Most people who enter the stock trade have found that reading from the tape is hard to do and very stressful. As a former Wall Street insider, there is a secret that most retailers don’t know.
Do not trade stocks with an average volume of over one million shares per day!
That’s it! It’s a big secret that most Wall Street insiders use to their advantage. Most retailers like to trade stocks that are on the most active lists because they are easy to buy and sell and have small differences. But there is a big problem with most high-volume stocks, and they are:
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Institutional order on all sides
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Spread traders / hedgers
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Too much information
Institutional order on all sides
Once too many institutions are involved in stock trading, it constantly changes the direction of the price. Institutions buy and sell stocks for many reasons that have nothing to do with stock bases. Some examples of why institutions buy and sell stocks are:
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Investors buy or sell shares in their fund
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Annual showcase
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Sector rotations
When you mix all these big orders together then it creates unstable conditions and it makes it difficult to read the tape. The direction of the bar changes back and forth to quickly sense any behavior. Another problem that institutions create is due to sending large orders at order counters. Most order counters “work to order,” which means you get the best price possible. This affects the trader because every time the stock looks like it is going to go in one direction, the ordering service enters and stops that movement.
Spread Traders and Hedgers
Spread traders and hedgers trade to protect second position. The direction usually does not affect them so their decisions are based on widespread relationships. One example would be Lowe’s Home Depot Stock Verse. If Home Depot was up 3% a day and Lowes was up just 1%, then a forward trader could sell Home Depot shares in the short term while buying Lows shares. These types of traders capitalize on the difference in the range of 2% because they know that the stock prices of both companies are moving together and will eventually return.
Too much information
Finally, it is simply too much information. As a tape reader, you need to be able to remember certain prices and the way quotes behaved around those prices. For example, if every time a stock falls to the lowest part of the day and many sales orders come in, but ECN just sits there and absorbs all the sales. In this case, you would buy that support unless that ECN gets out of the way and the price drops so low. A good cassette reader learns to remember certain price levels and how the order book reacts to those levels. If you trade a stock that has a lot of orders by volume, they come and go too fast to remember and read that data.