Most of the people who are involved in stock trading have found that reading tapes is difficult and very stressful. As a former Wall Street insider, there is a secret that most retail traders don’t know.

Do not trade stocks that have an average volume of more than a million shares per day!

That’s! That is the big secret that most Wall Street insiders use to their advantage. Most retailers like to trade the stocks that are on the most active lists because they are easy to buy and sell and have tight margins. But there is a big problem with most stocks that are traded with a high volume and they are:

  • Institutional order from all directions

  • Spread traders / hedgers

  • Too much information

Institutional order from all directions

Once there are too many institutions involved in trading a stock, that constantly changes the direction of the price. Institutions buy and sell stocks for many reasons that have nothing to do with the fundamentals of stocks. Some examples of reasons why institutions buy and sell shares are:

  • Investors who buy or sell shares in your fund

  • Annual window dressing

  • Sector rotations

When all these large orders are mixed together, it creates choppy conditions and that makes the tape difficult to read. The direction of the tape changes from side to side quickly to feel any behavior. Another problem that institutions create comes from placing their large orders at the order counters. Most order counters “work the order” and that means getting the best possible price. That affects the trader because every time the stock appears to be going in one direction, the order table steps in and stops that movement.

Spread Traders and Hedgers

Spread traders and hedgers are trading to protect another position. They are generally unaffected by management, so their decisions are based on extended relationships. An example would be Home Depot Stock verse Lowe’s. If Home Depot was up 3% on the day and Lowes was up just 1%, then the spread trader could sell Home Depot stock short while buying Lows stock. These types of traders are capitalizing on the 2% margin difference because they know that the stock prices of both companies are moving together and will eventually come back.

Too much information

Finally, it is too much information. As a tape reader, you need to be able to remember certain price points and how quotes behave around those prices. For example, if every time a stock hits the low of the day and many sell orders enter, but an ECN just stays there and absorbs all the sales. In this case, you would buy that support unless ECN pulled away and the price broke that low. A good tape reader learns to remember certain price levels and how the order book reacts at those levels. If you are trading a stock that has a lot of volume, orders come and go too fast to remember and read that data.

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