Reading the Tape with Gman: Longer Term Setups

SMB Gilbert Gman MendezGreetings from the Outer Banks, North Carolina. After an eventful August I finally got a chance to take some time off. In between the unusual price action in AIG and the serious task of creating our new Reading the Tape training program, I was finally able to get away for a few days. There’s nothing like some good company, phenomenal food, okay weather and the sound of the ocean to quiet the mind.

We are very excited to announce our new Reading the Tape training program will be available via our website on September 14th. I want to thank all of you for the kind comments and feedback sent to me over the last few weeks. One of the most popular topics of the many email exchanges was using tape reading for longer term setups. In this article I will give a brief introduction in the most general terms on this topic. Note though that I cover this topic in more detail in the training program through written lectures and video recordings (video recordings of my trading with audio commentary).

In the last article I discussed how tape reading can give you an edge for shorter term setups. But I didn’t mention how it helps for longer term setups. The reason is simple- it is difficult to gather information from a short time frame to infer something about a longer time frame. Think of it this way.  When was the last time you looked at a 1 minute chart, liked a pattern and decided solely from that chart that it was a week long trade? Umm… never, I hope.  A 1 minute chart is just too short of a time frame to infer anything further than the next 10-15 minutes.

Normally for longer term setups we use the longer time frames (hourly, daily, weekly charts) to identify the setup and use the shorter time frames (5, 15, 30 minute charts) to time the entry on the trade.  Reading the Tape will not change that process, you would still have to look at your longer time frames for your ideas and the shorter term ones for your entries. After all reading the tape is almost like looking at a noise filtered tick chart. This sounds like a bad idea but it is not. Think of it this way, reading the tape gives you a much shorter time frame to help you time your entry more precisely. Doing so will manifest more efficient entry prices.

It is as if you added another level of confirmation to your trade. Think of your long term trade composed of a setup developed in a long time frame, confirmed by a setup in a middle time frame, timed and confirmed by the smallest time frame possible. Seriously, talk about stacking probability to your advantage.

The biggest advantage to adding tape reading to your skill set for longer time frame setups is that you are able to take on more size on your overall position, while minimizing your overall risk on some of your trades. In simple math terms if in prior trade setups you risked 50 cents on 1000 shares, it may be the case that now you can risk 10 cents on 5000 shares for the same trade. You risk the same dollar amount but the reward profile is substantially improved.

With this ability to increase your size, while minimizing your overall risk, you can scale out of your position to further minimize your risk. Thus when a stock trades in your favor x amount you can get out of a small part of your position and let the rest get stopped out. This allows you to break even, and in most cases make a profit on a play that didn’t work out. Now that’s what I call making money while being wrong (a secret to all save the best of intraday traders).

Also, there is another advantage to improving the timing on your entries. Namely, reducing the loss on those losing trades that do not work out from the start. Think of that last breakout play in which you got in the trade, the stock traded a few cents in your favor and then tanked to your stop loss 40-50 cents lower. Wouldn’t it be nice to save yourself the 30-35 cents of pain by identifying the fake break instantly? This is a huge advantage of tape reading.

There is a lot more to discuss on using tape reading for timing your exits, but let’s save this for another article in the future. For now, I hope these few trading examples gives you an idea on how tape reading can also help you with longer time frame setups.  I am off to get in some cocktails by the pool before getting ready to head back to NYC. I am fully recharged and ready to crush the remaining part of this year. Happy trading. GMan out.

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