Every trader must see their big picture.  At SMB we make trading decisions based upon three factors: Reading the Tape, Technical Analysis, and Intraday Fundamentals.  We teach our traders to think of a big circle with each of these factors inside.  How do you determine your big picture?

Today during an informal discussion one of our new SMB Training traders, let’s call him Smooth, asked about a trade we make based upon Reading the Tape.   I asked the room to take a step back and remember the big circle.  Understand the context of this question.  The question was about the prints which we use to determine the strength of the tape.  So keeping our big picture in mind this was a question about a slice of a slice.  A part of our decision making is the tape and a part of determining the tape is the prints.  So we would only make a trading decision relying on the tape if it so clearly told us to buy or sell.

Most traders make trades based on technicals.  Ok great.  But what is your circle?  How about considering long term market technicals, intraday technicals, and the technical of the sector?  Couldn’t that be your circle?  So if the market is extremely weak and you want to get long a stock based on just intraday technicals you better have a very clear signal from your intraday charts. Remember the big picture please.

Let’s say you like to invest based upon fundamentals.  Terrific.  But what is inside your circle?  Perhaps you could consider the fundamentals of the whole economy, the fundamentals of the sector your investment is in, and then the fundamentals of your stock?

What is inside your circle is not as important as you are considering the big picture. To make excellent trading decisions requires you to determine your big picture.

Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

On Monday 2/15 at 11:00 AM (EST) SMB Capital invites you to participate in a Free Reading the Tape Seminar at our office in downtown Manhattan.  The seminar will be approximately a hour and a half long.  Reading the Tape is a skill held by professional traders that allow them to discern the next most likely direction of a stock.  This is a skill that very few new traders have developed and places them at a disadvantage to other market players.

The Advantages of Reading the Tape are:
1) Entering your positions at better prices
2) Find trading set ups not apparent on our charts.  Charts are a lagging indicator.  The tape is a leading indicator.
3) Increase your consistency, win rate, with your best set ups
4) Load up, load up at the right time, while limiting our downside

Mike Bellafiore (Bio) and Steve Spencer (Bio) will introduce this topic and then GMan (Bio) will show specific trades where this skill helped him make superior trading decisions.

For more about the importance of Reading the Tape please see the links below:

http://www.smbtraining.com/overview/smb-reading-tape

http://www.smbtraining.com/blog/reading-the-tape-trading-the-open-video

Those interested please send us an email to seminars@smbcap.com.  There is limited availability for this seminar and you must receive confirmation from us that we have room for you.

We will not be broadcasting the seminar live, but we will be recording the seminar and placing the recording on our blog next week.  I will post a blog about the recorded seminar next week to notify everyone that it is on the blog for viewing.

rOy

Teaching new traders how to trade has made me a better trader.  Below are five things I have learned about trading by teaching.

1) I have cemented the statistically profitable trades that work intraday.  Being forced to teach others trading plays has made me recognize exactly which plays work best for me.

2) Video review with other traders increases my screen time which has improved my trading.  There is all this talk about how hard it is to read the tape.  Yada yada yada.  I just do not have trouble reading the tape.  Since I often lead video review sessions with our new traders I am exposed to more market patterns than the average trader, which has sharpened my reading the tape skills.

3) New traders have struggled with the same things that I do.  I have been forced to learn how to cope with some of my shortcomings to help other new traders.  Specifically I have become very well versed in visualization, which has helped me control my emotions better as a trader.

4) Teaching challenged me to formalize my trading system.  This is different than just finding statistically profitable trades.  For example I never double down before because I recognized after working with new traders that it did not work for how we trade.  I used to double down on certain occasions.   Also, I do not fade as much as I used to because teaching new traders trend trading showed me the folly in some of my previous fade trading.  I trade the most active stocks daily, Stocks In Play, after allowing some to trade a basket and learning that this is just not as efficient for intraday trading.

5) Teaching has increased my confidence.  While working with others I experience that I do truly know what is most important to succeed as a trader.  I have been taught by the market all the little things that really make a difference.  My trading principles have been challenged by uber smart, ambitious new traders.  Each conversation reinforces that I have correctly deciphered the lessons from Mother Market.  And that spending your day committed to these things that are really are important is why you succeed.  Things like: keeping a detailed trading journal, visualization exercises, tweaking my playbook continually, staying positive, and video review of trading.

I have learned so much more than these five things above.  But I have to head into a video review session this Saturday AM with our new traders now.  Time to sharpen my reading the tape skills.  I hope someone saved me a bagel.

Enjoy your weekend. Don’t forget to follow us on Twitter

Today I made I mistake I rarely make – I let my bias take over my trading. I came in with a small overnight short in MGM and in AIG. Both showed huge relative weakness yesterday and both were working great in premarket with the gap down. The plan was simple, I would add to the positions once below important support levels or short into resistance levels established the previous day.

I wanted the sucker to plow through 43.5 so I could add to my short. I wanted it to break below 43 so I could crush the stock. I am trying to buy a place in South America and I was thinking if AIG went down to the mid 30s I would have some extra cash to furnish the place big daddy style… oh yeah, mistake number two. Can you say focus on the trading and not so much and what I would do with the money if I crushed it. yikes!

AIG went nuts right before the open for lack of a better word. It went from 44.4 to 43.3 back up to 44.5 through 45 back down to 44.5 all in less than a few seconds – could have been a couple of minutes but it was fast nonetheless. Luckily I was shorting into the pops and covering into the retarded downticks. It wasn’t fun and certainly got my heart pumping for a second.

The market opened and AIG was screaming as a long on the tape. I was a half point + in the money with some size and I didn’t cover. I let my bias of the tape and relative weakness from the previous days cloud my judgement. I tried but not hard enough to cover some of the short and before I knew it I was getting taken for some shorts at the prices I wanted but then it turned ugly. That sucker was getting ready to party on the long side. My out was above 45.6 and I could tell I was fighting the momo but I refused to cover and get long as the tape indicated it.

My day would have been a lot differently had I actually traded the dopey stock appropriately. Luckily there was plenty of opportunity today in HOG, WYE, and the casinos for me to make back that silly rip. I wrote down plenty in my journal to remind me in the future of how quickly I can get in trouble when I let a bias take over my trading. Hope your trading day was a lot more fun than mine. Happy trading!

We have gotten some comments and emails from some fellow readers asking what is included in our Reading the Tape program so we prepared this syllabus.

SMB Reading the Tape Syllabus

DAY 1: The Basics

The Basics

1. Two quick written lectures on The Level II and The Prints including a Glossary.
2. One 15-minute audio lecture on the Prints complimenting the written lecture.
3. 1 hour and 15 minutes of video lectures on The Level II and the Prints.
4. Multiple-choice quiz to reinforce your knowledge on the Basics: The Level II, Jargon, and Prints.

The Indicators

1. Four written lectures on the Reading the Tape indicators
2. 5-minute audio lecture and 10-minute video on indicator # 1.
3. 30 minute video compilation that includes examples of indicator #2.
4. 20 minutes of video lectures on indicator # 3.
5. 2 Multiple-choice quizzes to reinforce your knowledge on all of our indicators

Psychology of Tape Reading

1. Two written lectures on: “Thinking like the Big Player” and “Always Analyzing your Positions”
2. 1 hour of video lectures complimenting the written lectures

Proper Preparation Before Trading Plays & Execution

1. Two written lectures: Times of the Day & Important Questions Before Each Trade

Putting It Together

1. One written lecture on some notorious print patterns and a multiple choice quiz to recap the day.

Day 2: Trading Plays and Trade Execution

Getting Trading Ideas from the Charts

1. Three written lectures on the following topics: “Seeing the Tape from the Charts”, “Adding Probability to Chart Plays”, and “Different Lots, Different Plans”
2. 35 minutes of video lectures to compliment the written with examples.
3. Multiple-choice quiz to reinforce your knowledge on Trading Ideas from Charts.

Trade Execution

1. Two written lectures on “Proper Execution of Scalp Plays” and Proper Execution of Trade2Hold Plays”
2. Four hours of video lectures with 9 examples of different scalp plays and 6 examples of different trade2hold plays
3. Multiple-choice quiz to reinforce your knowledge of “Proper Execution of Trade2Hold Plays”.
4. SMB Reading the Tape Cheat Sheet

SMB Webinars
1. Access to 30 hours of archived webinars of our past video review sessions
2. Access to our live video review sessions

SMB Training now proudly presents our Reading the Tape training program for new and developing traders. After two months of arduous work we have finally put together an intensive 2 day program available to you for 30 days on our training website.

Reading the Tape allows intraday traders to determine the next move in a stock just by examining the bids, offers and prints. Reading the Tape (RTT) is an important skill that all intraday traders must develop. Most new and developing traders just learn technical analysis, a little fundamental analysis and then start their trading career. Consequently, they are trading without fully developed trading skills and this is a mistake. Reading the Tape:

1) improves your trading consistency
2) allows you to take bigger positions while limiting your risk
3) offers trading plays not offered with just charts
4) improves your entry and exit prices

To learn more about our new training program click here.

A couple of days ago I received this inquiry via email from DH, one of our blog readers. It is a very interesting question so I thought I would share with all of you. Below is DH’s email:

“I read the SMB blog and watch the videos every chance I get and I
really enjoy them. Thanks for sharing!

I’m a fairly new trader and just started trying to learn how to read
the tape recently. I was looking at AIG today and the stock traded
above the important $35.00 level during the open. I went long at 35.05
as I saw the 35.00 level being hit but it was holding, and I was
hoping to ride a big move up. However, when 35.00 broke, I did not
exit because I did not want to get shaken out. My stop loss was at
$34.85 but before I could get out, the stock moved fast and I was down
about 30 cents on my trade.

My question is: When you are leaning on an important level for your
trade (35.00 in this case) and it gets broken, do you exit immediately
or do you wait and see? If you decide to wait and see, how do you
determine how much room to give the stock to move against you (5
cents, 10 cents, etc…)?”

Gman’s Comments now:

The reader is referring to the trading in AIG from last Monday. First let’s just put the play into contest. AIG had failed to get above $35 a couple of times in the last few days. The first time the stock failed there after a $5 point run in 20 minutes; $35 held the offer nicely. The second time the stock failed because there was serious selling at 34.95 and 35. so it was not like the buyers weren’t ready to buy above it – clearly the supply at that level was much greater than the demand. So $35 was setting up as the level to watch for another possible huge break. So great job by DH at identifying an excellent level in AIG.

Now when we prepare for a stock to break through an important level we consider a few possibilities on how the stock may break. One the stock could just drive up on the open, lift through $35 and not stop until $36+. Clearly the best and easiest way for people to be in it for the big move. You pay $35 and sell it when it stops up ticking a point higher. Can’t get easier than that. Chop.

But then what if the break is not clean? ideally we would like to see a few things for the breakout play to work:

1. We would like to see serious buying interest near $35. Say anywhere in the 34.60-.90 area.
2. When it gets near $35 you should see the bids getting hit for some size, dropping and see the stock not go down.
3. Once it starts to take $35 it should have a clean break and powerful break through it
4. If the $35 gets tested after popping above it, it should not drop more than a few cents through to shake the weak-hand longs. It is better if it just holds for size and never drops though.
5. It would be even better if when $35 lifts and pops that we see buying interest above it. Say 35.10 and higher.

Now coming into the open AIG was starting to hold 34.60 but the volume really wasn’t there yet. When the stock opened it popped through it without much of a fight. To me there was no buying on the bid, it was going up by people paying the offer; so it was starting to look like just a drive through the level. But the stock stopped printing aggressively on the offer near 35.3 and the last noticeable buyer was 70 cents away..uh oh..danger, danger, danger. And When the stock tested $35 on the way down it went powerfully through it into the 80s. Ripper.

So not only did it not drive just straight up a point but it also seemed like a huge fake break. The stock wasn’t showing signs of buying interest on the bid below, at or above the level; so we were skeptical. When the stock failed to drive up and it slowed we sold. Then the next and only place to buy the stock back was in front of $35 but you had to be out if $35 broke. You do so because you have not seen confirmation clues as the ones described above. Had we seen a few of those clues then we can restructure our trading plan to allow for a little wiggle room. But this just wasn’t the case for the way the stock traded last Monday. So there isn’t a magic number for how much room you can give the stock. It really does depend on how the play develops and where you are noticing clear buying near the level. Had we seen noticeable buying around 34.90 before lifting $35 then we woulld give the stock some room until we saw selling below 24.90. I hope that makes sense.

Will be watching this dopey stock tomorrow as it decided to pop in the last 10 minutes of the trading day today without me. Strictly going to be momentum trading this sucker so really have no levels to share at this time. But will tweet if we spot any.

I believe Bella said it best yesterday in his post “Don’t start your vacation before your vacation”. AIG was a party all day long. Talk about crazy opportunity on this hot summer day. I want to highlight a few trading levels from today that will be important for tomorrow.

First let me just say the following: For the first time in like a year I didn’t trade the Open today. I have been working extensively on the new reading the tape training manual and I am just getting around to doing the videos. I finished all the written content – finally – and created a few videos in the office yesterday. After replaying them I found that there was too much noise (trader talk) in the background and so I decided to skip the Open and focus on the videos from home. WHAT A RIP!

So I got up early, got a quick work out in and got cracking on the videos. I was so focused on the task at hand that I didn’t even bother to open my trading platform – I knew I would just start trading otherwise. Around 10:50am I got a text message from a young trader (thanks dude) at our firm asking if I was crushing AIG. I knew immediately what that meant. I figured worst case scenario it was trading around 30 and I could catch the momentum to the low 30s. NOOOOOO…I checked on my Crackberry and the sucker had ran to 35 without me. I was fuming. But then again I remembered that the day didn’t end until 4pm. I had 5 hours to party with AIG.

As soon as LightSpeed loaded up I paid for 200 shares to get me to focus on the tape rather than contemplating how much PnL I had left on the table by not trading the Open. I gotta tell you, there is nothing like floating on a position without a clue as to what is going on to get you to figure out the important levels real quick. I call that paying for information…the forced way.

Mind you I had not loaded up the charts at this point. All I knew from the text message and CNBC on my Crackberry was that the stock went straight up for 5 points. But from watching the stock for 5 minutes I knew that the stock couldn’t trade below 34.20 or hold above 34.45. It finally held below 34.2 and I whacked the bids with fury. Within a minute the stock was down 80 cents, that was a chop. Later I noticed 33.85 held the offer unusually so I started a core short (stock cracked hard from 34.20 and now I had a seller below that level) and it was go time!

By 12:30pm I had managed to grind dual Gs on a couple hundred thousand shares and I was just getting started. The stock was still In Play so I kept at it. 33.15 big level drops and I whacked the bids once again with passion. Another 80 cent move in a couple of minutes – chop again!.

3 hours later I was still trading the crap out of the stock. No charts, just going by the box…I guess this reading the tape stuff does work huh . I had a good day though I know I left a lot of money out on the table by not being at my desk early this morning. But you know what? This stock is going to be in play again tomorrow and possibly even Monday. So who cares I didn’t make an extra 4k today.

So for tomorrow, keep an eye on the following levels: $31 (s), 31.40 (S), 33.15 (r) and 34.20 (R). You may want to consider moving that vacation until the last few days in August. The party is on!

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In a recent blog Dr. Steenbarger talked about a vital skill for the intraday trader, reading the tape.  Dr. Steenbarger, aka the godfather of modern trading psychology, wrote: “My experience is that an understanding of (and ability to read) order flow is one important factor that separates the older, successful generation of daytraders from the newbies who only know simple chart patterns and indicator readings.”  I am one from this older generation of intraday traders.  And I thought this old-timer could share his thoughts on reading the tape and how it impacts the developing intraday trader.

In the past I have disappointingly heard developing traders state,”I am just going to focus on the charts going forward.  I can’t read the tape.”  I have heard this uttered on numerous occasions. Not one of these individuals became successful traders.

Recently, our newest class has moved from the first part of our training to the second part, Trader Development.  After the Close we answered their questions and discussed what was important on Day 6 of their live trading career. (Oh to be young again.  What was I doing on Day 6 of my trading career?)  And one of our promising traders discussed a trailing stop for a MS trade today.  Trailing stop?  My impression was this talented new trader had trouble reading the tape so was experimenting with these trailing stops to minimize this weakness.  This is not the right approach.  I counseled to continue working on the skill of reading the tape and to sell the stock on the offer when the tape showed weakness.  And I did so because this is what an older generation intraday trader, like myself, does.

And I offered an analogy about not learning how to read the tape.  To me not learning this skill is like a basketball player not working on their free throws.  This athlete just decides to keep clanging their free throws and give up some easy points.  This same new trader offered a better analogy. (Hey we hire smart new traders.  Obviously this analogy was much better than mine.  In the future I will take creative license to just use his idea as my own.  After all what is the point of being a partner if you can’t steal the analogies from your trainees.)  Back to this better analogy from the youngster who just started trading.  Not developing this skill is like the amateur golfer hitting only irons during his round because he never learns to hit driver.

I like that.

Still not convinced?  Let’s bring is some famous market players for further persuasion.

Exhibit A:  Steve Cohen of SAC Capital: “…everything I do today has its roots in those early tape-reading experiences.”

Exhibit B: Jesse Livermore:  ”A battle goes on in the stock market and the tape is your telescope.  You can depend upon it seven out of ten cases.”

Exhibit C: Linda Rascheke: “If you can learn to follow the price action, you will be two steps ahead of the game….”

Exhibit D: Paul Tudor Jones: “…..at the end of the day, I am a slave to the tape and proud of it.”

So learn to read the tape.  It will help you become a consistently profitable trader.  It will give you an edge over other intraday traders.

Best of luck with your trading! Don’t forget to follow us on Twitter!