Thursday, February 19, 2009

Tape Reading skills required for currency trading.

"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 is nothing more than monitoring the current price action and asking 'Is the price going up or down right now?'Even 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.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.
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."The only truth is current price". Your job as a currency trader will become ten times easier once you accept this.
There are two main tricks to monitoring price action.The first is to watch the price relative to another reference point.It is the easiest way to tell if the market is moving closer to or further away from a particular point.Some reference points, such as a swing high or the days opening price will have much more significance than those points involving some type of calculation.When watching price, the currency trader wants 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 and pivot levels.
Watch the price with the intent to do something or to anticipate a certain response." The study of responses is an unerring guide to the technical position of the market" Richard Wycliff 1910.
The second main trick to monitoring price action is to watch for the markets response to a particular condition, in other words, anticipating a particular behavior.For example, if the market has been at a very low volatility point and just begins breaking-out of its particular trading range, one might anticipate that the price would begin to accelerate in an impulsive manner and not run into immediate resistance or on a directional play, if the price is moving in an impulsive manner in a trending market and then pauses to catch its breath on a mild reaction, one would expect it, then to continue on in the direction of the trend.When there is a particular behavior to anticipate it is easier to watch the price to see if it acts according to ones expectations.
Is the market failing to break on bad news?Is it find support after a series of advances?Does it run into an invisible overhead wall and sharply back off implying strong resistance?These are market responses to certain conditions.Part of studying price behavior and gaining experience as a currency trader is gradually learning what actions to anticipate.Then you must learn what the markets most probable response or outcome should be.
However it can also be a profitable strategy to recognize when a given signal or expected response is failing.Sometimes a failed signal can be more profitable than the normal expected response.For example, a classic failed response might be a scenario wherein price was consolidating in a pattern higher lows and higher highs-a classic triangle pattern.One would expect a break-out from a chart formation to have some follow through.However if price only penetrates the lows by a small amount and then turns upward, picking up volume and momentum as it goes, and comes out the upside, a very significant reversal has probably occured and there may be much more price advance to unfold.
One last trick to watching price action is to learn to think in terms of handles or levels.Use big round numbers as reference points for levels.It does not mean that you are placing orders at those numbers.It is just a simple way of organizing data that professional traders practice subconsciously.
PIVOT POINTS.An astute trader will always have the previous day's close in his head.He also knows the previous day's high and low.He also knows the opening price, for that tells if the buyers or sellers are in control for the day.The previous day's high and low and today's open have very strong psychological implications and are the most important pivot points to recognize.By concentrating on price action near these points, we can eliminate much of the hard work in tape reading.Many times the market will let us know right away if this is going to be an area of support or resistance.The previous day's high and low tend to overlap in congestion areas.Look to exit profitable trades immediately at these points in sideways markets.In trending markets the price will run through these points a bit before pausing.When the market is strongly trending the opening price becomes the most important.
If we are watching a high, low or opening price as a pivot point, we are watching to see whether there is any impulsive price action as the market approaches the point or moves further away from it.What is impulsive action?"A whoosh"The market moves rapidly as if just coming to life for the first time.It is usually a series of ticks in one direction without a tick in the opposite direction.A sequence like this tends to consolidate or pause a bit before being followed by more impulsive action.If we quantify these 'whooshes' which we can do in several ways, we will see that the market tends to have continuation moves at least 2/3's of the time.Not bad for arriving at a 'positive expectation' simply by following price action.
In conclusion, tape reading is not watching every trade that passes by but rather keeping an eye out for unusual impulsive action, unusual volume, or just observing the way the price trades at significant levels.Each price swing has forecasting value as to what the next most immediate move should be.We then follow the price action to see if that move plays out.
Tape reading is at the heart of swing trading.When looking for short term moves, price based derivative indicators will be too late to be of value.Ultimately, currency traders should feel a great sense of freedom when they can rely on simple charts to formulate a game plan or a conceptual road map in their heads and the movement on the tape to tell them their game plan is correct. Muraleedharan.

2 comments:

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