the same direction, stand still or reverse depends entirely upon the forces which come in contact with its hub and tread. Even when the contact is broken, and nothing remains to affect its course, the wheel retains a certain impulse from the most recent dominating force, and revolves until it comes to a standstill or is subjected to other influences.
The element of manipulation need not discourage any one. Manipulators are giant traders, with deep pockets. The trained ear can detect the steady “chomp, chomp,” as they gobble up stocks, and their teeth marks are recognized in the fluctuations and the quantities of stock appearing on the tape. Little traders are at liberty to tiptoe wherever the food trail leads, but they must be careful that the giants do not turn quickly on them. The Tape Reader has many advantages over the long-term investor. He never ventures far from shore; that is he plays with a close stop, never laying himself open to a large loss. Accidents or catastrophes cannot seriously injure him because he can reverse his position in an instant, and follow the newly- formed stream from source to mouth. As his position on either the long or short side is confirmed and emphasized, he increases his line, thus following up the advantage gained. A pure tape reading day trader does not care to carry stocks over night. The tape is then silent, and he only knows what to do when it tells him. Something may occur at midnight which may crumple up his diagram of the next day’s market. He leaves nothing to chance; hence he prefers a clean sheet when the market gong strikes. By this method interest charges on margin are avoided, reducing the percentage against him to a considerable extent.
The Tape Reader is like a vendor of fruit who, each morning, provides himself with a stock of the choicest and most seasonable products, and for which there is the greatest demand. He pays his cash and disposes of the goods as quickly as possible, at a profit varying from 50 to 100 per cent on cost. To carry his stock over night causes a loss on account of spoilage. This corresponds with the interest charge to the trader. The fruit vendor is successful because he knows what and when to buy, also where and how to sell. But there are stormy days when he cannot go out; when buyers do not appear; when he is arrested, fined, or locked up by a blue coated despot or his wares are scattered abroad by a careless trackmen. All of these unforeseen circumstances are a part of trading and life, in general. Wall Street will readily apply these situations to the various attitudes in which the Tape Reader finds himself. He ventures $100 to make $200, and as the market goes in his favor his risk is reduced, but there are times when he finds himself at sea, with his stock deteriorating. Or the market is so unsettled that he does not know how to act; he is caught on stop or held motionless in a dead market; he takes a series of losses, or is obliged to he away from the tape when opportunities occur. His calculations are completely upset by some unforeseen event or his capital is impaired by overtrading or poor judgment.
The vendor does not hope to buy a barrel of apples for $3 and sell them the same day for $300. He expects to make from nothing to $3 a day. He depends upon a small but certain profit, which will average enough over a week or a month to pay him for his time and labor. This is the objective point of the Tape Reader-to make an average profit. In a month’s operations he may make $4,000 and lose $3,000 — a net profit of $1,000 to show for his work. If he can keep this average up, “The professional day trader must be able to say: “The facts are in front of me; my analysis of the situation is this; therefore I will do this and this.” trading in 100 share lots, throughout a year, he has only to increase his unit to 200, 300, and 500 shares or more, and the results will be tremendous.
