Order Flow and Tape Reading | Stock Trading Magic
I'm a long-term viewer, subscriber, and big fan of yours! Thanks a lot for the amazing content you deliver day in and day out!
What's the difference between Reading the Order Flow and Reading the Tape?
Could you please take the time to answer the question and make a clear distinction between the two?
Thank you so much! Best Regards!
Transcript Begins at 4:55 of the video...
At one point when, and this is actually getting into the question, we're going to answer today about order flow. At one point they changed in to February of 2007. The New York stock exchange changed their order from a super dot system, which was where the specialist stood at their postal day.
And pretty much managed most of the order flow that went through those stocks. Things changed when they went electronic and they went to what was called a hybrid. And it became, at that point, it became super montage and a lot more electronic orders came into the market. And there's a whole point.
So I want to get to the question and I want to bring it up because the question is what's the difference between order flow and tape reading. So we're going to answer that, but I want to give you the content. How we came up with the New York method, which is actually what we're, our core trait, a core method of course, system of how we look at everything it was born out of when the New York stock exchange changed.
That if you could imagine you're a specialist on the floor of the New York stock exchange, and you had a limit to the amount of electronic orders that you can be hit with at one time. And at that time it was 1099 shift. Every 30 seconds on one side of the market. So let's just say for argument's sake, I'll just use this as an example, say, this is my specialist post I'm standing on the floor of the New York stock exchange.
And I have IBM as the stock that I'm a specialist in and people sitting at their desk or anywhere really electronically, could only buy a maximum of 1,099. Every 30 seconds on one side of the market. So you can buy 1,099 shares electronically, but that was the maximum I could get hit with. So it gave me time to manage the positions on one side of the market.
I could buy and sell quickly, but that's different sides of the trade. So if I bought 1,099 shares, I was okay. That I wasn't getting blessed at electronically. And this is 2007 up to 2007. It's not that long. I'd have to wait 30 seconds in order to hit that manually again. So the specialist was in control of the order flow.
They could wait that kind of stuff. They also had the specialist book where all of their orders were electronically trading with it. When the hybrid system came in that same thousand 99 order became unlimited. So it went from, yeah, I'm in control of everything to what the heck is going on. This is impossible.
So those specialists came off the floor and actually had 25 of them trade in my office at one point. And that's actually how we came up with the New York method. I was a momentum trader trading, mostly NASDAQ stocks. At that time, they came off the floor. We taught them how to trade on a computer, because if you could imagine being on the floor, the New York stock exchange, none of them hardly used computers.
Most of them was the roar of the crowd, the crescendo of the buying and selling and everybody yelling. If you could, you could picture the floor of the exchange being. So that's how we started to combine order flow with momentum and tape readings a little bit further into that. So I'm actually going to bring up the question that was asked about that and it came from the community.
So these questions are awesome. So we're actually going to talk about this Turmo ADA last night asked a long-term view and subscriber and a big fan of thank you so much. I appreciate, I want you to know how much I appreciate. So what I want to get over here is the pillars you trading strategy, keep reiterating, emphasizing, and drilling into our heads, reading the order flow and reading the tape.
Okay. I'm still not a hundred percent clear on the difference between reading order flow and reading the tape.
So this is. This is just, it's an awesome question. It really is because if there's one thing that we try and do especially obviously in our private community, is that we try and drill in that trading does not need to be conflict.
But it needs to be consistent. However, you end up looking at the market, it needs to be the same way all the time. And however you end up doing that, whether it's moving averages, trading indicators, whatever you're comfortable with, I don't use any of that. I use moving averages, price and volume, but mostly price and volume, whatever it is, you need to be consistent because you need to believe in it.
If you have a hard time believing in it, you don't believe it works quite honestly. You don't believe that it follows through over time. So you need to trade and get feedback. You need to trade and get feedback. And there's an easy way to tell whether or not you believe in your own trading strategy.
Raise your hand. If you've hesitated to buy a stock when you had a signal, I think we all have at some point in the past, but when you work on your system again, we came up with the New York method. When you work on that system, you don't hesitate. It. Because you have an exact, if this happens, I'm doing this.
If this happens of doing this, see the trade, take the trade, see the trade, take the trade. So if you raise your hand right now, and if you want you to type in the chat, if you say yes that you see a signal and you hesitate, that means that you don't believe in your strategy, because if you believe in your strategy, you expect it to follow through provided.
You're actually taking trades that match your strategies. I think we can also admit that sometimes we take trades that have nothing to do with our strategy, which are those bonehead trades that cause us to not get paid. So the answer I want to bring this up again, if you want to snapshot this, I'll bring it up so you could take a quick picture of it.
And he's really asking this, the difference between order flow and tape reading. I'm going to, I'm going to rattle this off and if you want, you could obviously pause it. And again it's funny, I have these big post-it pads in here. This is a post-it pad moment. These are the kinds of things you want to write down.
Order flow is the reason to take the trade tape reading is whether you should buy or sell now. So and building an argument for the trade. Okay. So order flow is the answer to the question. Is it obvious? Is it obvious that smart money has been allocating millions of dollars to a trade?
That's the question that we need to answer now? The problem that a lot of traders have is yesterday, quite frankly that's the big problem. They're looking at stocks from yesterday, running those scans, whatever software you happen to use and wow. This stock was up a lot yesterday. But that's it just yesterday.
So if you could imagine you're a hedge fund and you're buying stock, you started to buy stock. You're sending your order flow down to the floor of the New York stock exchange, or however you ended up putting it into your algorithm. You start sending it in, you have 5 million shares to buy. And again, this is where the New York Method was merged with tape reading and NASDAQ trading, which we did back in the day could call it momentum trading. But we prefer to call it tape reading because there's more to the argument.
One day is not enough order flow one day. Maybe you can day trade those stocks one day. Maybe you can take advantage of those stocks, but you have to factor in position sizing into the quality and the depth of the order flow.
So here's the thing. Pick a side, then pick a spot. Okay. Picking aside means order flow is obvious. So you need to answer the question is order flow obvious. And how long has it been obvious now the big thing that should be going through your head right now. Okay. What does that mean? What is obvious mean?
How long has smart money, but spending money for that idea? How long have they been buying that stock? How long have they been committing higher highs and higher lows in paint? What. W we take technical analysis for granted sometimes, but what does it actually mean that a stock is well bid on the hourly chart, the daily chart, the weekly chart, the monthly chart.
Well, bid, we take, again, we take all this stuff in technical analysis for granted because yeah, look at the chart. But what's actually happening, which is why we call it order flow, not the trend. It is technically the trend, but we want you to visualize. Somebody actually had enough money to push that they're paying higher prices.
That's what you're supposed to visualize with order flow. So order flow is determining how long has smart money. The deep pockets, somebody with a lot of research, been allocating money to this, to the point where they've had to pay higher prices because there's underlying demand for. Now if it's one day that's okay.
If it's two days, a little bit more where higher highs, higher lows, you get a big breakout on big volume. That's one day it's impressive. They stepped up, they bought more and more money was allocated to that trade. We got a good question yesterday. When does a breakout confirmed? It's not the day it breaks out.
It's the next day. Remember we talk a lot about what do I want to see what don't I want to see and how that influences everything that you do while you're trading. You need to have that question in your head all the time, because then you'll never get. You'll never be acting out of impulse. You'll be, I know exactly what I'm going to do.
What do I need to see what don't I want to see? So if a stock breaks out, when do you want to see, we want to see that stock go well bid, which means they're holding the bid, which actually brings me to something we're going to talk about in a second. We wrote this piece out today to, to our sunscreen.
Essentially about what it means to hold the bid and what's going on in the market right now and whether or not we're actually in a short covering rally the last five days when we have been moving to the upside or is it fresh buying, getting ready for a new leg to the upside. So we're actually going to, I'm going to show screenshot out, which you can take a snapshot of as well.
So that's what order flow is. Order flow is determining how obvious deep pockets have been allocating money to a stock. And how long have they been doing? But here's the key. We did not talk about an entry. Okay. That's the thing order flow does not mean just get in there and buy you still have to determine the entry price to the potential reward.
And is it worth buying right? That's where the tape reading part of it comes in. The tape reading part comes in is assessing entry, stop loss, initial profit target, and probability of it getting there. So is it worth taking the risk, then you throw the stock market power pyramid on top of that, which if you want to learn more about that, there's a link below in the video to click on that one, to watch the stock market power pyramid.
You now adding what's going on in the market. What's going on in the sectors, the industry groups and the individual stocks. So order flow is determining if we should be looking to buy tape reading is building that argument to time our entry determined risk reward, and then allocate position sizing based on the argument that we built while we'll reading the tape.
So order flow is, should we be looking to buy tape? Reading is determining if right now is the right time to do. And what is our position size based on how much the stock has recently moved and what it normally moves. That's a mouthful, right? But that's real trading. That's real trading. And if you're struggling right now, if you're like, wow, that sounds like a lot.
That means that you're not making enough distinctions. That means that you're not taking your thought process to the next level. That means you might just be like bull flag. I'm going to buy a bull flag. I'm going to be. That's not tape reading that's chart patterns. And that's what we talk about all the time chart readers struggle, because they're just looking for those patterns.
Take readers and traders, get paid tape readers and traders look for money and whether or not they should put their hard earned money in harm's way. By first reading the order flow, determine if smart money is allocating it to an idea. And then if right now is the right time.