In the last article I described two tools used by me in daytrading on US stock markets: Level II and Time and Sales. Today I will present, some of tape reading strategies based on reading from tools mentioned above, which you can use in day trading investments.
If you are new to trading, start with reading these articles:
Size of orders and their meaning in tape reading strategies
One of the oldest, it would seem that also the simplest is to use the large trader and to trade under his movement.
For that purpose it is necessary to find orders significantly deviating from the norm on the market:
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typical size of order on the company on determined level is: 100-2000 shares
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we can see orders of e.g. 30 000 shares
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we can state that it’s a big order, so-called Big print
Next to determine in what way traders behave near this large order. This will enable to determine, which from undermentioned trading option it is worthwhile to use.
When the large order is already located in the window of quotings, there are 3 possible scenarios of trading:
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Trading under the change up to large order
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Trading to break through above the large order
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Short scalps
The large order usually appears on the level of important support or opposition. As in technical analysis, the same during tape reading, we can use support/opposition to trade against-according to its direction.
Example – trade #1
On OFFER side we can see the order of 100 000 shares. We place short at the price of 8.49$, waiting that OFFER will turn out to be a strong opposition. This way we open the short position, expecting the change in accordance with average daily range of movement of the given company (so-called ATR, average true range).
To what we pay attention in this play is the fact that:
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on TAS window, most of orders is concluded by small traders: 100-300 of shares to fill up
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size of orders on Level II: on OFFER side is large order; on BID side is order between 100 and 1300 shares
The above play is most effective in case of companies, on which publication of quarterly results is not planned in the near future, on the given day we don’t notice increased volume. That is preserves typically for its averages: daily variation and average volume.
Realization of the movement usually agrees with the assumptions, which may also arise from technical analysis.
Example – trade #2
The second scenario, which we can play, is when we recognize large order to trade against it. When we see the order on OFFER side – we open long position; when we see the order on BID side – we open short position.
On OFFER side we can see a big sales order –> 50 000 of shares. When the order is carried out, we join this movement by opening long position.
To what we pay attention in this play is the fact that:
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on TAS window, most of orders are minimum of few thousand of shares
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size of orders on Level II: large order in this case isn’t important, because increase of volume on the company is significant, which represents an additional strong signal of breaking
The above play is most effective in case of companies, on which appeared information in relation to financial data or news that was the driving force of company.
In case of breaking, important is to notice not only how filling up the large order was carried out, but also the turnover which continued in next candles, which is confirmed by the following graph. It is worthwhile to pay attention to the huge difference between turnover on the given trading session, but on the previous one.
Hidden orders on the market
Large traders, who plan to close or open a significant position on the market, usually want to do it in a way least affecting the rate in the company. Thanks to that: they reach better prices of opening the position, don’t give a prior signal on the market that significant player appeared on it. For that purpose hidden orders or orders with disclosed value are used.
When you see appearing refreshers on BID or OFFER side you have two possibilities of trading. The first is to follow the large hidden trader, who wants to buy/sell so large number of shares that prefers to do it through orders with disclosed value. These orders cause that he doesn’t show officially how big position is going to open on the market, thus he doesn’t lead to a sudden buy or decreasing reaction.
Hidden order, which is observed in this way, looks as follows:
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at the price of 10.05$ we can see placed order of 5000 shares on ECN Nasdaq
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at this price orders are carried out: 2000 shares, 5200 shares, 3800 shares
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generally there were carried out 11 000 of shares at the price of 10.05$
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after order executions at the price of 10.0$5 still we can see 5000 shares on BID side on Nasdaq
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this proves about refresh on this price level
At this point you have two options in which you can trade.
Trade #1
When we recognize refresh:
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hidden order appears on BID side at the price of 10.05$
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we try to enter at the same price or cent higher
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we wait for upward, which is caused with the direction of movement in which the large hidden trader opens the position
Decision to open the position is supported by the fact that the large trader is on the same side. The risk in such trading is quite clearly defined. Closing position is followed immediately when the hidden trader disappears (or his order will be fully carried out – because how large is it, we never know).
Trade #2
When we recognize refresh, there is a second scenario of trading:
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hidden order appears on BID side at the price of 10.05$
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we expect for opening the short position when the large hidden order on BID side will be fully carried out and the price will increase to the level of 10.04$
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often in such case traders, who open the long positions along with hidden trader, start to carry out of already holding long positions with the smallest loss, which usually leads to short but dynamic decline
This trading requires greater patience. Waiting for breaking the order of hidden trader, may last sometimes for hours. Of course, there is a possibility of expecting order, which was activated when 10.05$ is carried out and transaction is concluded at the minimum price.
I know from experience that this type of breaking the order usually results in a stronger movement, dynamic, because there are a lot of traders, who are on the hidden trader side.
Summary
In daytrading on stock exchanges, observations of prices (thanks to Level II), volume changes (thanks to the graph) and the way in which orders are carried out (thanks to TAS window), constitute one of effective trading strategies. Appropriate interpretation of the tape and quotings at first may seem tedious and tiring. Over time, and at the same time thanks to gained practice, it becomes a simple task. When trader starts to seek for specific patterns, begins to approach the trading more automatically. It is necessary to remember that it isn’t possible to interpret and to understand each transaction. As in technical analysis, the trader selects determined formations, under which applies own strategy, the same in case of tape reading.
