CHAPTER FOURTEEN The Principles Applied to Longer Term Trading



THE first edition of this book having been exhausted, it has been my privilege to edit the foregoing chapters in preparation for the second edition. This has required a consideration of the principles therein set forth, and has enabled me to test and compare these principles in their adaptation to the stock market of 1916.

I find that in no important degree is it necessary to modify what has been written. While the character of the trading has altered since the outbreak of the European War, this change represents more a shifting of the leadership and a widening of the swings, due to extraordinary conditions. Proof that these rules and methods are correct is also found in their adaptation to other forms of trading, chief among which is the detection of accumulation and distribution at certain important turning points in the market. I have used this method successfully in forecasting the market for these principal swings and find it to be a much more comfortable way of following the market, because it is not so confining.

Preparation for a long advance or decline, as well as for the intermediate movements are numerous, is clearly apparent to those who understand the art of Tape Reading. In judging the market by its own action, it is unimportant whether you are endeavouring to forecast the next small half hourly swing or the trend for the next two or three weeks. The same indications as to price, volume, activity, support and pressure, are exhibited in the preparation for both. The same elements will be found in a drop of water as in the ocean, and vice versa. A study of the stock market means a study in the forces above and below the present level of prices. Each movement has its period of preparation, execution and termination, and the most substantial of movements are those that make long preparation. Without this preparation and gathering of force, a movement is not likely to be sustained.

On the other hand, the greater the preparation, the greater the probable extent of the swing. Preparation for the principal movements in the market will very often occupy several months. This may be preceded by a decline, in which large operators accumulate their stocks. They may even precipitate this decline in order to pave the way for such accumulation.

Large operators differ from small ones in their ability to foresee important changes in stock market values from six months to a year in advance, and to prepare themselves for it. A study of these preparatory periods discloses to those who understand the anatomy of market movements the direction and possible extent of the next big move. Thus, a study of these important turning points, principal among which are booms and panics, is the most essential. Small operators should take a leaf from the book of those who buy and sell enormous quantities of securities. It is their foresight which enables them to profit. To cultivate foresight means to study the markets condition. In a lecture at the Finance Forum, New York, I showed how all influences of every sort affecting the stock market are shown on the tape, and in the changes in prices. While I would not for a moment discourage the student from acquiring any knowledge, and giving some consideration to Fundamental Statistics such as crops, money, politics, corporate earnings, etc.- the advantages of studying the action of the market, as a guide to future prices, are productive of too great results to warrant their dilution with factors which are really of secondary importance. I make this claim because of my conviction that the position of large operators is more important than the so-called basic factors.

For several years past I have applied the principles in this book to the forecasting of the swings of from 5 to 20 points. Results have been highly outstanding. For this reason I can recommend that the subject be studied with a view to the formation of a method of trading, especially adapted to the individual requirements of those who wish to follow this intensely interesting and highly profitable business.

RICHARD D. WYCKOFF
New York, 1919

CHAPTER THIRTEEN Two Days Trading - An Example Of My Method Applied



BELOW is a record of transactions made by me, results having been obtained by following the methods suggested in these pages on Tape Reading. The object is to show the possibilities in this adventure and to encourage anyone who wants to master the art of day trading.

Please note that out of fifteen transactions, figuring on the buying and selling prices alone, there were thirteen wins and only one loss. One transaction showed neither profit nor loss. Seven trades were on the long side and eight on the short. The stock fluctuated between 166 3/4 and 170 3/8 (3 5/8 points) during these two sessions, and gave numerous trading opportunities. All transactions were protected by a close stop, in some cases not more than 1/8 or ź point from the original buying or selling price. These stop orders were not always put on the floor. The reason: in such active trading - stops could be changed or cancelled more quickly when they were carried in the head and executed "at the market" when the price hit the required figure.

Qty Stock Trade Bought Sold Loss Profit
200 Reading Long 167 1/2 168 1/4
3/4
200 Reading Short 167 1/4 168 3/8
1 1/8
200 Reading Long 167 1/4 168 3/4
1 1/2
200 Reading Short 169 5/8 169 3/4
1/8
200 Reading Short 169 169 1/2
1/2
200 Reading Short 169 1/8 170
7/8
100 Reading Short 169 5/8 170
3/8
200 Reading Short 168 1/8 169 7/8
1 3/4
200 Reading Long 168 168

200 Reading Long 168 1/4 168 3/4
1/2
100 Reading Short 168 169 1/4
1 1/4
100 Reading Short 168 1/8 169 1/4
1 1/8
200 Reading Long 168 1/8 168 1/2
3/8
200 Reading Long 168 1/4 169
3/4
200 Reading Short 169 1/4 168 3/8 7/8
2700



7/8 11

Commission


3 3/8

Tax (about)


1/4






-4 1/2

Net Profits (Points)


6 1/2


CHAPTER TWELVE Closing The Trade


THE student of Tape Reading, especially he who puts his knowledge into actual practice, is constantly evolving new ideas and making discoveries which modify his former methods. From each new elevation he enjoys a broader view; what were obstacles disappear; his problems gradually simplify.

We have previously defined Tape Reading as the art of determining the immediate trend of prices. If one can do this successfully in the majority of his trades, his profits should roll up. But recognizing the trend and getting in at the right moment is only one-half of the business. Knowing when to close a trade is just as important if not the most important part of a complete transaction. At a certain point in my trading, I became aware that a large percentage of my losing trades resulted from failure to close at the culmination of what I have termed the immediate trend.

An example will make this clear: New York Central was on a certain day the strongest stock in a bull market that showed a tendency to react. The pressure was on Reading and Steel. My indications were all bullish, so I couldn't consistently sell either of the latter short. I was looking for an opportunity to buy. The market began to slide off, Reading and Steel being the principal clubs with which the pounding was done. I watched them closely and the moment I saw that the selling of these two stocks had ceased, gave my order to buy New York Central, getting it at 137 1/4. It never touched there again, and in ten minutes was 139 bid for 5,000 shares. Here I should have sold, as my buying indication was for that particular advance. Especially should I have sold when I saw the rise culminate in a spectacular bid which looked like bait for outside buyers. Of course the stock might have gone higher The main trend for the day was upward. But for the time being 139 was the high point. I knew the stock was due to react from this figure, and it did, but at the bottom of the normal reaction selling broke out in fresh quarters and the whole market came down heavily. The result was that my profit was only a fraction of what it ought to have been. This is the way the trade might have been made: I should have sold when 139 was noisily bid, and when the reaction had run its course, picked it up again, provided indications were still bullish. If they were not I would have been in the position of looking to get short instead of waiting for a chance to get out of my long.

Having reserved in the early part of this book the right to revise my views, I will here record the claim that the best results in active Tape Reading lie in recognizing the moves as they occur, getting in when they start and out when they culminate. This will in most cases cause failure to get all of the moves in the one most active stock for the day, but should result in many small profits, and I believe the final results will exceed those realized by sitting through reactions with any one stock. There is a very wide difference in mental thought processes between the man who feels compelled to get out of something and one who has money to invest and is looking for a chance to make a fresh trade. The start and finish of a small move is best illustrated by a triangle - the narrow end representing the beginning, and the wide end the termination of the move. The width in an upward move would appear like this:



and a downward move like this:



These figures denote the widening character of a move as it progresses and are intended to show how volume, activity and number of transactions expand until, at the end, comparatively active conditions prevail. The principle works the same in the larger market moves; witness the spectacular rise in Union Pacific within a few sessions marking the end of the August1 1909, boom.

After closing out a trade the tape will tell on the following reaction whether you are justified in taking the same stock on again or whether some other issue will pay better. Frequently a stock will be seen preparing for a move two or three swings ahead of the one in which it becomes the leader. This is a fine point, but with study and practice the most complicated indications clarify.

And now a word about you who are endeavouring to turn day trading to practical account. The results which are attainable depend solely upon the YOU. Each must work out his own method of trading, based on suggestions derived from these suggestions or from other sources.

It will doubtless be found that what is one man's meat is another's poison, and that no amount of "book learning" will be of any use if the student does not put his knowledge to an actual test in the market. It is surprising how any familiarity with subjects relative to the stock market, but seemingly having no bearing upon Tape Reading, will lead to opportunities or aid in making deductions. And so when asked what books will best for supplementing these suggestions, I should say: Read everything you can get hold of. If you find but a single idea in a publication it is well worth the time and money spent in procuring and studying it.

Wall Street is crowded with men who are there in the hope of making money, but who cannot be persuaded to look at the proposition from a practical business standpoint. Least of all will they study it, for this means long hours of hard work, and Mr. Speculator is laziness personified. Frequently I have met those who pin their faith to some one point, such as the volumes up or down, and call it Tape Reading. Others, unconsciously trading on mechanical indications such as charts, pretend to be reading the market. Then there is a class of people who read the tape with their tongues, calling off each transaction, a certain accent on the higher or lower quotations indicating whether they are bullish or bearish.

These and others in their class are merely operating on the superficial. If they would spend the same five or six hours a day (which they now practically waste) in close study of the business of speculation, the result in dollars would be more gratifying at the end of the year. As it is, the majority of them are now losing money. It is a source of satisfaction, however, that these suggestions of mine which, I believe, are the first practical articles ever written on the subject of Tape Reading, have stirred the minds of many people to the possibilities in the line of scientific speculation. This is shown in a number of letters I've received, many of them from traders situated in remote localities. In the main, the writers, who are now carrying on long distance operations for the big swings are desirous of testing their ability as Tape Readers. No doubt those who have written represent but a small percentage of the number who are thus inclined. To all such persons I would say you can make a success of Tape Reading but you must acquire a broad fundamental knowledge of the market. A professional singer who was recently called upon to advise a young aspirant said: "One must become a 'personality' - that is, an intelligence developed by the study of many things besides music". It is not enough to know a few of the underlying principles; one must have a deep understanding.

To be sure, it is possible for a person to take a number of the "tricks of the trade" herein mentioned and trade successfully on these alone. Even one idea which forms part of the whole subject may be worked and elaborated upon until it becomes a method in itself. There are endless possibilities in this direction, and after all it matters little how the money is extracted from the market, so long as it is done legitimately. But real Tape Reading takes everything into account - every little character which appears on the tape plays its part in forming one of the endless series of "moving pictures". In many years study of the tape, I do not remember having seen two of these "pictures" which were duplicates. One can realize from this how impossible it would be to formulate a simple set of rules to fit every case or even the majority of them, as each 5 day trading session produces hundreds of situations, which, so far as memory serves, are never repeated. This goes on to suggest further that charts and chart pictures are merely guides and cannot be relied upon to form judgments of the market at the moment you need it to.

The subject of Tape Reading is therefore practically inexhaustible, which makes it all the more interesting to the man who has acquired a habit of study. Having fortified himself with the necessary fundamental knowledge, the student of Tape Reading should thoroughly digest these suggestions and any others which may be obtainable in future. It is not enough to go over and over a lesson as a student in elementary school does, driving the facts into his head by monotonous repetition; tapes must be procured and the various indications matched up with what has been studied. And even after one believes he understands, he will presently learn that, to quote the words of a certain song, "You don't know how much you know until you know how little you know". One of my instructors in another line of study used to make me go over a thing three or four times after I thought I knew it, just to make sure that I did.

I should say that it is almost impossible for one who has never before traded from the tape to go into a broker's office, start right in and operate successfully. In the first place, there are the abbreviations and all the little characters and their meanings to know, the abbreviations of the principal stocks; it is necessary to know everything that appears on the tape, so that nothing will be overlooked. Otherwise the trader will be like a person who attempts to read classic literature without knowing words of more than four letters.

It is a common impression that anyone who has the money can buy a seat on the Stock Exchange and at once begin making money as a floor trader. But floor trading is also a business that one has to learn, and it usually takes months and years to become accustomed to the physical and nervous strain and learn the ropes. Frequent requests are made for the name of someone who will teach the Art of Tape Reading. I do not know of anyone able to read the tape with profit who is willing to become an instructor. The reason is very simple. Profits from the tape far exceed anything that might be earned by charging tuition fees to his students. It's simple economics. In addition to the large operators and floor traders who use Tape Reading in their daily work, there are a number of New York Stock Exchange members who never go on the floor, but spend the session at the ticker in their respective offices. Experience has taught them that they can produce larger profits by this method, or else they would not follow it. The majority of them trade in 5000 share lots and up and their business forms an important share of the daily volume. A number of so-called semi-professionals operate on what may be termed pure intuitive tape reading. They have no well-defined code of rules, methods or strategies and probably could not explain clearly just how they do it, but they "get the money" and that is the best proof of the pudding. The existence of even a comparatively small body of successful Tape Readers is evidence that money making by this means is an accomplished fact and should encourage you.

One of the greatest difficulties which the novice has to overcome is known as "cold feet". Too many people start and dabble a little without going far enough to determine whether or not they can make a go of it. And even those who get pretty well along in the subject will be scared to death at a string of losses and quit just when they should dig in harder. For in addition to learning the art they must form a sort of trading character, which no amount of reverses can discourage nor turn back and which constantly strives to eliminate its own weak points such as fear, greed, anxiety, nervousness and the many other mental factors which go to make or unmake the profits in this business. Perhaps I have painted a difficult proposition. If so, the greater will be the reward of those who master it. As stated at the beginning, Tape Reading is hard work. There seems no good reason for altering that opinion.

CHAPTER ELEVEN Obstacles To Be Overcome - Potential Profits





MENTAL poise is an indispensable factor in Tape Reading. The mind should be absolutely free to concentrate upon the work; there should be no feeling that certain things are to be accomplished within a given time; no fear, anxiety, or greed.

When a Tape Reader has his emotions well in hand, he will play as though the game were dominoes.

When anything interferes with this attitude it should be eliminated. If, for example, there be an unusual series of losses, the trader had better suspend operations until he discovers the cause.

The following are the Tape Readers 7 Commandments:

1. Do not overtrade ! One may be trading too often. Many opportunities for profit develop from each day's movements; only the very choicest should he acted upon. There should be no haste. The market will be there to-morrow in case to-day's opportunities do not meet requirements.

2. Eliminate anxiety! Anxiety to make a record, to avoid losses, to secure a certain profit for the day or period will greatly warp the judgment, and lead to a low percentage of profits. Tape Reading is a good deal like laying eggs. If the hen is not left to pick up the necessary food and retire in peace to her nest, she will not produce properly. If she is worried by dogs and small boys, or tries to lay seven eggs out of material for six, the net proceeds may be an omelette. The Tape Reader's profits should develop naturally. He should buy or sell because it is the thing to do - not because he wants to make a profit or fears to make a loss.

3. Don't trade when the market isn't acting right! The market may be unsuited to Tape Reading operations. When prices drift up and down without trend, like a ship without a rudder, and few positive indications develop, the percentage of losing trades is apt to be high. When this condition continues it is well to hold off until the character of the market changes.

4. Get a broker you can trust! One's broker may be giving poor service. In a game as fine as this, every fraction every second counts. Executions of market orders should average not over one minute. Stop orders should be reported in less time as such orders are on the floor and at the proper post when they become operative. By close attention to details in the handling of my orders, I have been able to reduce the average time of my executions to less than one minute. The quickest report obtained thus far required but 25 seconds. A considerable portion of my orders are executed in from thirty to forty seconds, varying according to whether my broker is near the phone or in a distant crowd when the orders reach the floor and how far the identical "crowd" is from his 'phone.

5. Do not leave orders to the discretion of the roker! Make your orders clear and firm. Do not say, Try to sell better than the bid and let me know what happened say, Sell at the bid price and report instantly! He cannot do better" than the momentary bid or offered price. Ordinarily it is expected and is really an advantage to the general run of speculators to have the broker use some discretion; that is, try to do better, providing there is no chance of losing his market. But I do not wish my broker to act like that for me. My indications usually show me the exact moment when a stock should be bought or sold under this method, and a few moments' delay often means a good many dollars lost. With the execution of orders reduced to a matter of seconds, I can also hold stop orders in my own hands and when the stop price is reached, phone the order to buy or sell at the market. Results are very satisfactory as my own broker handles the orders and not the specialist or some other floor broker.

6. Keep alert, calm after losses! The Tape Reader should be careful to trade only in such amounts as will not interfere with his judgment. If he finds that a series of losses upsets him it is an easy matter to reduce the number of shares to one-half or one-quarter of the regular amount, or even to ten shares, so that the dollars involved are no longer a factor. This gives him a chance for a little self-examination.

7. Stay physically and mentally fit! If a person is in poor physical condition or his mental alertness below par for any reason, he may be unable to stand the excitement attending the work. Dissipation, for example, may render one unfit to carry all the quotations in his head, or to plan and execute his moves quickly and accurately. When anything of this kind occurs which prevents the free play of all the faculties it is best to bring the day's work to a close.

Some of my readers may think it futile to aim for a fractional average profit per trade when there are many full points per day to be made by holding on through days and weeks and getting full benefit of the big moves. Admitting that it is possible to make many more points at times, there is a risk of losses corresponding to the profits and the question is not how much we can make, but how much we can make net. Tape Reading reduces profit- making to a manufacturing basis. To show how the nimble eighths pile up when their cumulative power is fully employed, I have prepared a table representing the results of 250 trading days, starting with a capital of $1,000. It is assumed that the Tape Reader has reached that stage of expertness where he can average one trade a day and a profit of $12.50 per trade, and that as fast as $1,000 is accumulated he adds 100 shares to his trading unit. These results depend solely upon the Tape Reader's ability to make more than he loses per day. There is no limit to the number of shares he can trade in, provided he has the margin. If he is at all proficient his margin will not be depleted more than a few points before he makes up his losses and more. He is not pyramiding in the ordinary sense of the word; he is simply doing an increasing volume of shares as his capital expands. All progressive business men increase commitments as fast as warranted by their capital and opportunities. What a profit 1/8 of point per day would amount to in 250 days if profits were used as additional margin:

100 Shares at $12.50 Per Day = $1,000.00 in 80 days

200 Shares $25 $1,000.00 in 40 days (Etc)

300 Shares $37.50 $1,012.50 27

400 Shares $50.00 $1,000.00 20

500 Shares $62.50 $1,000.00 16

600 Shares $75.00 $1,050.00 14

700 Shares $87.50 $1,050.00 12

800 Shares $100.00 $1,000.00 10

900 Shares $112.50 $1,012.50 9

1000 Shares $125.00 $1000.00 8

1100 Shares $137.50 $962.50 7

1200 Shares $150.00 $1050.00 7

GROSS $12,137.50 in 250 Days

Less Tax & Commissions -$1,942.00

Net Profit $10,195.50

Assuming that there are about three hundred Stock Exchange sessions in the year, the two hundred and fifty days figured represent five-sixths of a year, or ten months. From that time on, having struck his gait, the Tape Reader can, without increasing his unit to over 1200 shares, make $900 a week or $46,800 a year.

One trader who for years has been trying to scalp the market and who could never quite secure a profit, reports that his first attempts at applying these rules resulted in a loss of about $20 per trade. This he gradually reduced to $12, then to $8, finally succeeding in throwing the balance over to the credit side and is now able to make a daily profit of from $12 to $30 per 100 shares. That's only an example of small traders. A medium size traders goal should be to make $150 to $350 per 1000 shares. This is doing very well indeed. I have no doubt that profits will continue to increase as experience increases.

Some people seem to hold the opinion that as the profits desired are only 1/8 average per trade one should limit himself in taking profits. Perhaps I have not made myself clear. I buy and sell when I get my indications. In going into a trade I do not know whether it will show a profit or a loss, or how much. I try to trade at a point where I can secure protection with a stop from ź to ˝ point away, so that my risk is limited to this fraction plus commission and tax. If the trade goes in my favour I push the stop up as soon as possible, to a point where there can be no loss. I do not let profits run blindly but only so long as there appears no indication on which to close. No matter where my stop order stands, I am always on the watch for danger signals. Sometimes I get them away in advance of the time a trade should be closed; in other instances my "get out" will flash onto the tape as suddenly and as clearly defined as a streak of lightning against a black sky. When the tape says "get out" I never stop to calculate how much profit or loss I have or whether I am ahead or behind on the day.

I strive for an increasing average profit but I do not keep my eye so much on the fraction or points made or lost, so much as on myself and keeping alert. I endeavour to perfect myself in resolute calmness and precision, quickness of thought, accuracy of judgment, promptness in planning and executing my trades, foresight, intuition, courage and initiative. Masterful control of myself in these respects will produce a winning average - it is merely a question of practice.

To show how accurately the method works out in practice, I will describe one recent day's trading in which there were three transactions, involving six orders (three buying and three selling). The market didn't go one-eighth against me in five orders out of the six. In the sixth, the stock went 5/8 above the selling price at which my order was given.

Here are the details: I had no open trades at the market's open bell. Kansas City Southern, which had been intensely dull, came on the tape 2600 at 46 3/4. I gave a buying order and before it could reach the "post" the Tape said 46 7/8 and 47. The stock rose steadily and after selling at 48 5/8 and coming back to 48 1/2 I gave the selling order. It did not touch 48 5/8 again.

The next trade was in Reading. I saw that it was being held in check in spite of its great strength. The stock had opened at 158. After a certain bulge I saw the reaction coming. When it arrived, and the stock was selling at 157 1/2, I gave the buying order, and got mine at 157 5/8. It immediately rose to 158 3/4. I noted selling indications and gave the order while the stock was at that price on the tape. It did not react sufficiently to warrant my picking it up again and later went to 159 3/8, which was 5/8 above my selling indication.

Southern Pacific suddenly loomed up as a winner and I bought it at 135. It promptly went to 135 1/2. The rest of the market began to look temporarily over-bulled, so I gave my order to sell when the stock was 135 1/2, which proved to be the highest for the day, making the fifth time out of six orders when my stock moved almost instantly in my favour.

This illustration is given as an example of the high percentage of accuracy possible under this method of trading. I do not pretend to be able to accomplish these results except occasionally, but I am constantly striving to do so in a large percentage of my trades. If one makes 2 3/8 points one day and loses 2 points in the next two days, he is 3/8 ahead for the three days, or an average of 1/8 per day. He may have losing and winning streaks, get discouraged and lose his nerve at times, but if he is made of the right stuff he will in time overcome all obstacles and land at the desired goal.


CHAPTER TEN Various Examples and Suggestions





RECENT trading observations and experiments have convinced me that it is impracticable and almost impossible to gauge the extent of a move by its initial fluctuations. Many important swings begin in the most modest way. The top of an important decline may present nothing more than a light volume and a drifting tendency toward lower prices, subsequently developing into a heavy, slumpy market, and ending in a violent downward plunge. If it has been moving within a three-point radius and suddenly takes on new life and activity, bursting through its former bounds, he must go with it. I do not mean that he should try to catch every wiggle. If the stock rises three points and then reverses one or one and a half points on light volume, he must look upon it as a perfectly natural reaction and not a change of trend. The expert operator will not ordinarily let all of three points get away from him. He will keep pushing his stop up behind until the first good reaction puts him out at close to the high figure. Having purchased at such a time, he will sell out again as the price once more approaches the high figure, unless indications point to its forging through to a new high level.

The more we study volumes, the better we appreciate their value in Tape Reading. It frequently occurs that a stock will work within a three-point range for days at a time without giving one a chance for a respectable-sized scalp. Without going out of these boundaries, it suddenly begins coming out on the tape in thousands instead of hundreds. This is evidence that a new movement has started, but not necessarily in the direction first indicated. The Tape Reader must immediately go with the trend, but until it is clearly defined and the stock breaks its former limits with large and increasing volumes, he must use caution. The reason is this: If the stock has been suddenly advanced, it may be for the purpose of facilitating sales by a large operator.

The best way to distinguish the genuine from the fictitious move is to watch out for abnormally large volumes within a small radius. This is usually evidence of manipulation. The large volume is simply a means of attracting buyers and disguising the hand of the operator. A play of this kind took place when Reading struck 159 3/4 in June1909. I counted some 80,000 shares within about half a point of 159 - unmistakable notice of a coming decline. This was a case where the stock was put up before being put down, and the Tape Reader who interpreted the move correctly and played for a good down swing would have made considerable money.

We frequently hear people complaining that "the public is not in this market," as though that were a reason why stocks should not go up or the market should be avoided. The speaker is usually one of those who constitute "the public," but he regards the expression as signifying "every outsider except myself." In the judgment of many the market is better off without the public. To be sure, brokers do not enjoy so large a business, the fluctuations are not so riotous, but the market moves in an orderly way and responds more accurately to prevailing conditions. A market in which the general pubic predominates the purchase of individual stocks represents a sort of speculative "jag" indulged in by those whose stock market knowledge should be rated at 1/8's.

Everyone recognizes the fact that when the smoke clears away, the Street is full of victims who didn't know how and couldn't wait to learn. Their buying and selling produce violent fluctuations, however, and in this respect are of advantage to the Tape Reader who would much rather see ten-point than three-point swings. To offset this, there are some disadvantages. First, in a market where there is "rioting of accumulated margins," the tape is so far behind that it is seldom one can secure an execution at anywhere near his price. This is especially true when activity breaks out in a stock which has been comparatively dull. So many people with money, watching the tape, are attracted by these apparent opportunities, that the scramble to get in results in every one paying more than he figured; thus the Tape Reader finds it impossible to know where he is at until he gets his report. His tape prices are five minutes behind and his broker is so busy it takes four or five minutes for an execution instead of seconds. In the next place, stop orders are often filled at from small fractions to points away from his stop price-there is no telling what figure he will get, while in ordinary markets he can place his stops within ź of a resistance point and frequently have the price come within 1/8 of his stop without catching it.

Speaking of stop orders, the ways in which one may manipulate his stops for protection and advantage, become more numerous as experience is acquired. If the Tape Reader is operating for a fractional average profit per trade, or per day, he cannot afford to let a point profit run into a loss, or fail to "plug" a larger profit at a point where at least a portion of it will be preserved.

One of my recent day's trading will illustrate this idea. I had just closed out a couple of trades, in which there had been losses totalling slightly over a point. Both were on the long side. The market began to show signs of a break, and singling out Reading as the most vulnerable, I got short at 150 3/4. In a few moments it sold below 150. My stop was moved down so there couldn't be a loss, and soon a slight rally and another break gave me a new stop that insured a profit. A third drive started, and I pushed the stop down to within ź of the tape price at the time, as it was late in the day and I considered this the final plunge. By the time my order reached the floor the price was well away from this latest stop and when the selling became most violent I told my broker to cover "at the market." The price paid was within ź of the bottom for the day, and netted 2 5/8 after commissions were paid.

I strongly advocate this method of profit insuring. It is also a question whether, in such a case, the trade had better not be stopped out than closed out. When you push a stop close behind a rise or a decline, you leave the way open for a further profit; but when you close the trade of your own volition, you shut off all such chances. If it is your habit to close out everything before market close daily, the stop may be placed closer than ordinarily during the last fifteen minutes of the session, and when a sharp move in the desired direction occurs the closing out may be done by a stop only a fraction away from the extreme price.

This plan of using stops is a sort of squeezing out the last drop of profit from each trade and never losing any part that can possibly be retained. Suppose the operator sells a stock short at 53 and it breaks to 51. He is foolish not to bring his stop down to 51ź unless the market is ripe for a heavy decline. With his stop at this point he has two chances out of three that the result will be satisfactory: 1) The price may go lower and yield a further profit; 2) The normal rally to 52 will catch his stop and enable him to put the stock out again at that price; 3) The stock will rally to about 51 ź, catch his stop and then go lower. But he can scarcely mourn over the loss of a further profit. If the stock refuses to rally the full point to which it is entitled, that is, if it comes up to 51˝ or 5/8 and still acts heavy, it may be expected to break lower, and there usually is ample time to get short again at a price that will at least cover commissions.

There is nothing more confusing than to attempt scalping on both sides of the market at once. You might go long of a stock which is being put up or is going up for some special reason, and short of another stock which is persistently weak. Both trades may pan out successfully, but in the meantime your judgment will be interfered with and some foolish mistakes will be made in four cases out of five. As Dickson G. Watts said, "Act so as to keep the mind clear, the judgment trustworthy." The mind is not clear when the trader is working actively on two opposing sides of the market. A bearish indication is favourable to one trade, and unfavourable to the other. He finds himself interpreting every development as being to his advantage and forgetting the important fact that he is also on the opposite side. If you are short of one stock and see another that looks like a purchase, it is much better to wait until you have covered your short trade (on a dip if possible), and then take the long side of the other issue.

The best time for both covering and going long is on a recession that in such a case serves a double purpose. The mind should he made up in advance as to which deal offers the best chance for profit, so that when the moment for action arrives there will he nothing to do but act. This is one great advantage the Tape Reader has over other operators who do not employ market science. By a process of elimination he decides which side of the market and which stock affords the best opportunity. He either gets in at the inception of a movement or waits for the first reaction after the move has started. He knows just about where his stock should come on the reaction and judges by the way it then acts whether his first impression is confirmed or contradicted. After he gets in it must act up to expectations or he should abandon the trade and get out of it immediately. If it is a bull move, the volume must increase and the rest of the market offer some support or at least not oppose it. The reactions must show a smaller volume than the advances, indicating light pressure, and each upward swing must be of longer duration and reach a new high level, or it will mean that the rise has spent its force either temporarily or finally.

Tape Reading is the only known method of trading which gets you in at the beginning, keeps you posted throughout the move, and gets you out when it has culminated. Has anyone ever heard of a man, method, system, or anything else that will do this for you in Wall Street? It has made fortunes for the comparatively few who have followed it. It is an art in which one can become highly expert and more and more successful as experience sharpens his instincts and judgment and shows him what to avoid.


CHAPTER NINE Daily Trading Versus Longer Term Trading




JUST now I took a small triangular piece of blotting paper three-eighths of an inch at its widest, and stuck it on the end of a pin. I then threw a blot of ink on a paper and put the blotter into contact. The ink fairly jumped up into the blotter, leaving the paper comparatively dry.

This is exactly how the market acts on the tape when its absorptive powers are greater than the supply - large quantities are taken at the offered prices and at the higher levels. Prices leap forward. The demand seems insatiable. After two or three blots had thus been absorbed, the blotter would take no more. It was thoroughly saturated. Its demands were satisfied. Just in this way the market comes to a standstill at the top of a rise and hangs there. Supply and demand are equalized at the new price level.

Then I filled my pen with ink, and let the fluid run off the point and onto the blotter. (This illustrated the distribution of stocks in the market). Beyond a certain point the blotter would take no more. A drop formed and fell to the paper. (Supply exceeded demand). The more I put on the blotter the faster fell the drops. (Liquidation - market seeking a lower level). This is a simple way of fixing in our minds the principal opposing forces that are constantly operating in the market-absorption and distribution, demand and supply, support and pressure. The more adept a Tape Reader becomes in weighing and measuring these elements, the more successful he will be. But he must remember that even his most accurate readings will often be nullified by events that are transpiring every moment of the day. His stock may start upward with a rush-apparently with power enough to carry it several points; but after advancing a couple of points it may run up against a larger quantity of stock than can be absorbed or some unforeseen incident may change the whole complexion of the market.

To show how an operator may be caught twice on the wrong side in one day and still come out ahead, let us look at the tape of December 21, 1908. Union Pacific opened below the previous night's close: 500 @ 179 6000 @ 178 3/4 and for the first few moments looked as though there was some inside support. Supposing the Tape Reader had bought 100 Union Pacific at 178 7/8, he would have soon noticed fresh selling orders in sufficient volume to produce weakness. Upon this he would have immediately sold 200 Union Pacific at 178ź, putting him short one hundred at the latter price. The weakness increased and after a drive to 176 1/2, two or three warnings were given that the pressure was temporarily off. A comparatively strong undertone developed in Southern Pacific as well as other stocks and short covering began in Union Pacific, which came 600 @ 176 5/8 1000 @ 176 ž then 177ź. Assuming that the operator considered this the turn, he would have, bought 200 Union Pacific at 176 7/8, which was the next quotation. This would have put him long. Thereafter the market showed more resiliency, but only small lots appeared on the tape.

A little later the market quiets down. The rally does not hold well. He expects the stock to react again to the low point. This it does, but it fails to halt there; it goes driving through to 176, accompanied by considerable weakness in the other active stocks. This is his indication that fresh liquidation has started. So he, sells 200 Union Pacific at 176 That is, he dumps over his long stock and goes short at 176. The weakness continues and there is no sign of a rally until after the stock his struck 174 1/2. This being a break of 6ź points since yesterday, the Tape Reader is now wide awake for signs of a turn, realizing that every additional fraction brings him nearer to that point, wherever it may be. After touching 174 1/2 the trend of the market changes completely. Larger lots are in demand at the offered prices. There is a final drive but very little stock comes out on it. During this drive he, buys 100 Union Pacific at 175 7/8, and as signs of a rally multiply he buys 100 at 175 1/4 From that moment it is easy sailing. There is ample opportunity for him to unload his last purchase just before the close when he sells 100 at 176 5/8.


Bought Sold Loss Profit
178 7/8 178 1/4 62.50 -
176 7/8 178 1/4 - 137.50
176 7/8 176 87.50 -
174 7/6 176 - 112.50
175 1/4 176 5/8 - 137.50

Commissions & Taxes 135.00 -

Totals 285.00 387.50

Less Loss -285.00

Net Profit For Day
$102.50


This is doing very well considering he was caught twice on the wrong side and in his anxious trading paid $135.00 in commissions and taxes. Success in trading comes down to a question of reducing and eliminating losses, commissions, interest and taxes.

Let us see whether he might have used better judgment. His first trade seems to have been made on what appeared to be inside buying. No trend had developed. He saw round lots being taken at 178 3/4 and over and reasoned that a rally should naturally follow pronounced support. His mistake was in not waiting for a clearly defined trend. If waiting for the buying was strong enough to absorb all offerings and turn the market, he would have done better to have waited until this was certain. When a stock holds steady within a half point radius it does not signify a reversal of trend, but rather a halting place from which a new move in either direction may begin. Had he followed the first sharp move, his original trade would have been on the short not the long side. This would have saved him his first loss with its attendant expenses, aggregating $89.50, and would have nearly doubled the day's profits.

His second loss was made on a trade which involved one of the finest points in the art of Tape Reading - that of distinguishing a rally from a change in trend. A good way to do this successfully is to figure where a stock is due to come after it makes an upturn, allowing that a normal rally is from one-half to two-thirds of the decline. That is, when a stock declines two and a half points we can look for at least a point and a quarter rally unless the pressure is still on. In case the decline is not over, the rally will fall short. What did Union do after it touched 176˝? It sold at 176 5/8 177 ž - 177 ź . Having declined from 179 1/8 to 176 ˝, 2 5/8 points, it was due to rally at least 1ź points, or to 177 ž . Its failing to make this figure indicated that the decline was not over and that his short position should be maintained. Also, that last jump of half a point between sales showed an unhealthy condition of the market. For a few moments there was evidently a cessation of selling, then somebody reached for a hundred shares offered at 177ź. As the next sale was 176 7/8 the hollowness of the rise became apparent. While this rally lasted, the lots were small. This of itself was reason for not covering. Had a genuine demand sprung from either longs or shorts a steady rise, on increasing volumes, would have taken place. The absence of such indications seems to us now a reason for not covering and going long at 176 7/8.

It is very difficult for anyone to say what he would actually have done under the circumstances, but had both these trades been avoided for the reasons mentioned, the profit for the day would have been $421, as the 100 sold at 178 ź would have been covered at 174 7/8, and the long at 175 ź sold out at 176 5/8. So we can see the advantage of studying our losses and mistakes, with a view to benefiting in future transactions.

As previously explained, the number of dollars profit is subordinate to whether the trader can make profits at all and whether the points made exceed the points lost. With success from this standpoint it is only a question of increased capital enabling one to enlarge his trading unit. A good way to watch the progress of an account is to keep a book showing dates, quantities, prices, profits and losses, also commission, tax and interest charges. Beside each trade should be entered the number of points net profit or loss, together with a running total showing just how many points the account is ahead or behind. A chart of these latter figures will prevent anyone fooling himself as to his progress. People are too apt to remember their profits and forget their losses. The losses taken by an expert Tape Reader are so small that he can trade in much larger units than one who is away from the tape or who is trading with an arbitrary stop. The Tape Reader will seldom take over half a point to a point loss for the reason that he will generally buy or sell at, or close to, the pivotal point or the line of resistance. Therefore, should the trend of his stock suddenly reverse, he is with it in a moment.

The losses in the above mentioned Union Pacific transactions (5/8 and 7/8 respectively) are perhaps a fair average, but frequently he will be able to trade with a risk of only ź, 3/8, or ˝ point. The fact that this possible loss is confined to a fraction should not lead him to trade too frequently. It is better to look on part of the time; to rest the mind and allow the judgment to clarify. Dull days will often constrain one for a time and are therefore beneficial. The big money in Tape Reading is made during very active markets. Big swings and large volumes produce unmistakable indications and a harvest for the experienced operator. He welcomes twenty, thirty and fifty-point moves in stocks like Reading, Union or Consolidated Gas-powerful plays by financial giants. And this fact reminds us: Is it better to close trades each day, or hold through reactions, and if necessary, for several days or weeks in order to secure a large profit? The answer to this question depends somewhat upon the temperament of the Tape Reader. If his make-up be such that he can closely follow the small swings with profit, gradually becoming more expert and steadily increasing his commitments, he will shortly "arrive" by that route. If his nerves are such that he cannot trade in and out actively, but is content to wait for big opportunities and patient enough to hold on for large profits, he will also "get there." It is impossible to say which style of trading would produce the best average results, because it depends altogether upon individual qualifications, attitudes and tolerance of risk. Looking at the question broadly, we should say that the Tape Reader who understood the lines thus far suggested in this series, might find it both difficult and less profitable to operate solely for the long swings. In the first place, he would be obliged to let twenty or thirty opportunities pass by to every one that he would accept. The small swings of one to three points greatly outnumber the five and ten-point movements, and there would be a considerable percentage of losing trades no matter how he operated.

Many of the indications, such as the extent of reactions, lines of resistance, etc., will be found equally operative in the broader swings, just as an enlargement of a photograph retains the lines of its original. Tape Reading seems essentially a profession for the person who is mentally active and flexible, capable of making quick and accurate decisions and keenly sensitive to the smallest and almost imperceptible signals and indications.

On the other hand, trading for the larger swings requires one to ignore the minor indications and to put some stress upon the influential news of the day, and its effect upon sentiment; he must stand ready to take larger losses and in many ways handle himself in a manner altogether different from that of the day trader. The more closely we look at the differences between the longer-term trader/investor and the day trader, the more the two methods of operating seem to disunite, the long-term investing player appearing best adapted to those who are not in continuous touch with the market and who therefore have the advantage of distance and perspective.

There is no reason why the Tape Reader should not make long-term trading an auxiliary profit producer if he can keep such trades from influencing his daily operations. For example, in the previously mentioned shake-down in Reading from 144 3/8 to 118, on his first buying indication he could have taken on an extra lot for the long swing, knowing that if the turn had really been made, a rally to over 130 was due. A stop order would have limited his risk and conserved his profits as they rolled up and there is no telling how much of the subsequent forty point rise he might been able to ride. Another case was when Steel broke from 58 3/4 (November, 1908) to 41ź in February. The market at the time was hinging on Steel and it was likely that the Tape Reader would be operating in it. His first long trade under this plan would be for at least a hundred shares more than his usual amount, with a stop on the long pull lot at say 40 3/4. He would naturally expect a rally of at least 8 3/4 points (to 50), but would, in a sense, forget this hundred shares, so long as the market showed no signs of another important decline. When it reached 60 he might still be holding it.

The above are merely a couple of opportunities. Dozens of such show themselves every year and should form no small part of the Tape Reader's income. But he must separate such trades from his regular daily trading; to allow them to conflict with each other would destroy the effectiveness of both. If he finds the long pull trade interfering with the accuracy of his judgment, he should close it out at once. He must play on one side of the fence if he cannot operate on both. You can readily foresee how a trader with one hundred shares of Steel at 43 for the long-term, and two hundred for the day, would be tempted to close out all three hundred on indications of a decline. This is where he can test his ability to act in a dual capacity. He must ask himself: Have I good reason for thinking Steel will sell down five points before up five? Is this a small reaction or a big shake-down? Are we still in a bull swing? Has the stock had its normal rally from the last decline? These and many other questions will enable him to decide whether he should hold this hundred shares or "clean house."

It takes an exceptionally strong will and clear head to act in this way without interfering with your regular trading. Anyone can sell two hundred and hold one hundred; but will his judgment be biased because he is simultaneously long and short-bullish and bearish? There's the problem! The real Day Trader is more likely to prefer a clean slate at market closing every day, so that he can sit down to his ticker at the next morning's opening and say, "I have no commitments and no opinion. I will follow the first strong indication." He would rather average $100 a day for ten days than make $1,000 on one trade in the same length of time. The risk is generally limited to a fraction and having arrived at a point where he is showing even small average daily profits, his required capital per 100 shares need not be over $1,500 to $2,000. Suppose for sixty days on 100 share a day trading his average profits over losses were only a quarter of a point or $25 a day. At the end of that time his capital would have been increased by $1,500, enabling him to trade in 200 share lots. Another thirty days with similar results and he could trade in 300 share lots, and so on. I don't mention these figures for any other purpose than to again emphasize that the objective point in Tape Reading is not large individual profits, but a continuous chipping in of small average net profits per day.

Some time ago, I am told, a man from the West Coast came into my office and said that he had been impressed by this series on Tape Reading, and had come to New York for the sole purpose of trying his hand at it. He had $1,000 which he was willing to lose in demonstrating whether he was fitted for the work. I was later informed that he called again and related some of his experiences. It seems that he could not abstain from trading, but started within two or three days after he decided on a brokerage house. He stated that during the two months he had made forty-two trades of ten shares each and had never had on hand over twenty full shares at any one time. He admitted that he had frequently mixed guesswork and tips with his Tape Reading but as a rule he had followed the tape. His losses were seldom over a point and his greatest loss was one and a half points. His maximum profit was three points. He had at times traded in other stocks beside the leaders. In spite of his inexperience, and his attempt to mix tips and guess with shrewd judgment, he was ahead of the game, after paying commissions, taxes, etc. This was especially surprising in view of the trader's market through which be had passed. While the amount of his net profit was small, the fact that he had shown any profit during this study period was reason enough for congratulations.

Another handicap which he did not perhaps realize was his environment. He had been trading in an office where he could hear and see what everyone else was doing, and where news, gossip and opinions were freely and openly expressed by many people. All these things tended to influence him, and to switch him from his foundation in Tape Reading fundamentals to other methods but he is persisting and shows some signs of discipline. I have no doubt that having mastered the art of cutting losses and keeping commitments down and returning to Tape Reading fundamentals, he will soon overcome his other deficiencies and begin showing remarkable progress. Given a broad, active market, he should show increasing average daily profits. Speculation is a business. It must he learned.


CHAPTER EIGHT The Use of Charts as Guides And Indicators



MANY interesting queries have been received regarding the use of charts. The following is a letter representative of most: Referring to your figure chart explained in Volume 1 of the Magazine of Wall Street, I have found it a most valuable aid to detecting accumulation or distribution in market movements. I have been in Wall Street a number of years, and like many others have always shown a sceptical attitude toward charts and other mechanical methods of forecasting trends; but after a thorough trial of the chart on Union Pacific, I find that I could have made a very considerable sum if I had followed the indications shown. I note your suggestions to operators to study earnings, etc., and not to rely on charts, as they are very often likely to mislead. I regret that I cannot agree with you. You have often stated that the tape tells the story; since this is true, and a chart is but a copy of the tape, with indications of accumulation or distribution, as the case may be, why not follow the chart entirely, and eliminate all unnecessary time devoted to study of earnings, etc?

Let us consider those portions of the above which relate to Tape Reading, first clearly defining the difference between chart operations and tape reading. The genuine chart player usually operates in one stock at a time, using as a basis the past movements of that stock and following a more or less definite code of rules. He treats the market and his stock as a machine. He uses no judgment as to market conditions, and does not consider the movements of other stocks; but he exercises great discretion as to whether he shall "play" a chart signal or not. The Tape Reader operates on what the tape shows now. He is not wedded to any particular issue, and, if he chooses, can work without pencil, paper or memoranda of any sort. He also has his code of rules - less clearly defined than those of the chart player. So many different situations present themselves that his rules gradually become intuitive - a sort of second nature evolved by self-training and experience.

A friend to whom I have given some points in Tape Reading once asked if I had my rules all down so fine that I knew just which to use at certain moments. I answered him this way: �When you cross a street where the traffic is heavy, do you stop to consult a set of rules showing when to run ahead of a trolley car or when not to dodge a wagon? No. You take a look both ways and at the proper moment you walk across. Your mind may be on something else but your judgment tells you when to start and how fast to walk. That is the position of the trained Tape Reader�. The difference between the Chart Player and the Tape Reader is therefore about as wide as between day and night.

But there are ways in which the Tape Reader may utilize charts as guides and indicators and for the purpose of reinforcing his memory. The Figure Chart is one of the best mechanical means of detecting accumulation and distribution.It is also valuable in showing the main points of resistance on the big swings. A figure chart cannot be made from the open, high, low and last prices, such as are printed in the average newspaper. We produced a Figure Chart of Amalgamated Copper showing movements during the 1903 panic and up to the following March (1904):


It makes an interesting study. The stock sold early in the year at 75 5/8 and the low point reached during the above period was 33 5/8. The movements prior to those recorded here show a series of downward steps, but when 36 is reached, the formation changes, and the supporting points are raised. A seven-point rally, a reaction to almost the low figure, and another sixteen-point rally follows. On this rally the lines 48-49 gradually form the axis and long rows of these figures seem to indicate that plenty of stock is for sale at this level. In case we are not sure as to whether this is further accumulation or distribution we wait until the price shows signs of breaking out of this narrow range. After the second run up to 51 the gradually lowering tops warn us that pressure is resumed. We therefore look for lower prices. The downward steps continue until 35 is touched, where a 36-7 line begins to form. There is a dip to 33 5/8, which gives us the full figure 34, after which the bottoms are higher and lines commence forming at 38-9. Here are all the earmarks of manipulative depression and accumulation - the stock is not allowed to rally over 39 until liquidation is complete. Then the gradually raised bottoms notify us in advance that the stock is about to push through to higher levels.

If the Figure Chart were an infallible guide no one would have to learn anything more than its correct interpretation in order to make big money. Our writer says, "after a thorough trial of the chart on U. P. I find that I could have made a very considerable sum if I had followed the indications shown". But he would not have followed the indications shown. He is fooling himself. It is easy to look over the chart afterwards and see where he could have made correct plays, but I venture to say he never tested the plan under proper conditions.

Let anyone, who thinks he can make money following a Figure Chart or any other kind of a chart have a friend prepare it, keeping secret the name of the stock and the period covered. Then put down on paper a positive set of rules which are to be strictly adhered to, so that there can be no guesswork. Each situation will then call for a certain play and no deviation is to be allowed. Cover up with a sheet of paper all but the beginning of the chart, gradually sliding the paper to the right as you progress. Record each order and execution just as if actually trading. Put my name down as covering the opposite side of every trade and when done send me a check for what you have lost. I have yet to meet the man who has made money trading on any kind of Chart over an extended period.

The Figure Chart can be used in other ways. Some people construct figure charts showing each fractional change instead of full points. The idea may also be used in connection with the Dow Jones average prices. But for the practical Tape Reader the full figure chart first described is about the only one we can recommend. Its value to the Tape Reader lies chiefly in its warnings of important moves thus putting him on the watch for the moment when either process is completed and the marking up or down begins. The chart gives the direction of coming moves; the tape says "when."

The ordinary single line chart which is so widely used, is valuable chiefly as a compact history of a stock's movements. If the stock which is charted were the only one in the market, its gyrations would be less erratic and its chart, therefore, a more reliable indicator of its trend and destination. But we must keep before us the incontrovertible fact that the movements of every stock are to a greater or lesser extent affected by those of every other stock. This in a large measure accounts for the instability of stock movements as recorded in single line charts. Then, too one stock may he the lever with which the whole market is being held up, or the club with which the general list is being pounded. A chart of the pivotal stock might give a strong buying indication, whereupon the blind chart devotee would go long to his ultimate regret; for when the concealed distribution was completed his stock would probably break quickly and badly. This shows clearly the advantage of Tape Reading over Charts. The Tape Reader sees everything that goes on; chart player's vision is limited. Both aim to get in right and go with the trend, but the eye that comprehends the market as a whole is the one which can read this trend most accurately.

If one wishes a mechanical trend indicator as a supplement and a guide to his Tape Reading, he had best keep a chart composed of the average daily high and low of ten leading stocks in a group. First find the average high and average low for the day and make a chart showing which was touched first. This will be found a more reliable guide than the Dow Jones averages, which only consider the high, low and closing bid of each day, and which, as strongly illustrated in the May, 1901, panic, frequently do not fairly represent the day's actual fluctuations. Such a composite chart is of no value to the Tape Reader who scalps and closes out everything daily. But it should benefit those who read the tape for the purpose of catching the important five or ten point moves. Such a trader will make no commitments not in accordance with the trend, as shown by this chart. His reason is that even a well planned bull campaign in a stock will not usually be pushed to completion in the face of a down trend in the general market. Therefore he waits until the trend conforms to his indication.

It seems hardly necessary to say that an up trend in any chart is indicated by consecutive higher tops and bottoms, like stairs going up, and the reverse by repeated steps toward a lower level. A series of tops or bottoms at the same level shows resistance. A protracted zigzag within a short radius accompanied by very small volume means lifelessness, but with normal or abnormally large volume, accumulation or distribution is more or less evidenced. Here is a style of hand chart especially adapted to the study of volumes:


When made to cover a day's movements in a stock, this chart is particularly valuable in showing the quantity of stock at various levels. Figures represent the total 100 share lots at the respective fractions. Comparisons are ready made by adding the quantities horizontally. Many other suggestions may be derived from the study of this chart. The proficient Tape Reader will doubtless prefer to discard all mechanical helps, because they interfere with his sensing the trend. Besides, if he keeps the charts himself the very act of running them distracts his attention from the tape on which his eye should be constantly riveted. This can of course be overcome by employing an assistant; but taking everything into consideration - the division of attention, the contradictions and the confusing situations which will frequently result - we advise students to stand free of mechanical helps so far as it is possible. Our correspondent in saying "a chart is but a copy of the tape" doubtless refers to the chart of one stock. The full tape cannot possibly be charted. The tape does tell the story, but charting one or two stocks is like recording the actions of one individual as exemplifying the actions of a very large family.


CHAPTER SEVEN Dull Markets and Their Opportunities



MANY people are apt to regard a dull market as a problem for trading purposes. They claim: "Our hands are tied; we can't get out of what we've got; if we could there'd be no use getting in again, for whatever we do we can't make a dollar".

Such people are not Tape Readers. They are Sitters. As a matter of fact, dull markets offer innumerable opportunities and we have only to dig beneath the crust of prejudice to find them.

Dullness in the market or in any special stock means that the forces capable of influencing it in either an upward or a downward direction have temporarily come to a balance. The best illustration is that of a clock which is about run down - its pendulum gradually decreases the width of its swings until it comes to a complete standstill, like this:


Turn this diagram sideways and you see what the chart of a stock or the market looks like when it reaches the point of dullness:


These dull periods often occur after a season of delirious activity on the bull side. People make money, pyramid on their profits and glut themselves with stocks at the top. As every one is loaded up, there is comparatively no one left to buy, and the break which inevitably follows would happen if there were no bears, no bad news or anything else to force a decline.

Nature has her own remedy for dissipation. She presents the debauch with its start, its climax and its collapse, with a thumping head and a moquette tongue. These tend to keep him quiet until the damage can be repaired. So with these intervals of market rest. Traders who have placed themselves in a position to be trimmed are duly trimmed. They lose their money and temporarily, their nerve. The market, therefore, becomes neglected. Extreme dullness sets in.

If the history of the market were to be written, these periods of lifelessness should mark the close of each chapter. The reason is: The factors that were active in producing the main movement, with its start, its climax and its collapse, have spent their force. Prices, therefore, settle into a groove, where they remain sometimes for weeks or until affected by some other powerful influence.

When a market is in the midst of a big move, no one can tell how long or how far it will run. But when prices are stationary, we know that from this point there will be a pronounced swing in one direction or another. There are ways of anticipating the direction of this swing. One is by noting the technical strength or weakness of the market, as described in a previous chapter. The resistance to pressure mentioned as characteristic of the dull period in March, 1909, was followed by a pronounced rise, leading stocks selling many points higher. This was particularly true of Reading, in which the shakeouts around 120 (one of which was described) were frequent and positive. When insiders shake other people out it means that they want the stock themselves. These are good times for us to get in. When a dull market shows its inability to hold rallies, or when it does not respond to bullish news, it is technically weak, and unless something comes along to change the situation, the next swing will be downward. On the other hand, when there is a gradual hardening in prices; when bear raids fail to dislodge considerable quantities of stock; when stocks do not decline upon unfavourable news, we may look for an advancing market in the near future.

No one can tell when a dull market will merge into a very active one, therefore the Tape Reader must be constantly on the watch. It is foolish for him to say: "The market is dead dull. No use watching it today. The leaders only swung less than a point yesterday. Nothing profitable can happen in such a market". Such reasoning is apt to make one miss the very choicest opportunities - those of getting in on the ground floor of a big move.

For example: During the previous mentioned accumulation in Reading, the stock ranged between 120 and 124 1/2. Without warning, it one day gave indication (around 125) that the absorption was about concluded, and the stock had begun its advance. The Tape Reader having reasoned beforehand that this accumulation was no small investors game, would have grabbed a bunch of Reading as soon as the indication appeared. He might have bought more than he wanted for scalping purposes, with the intention of holding part of his line for a long swing, using the rest for regular trading. As the stock drew away from his purchase price he could have raised his stop on the lot he intended to hold, putting a mental label on it to the effect that it is to be sold when he detects inside distribution.

Thus he stands to benefit to the fullest extent by any manipulative work which may be done. In other words, he says: "I'll get out of this lot when the big boys and their friends get out of theirs". He feels easy in his mind about this stock, because he has seen the accumulation and knows it has relieved the market of all the floating supply at about this level. This means a sharp, quick rise sooner or later, as little stock is to be met with on the way up.

If he neglected to watch the market continuously and get in at the very start, his chances would be greatly lessened. He might not have the courage to take on the larger quantity. On Friday, March 26, 1909. Reading and Union were about as dull as two gentlemanly leaders could well be. Reading opened at 132 3/4, high was 133ź, low 132ź, last 132 5/8. Union's extreme fluctuation was 5/8! - from 180 5/8 to 181ź. Activity was confined to Beet Sugar, Kansas City Southern, etc. The following day, Saturday, the opening gave every indication that the previous day's dullness would be repeated, initial sales showing only fractional changes. Let's see B. & 0., Wabash pfd. and Missouri Pacific were up 3/8 or 1/2. Union was an 1/8th higher and Reading 1/8 lower. Beet Sugar was down 5/8, with sales at 32. Reading showed 1100 @ 132ź, 800 @ 3/8, Union 800 @ 181, 400 @ 181, 200 @ 181 1/8, 400 @ 181. A single hundred Steel at 45˝ 1/8. B& O 100 @ 109 7/8.

Market dead, mostly single 100 share lots Ah! Here's our cue! Reading 2300 @ 132˝., 2000 @ ˝, 500 @ 5/8. Coming out of a dead market, quantities like these taken at the offered prices can mean only one thing, and without argument the Tape Reader takes on a bunch of Reading "at the market." Whatever is happening in Reading, the rest of the market is slow to respond, although N. Y. Central seems willing to help a little 500 @ 127˝ (after ). Beets are up to 33ź. Steel is 45 1/8, and Copper 77 ź -a fraction better. Reading 300 @ 132/2. Steel 1300 @ 45 1/8, ź Union 100 @ 181 Reading 300 @ 132 5/8 Beets 100 @ 33˝. Union 700 @ 181˝ N.Y. Central 127 5/8, 600 @ 7/8!There's some help coming! Union 900 @ 181˝ now Reading 100 @ 132 3/4. Copper 700 @ 71˝. Reading 800 @ 132 7/8, 100 @ 133, 900 @ 133, 1100 @ 1/8... Reading 1500 @ 133ź , 3500 @ 133 not much doubt about the trend now.

The whole market is responding to Reading, and there is a steady increase in power, breadth and volume. The rapid advances show that short covering is no small factor. It looks as though a lot of people are throwing their Beet Sugar and getting into the big stocks. St. Paul Copper and Smelters begin to lift a little. Around 11 A.M. there is a brief period of hesitation, in which the market seems to take a long breath in preparation for another effort. There is scarcely any reaction and no weakness. Reading backs up a fraction to 133ź and Union to 181 3/8. There are no selling indications, so the Tape Reader stands by his guns. Now they are picking up again Reading 133 3/8, ˝, 5/8, Union 181 5/8 N.Y. Central 128˝ 1/8, 700 @ ź, Union 1000 @ 181˝, 3500 @ 5/8, 2800 @ 7/8, 4100 @ 182 Steel 45 ˝. From then right up to the close it's nothing but bull, and everything closes within a fraction of its highest. Reading makes 134 3/8, Union 183, Steel 46 1/8, Central 128 7/8, and the rest in proportion. The market has gained such headway that it will take dire news to prevent a high, wide opening on Monday, and the Tape Reader has his choice of closing out at the high point or putting in a stop and taking his chances over Sunday.

So we see the advantage of watching a dull market and getting in the moment it starts out of its rut. One could almost draw lines on the chart of a leader like Union or Reading (the upper line being the high point of its monotonous swing and the lower line the low point) and buy or sell whenever the line is crossed. Because when a stock shakes itself loose from a narrow radius it is clear that the accumulation or distribution or resting spell has been completed and new forces are at work. These forces are most pronounced and effective at the beginning of the new move - more power is needed to start a thing than to keep it going.

Some of my readers may think I am giving illustrations after these things happen on the tape, and that what a Tape Reader would have done at the time is problematical. I therefore wish to state that my tape illustrations are taken from the indications which actually showed themselves when they were freshly printed on the tape, at that time I did not know what was going to happen.

There are other ways in which a trader may employ himself during dull periods. One is to keep tab on the points of resistance in the leaders and play on them for fractional profits. This, we admit, is a rather precarious occupation, as the operating expenses constitute an extremely heavy percentage against the player, especially when the leading stocks only swing a point or so per day. But if one chooses to take these chances rather than be idle, the best way is to keep a chart on which should be recorded every fluctuation. This forms a picture of what is occurring and clearly defines the points of resistance, as well as the momentary trend.

In the following chart the stock opens at 181ź and the first point of resistance is 181˝. The first indication of a downward trend is shown in the dip to 181 1/8, and with these two straws showing the tendency, the Tape Reader goes short "at the market," getting, say, 181ź (we'll give ourselves the worst of it). After making one more unsuccessful attempt to break through the resistance at 181˝, the trend turns unmistakably downward, as shown by an almost and broken series of lower tops and bottoms.


These indicate that the pressure is heavy enough to force the price to new low levels, and at the same time it is sufficient to prevent the rally going quite as high as on the previous bulge. At 180 1/8 a new point of resistance appears. The decline is checked. The Tape Reader must cover and go long - the steps are now upward and as the price approaches the former point of resistance he watches it narrowly for his indication to close out.

This time, however, there is but slight opposition to the advance, and the price breaks through. He keeps his long stock. In making the initial trade he placed a "double" stop at 181 5/8 or 3/4, on the ground that if his stock overcame the resistance at 181 1/2 it would go higher and he would have to go with it. Being short 100 shares, his double stop order would read "Buy 200 at 181 5/8 stop". Of course the price might just catch his stop and go lower. These things will happen, and anyone who cannot face them without becoming perturbed had better learn self-control.

After going long around the low point, he should place another double stop at 180 or 179 7/8, for if the point of resistance is broken through after he has covered and gone long, he must switch his position in an instant. Not to do so would place him in the attitude of a guesser. If he is playing on this plan he must not dilute it with other ideas.

Remember this method is only applicable to a very dull market, and, as we have said, is precarious business. We cannot recommend it. It will not as a rule pay the Tape Reader to attempt scalping fractions out of the leaders in a dull market. Commissions, taxes and the invisible eighth, in addition to frequent losses, form too great a handicap. There must be wide swings if profits are to exceed losses. and the thing to do is wait for good opportunities. "The market is always with us" is an old and true saying. We are not compelled to trade and results do not depend on how often we trade, but on how much money we make.

There is another way of turning a dull market to good account, and that is by trading in the stocks which are temporarily active, owing to manipulative or other causes. The Tape Reader does not in the care a bit what sort of a label they put on the goods. Call a stock "Harlem Goats preferred" if you like, and make it active, preferably by means of manipulation, and the agile Tape Reader will trade in it with profit. It doesn�t matters to him whether it's a railroad or a shooting gallery; whether it declares regular or "Irish" dividends; whether the abbreviation is X Y Z or Z Y X - so long as it furnishes indications and a broad liquid market on which to get in and out.

Take Beet Sugar on March 26, 1909, the day on which Union and Reading were so dull. It was easy to beat Beet Sugar. Even an embryo Tape Reader would have gone long at 30 or below, and as it never left him in doubt he could have dumped it at the top just before the close, or held it till the next day, when it touched 33˝.


On March 5,1909, Kansas City Southern spent the morning drifting between 42 3/4 and 43 1/2. Shortly after the noon hour the stock burst into activity and large volume. Does any sane person suppose that a hundred or more people became convinced that Kansas City Southern was a purchase at that particular moment? What probably started the rise was the placing of manipulative orders, in which purchases predominated. Thus the sudden activity, the volume and the advancing tendency gave notice to the Tape Reader to "get aboard." The manipulator showed his hand and the "get aboard" Tape Reader had only to go long with the current.


The advance was not only sustained, but emphasized at certain points. Here the Tape Reader could have pyramided, using a stop close behind his average cost and raising it so as to conserve profits. If he bought his first lot at 44, his second at 45, and his third at 46, he could have thrown the whole at 46 5/8 and netted $406.50 for the day if he were trading in 100 share units, or $2,032.50 if trading in 50 share units.


CHAPTER SIX Market Technique



ON Saturday morning, February 27, 1909, the market opened slightly higher than the previous night's close. Reading was the most active stock. After touching 123 1/2 it slid off to 122 1/2, at which point it invited short sales. This indication was emphasized at 122, at 121 1/2 and again at 121. The downward trend was strongly marked until it struck 119 7/8, then it followed a quick rally of 1 1/8 points.

This was a vicious three-point jab into a market that was only just recovering from a decline in early February. What was its effect on the other principal stocks? Union Pacific declined only 3/4, Southern Pacific 5/8 and Steel 5/8. This proved that they were technically strong; that is, they were in hands which could view with equanimity a three-point break in a leading issue. Had this drive occurred when Reading was around 145 and Union 185 the effect upon the others would probably have been very different.

In order to determine the extent of an ore body, miners use a diamond drill. This produces a core, the character of which shows what is beneath the surface. If it had been possible to have drilled into the market at the top of the foregoing rise, we should have found that the bulk of the floating supply in Steel, Reading and some others was held by a class of traders who buy heavily in booms and on bulges. These people operate with comparatively small margins, nerve and experience. They are exceedingly vulnerable, so the stocks in which they operate suffer the greatest declines when the market receives a jar.

The figures are interesting:


1907-09 Advance Feb 09 Decline % Break to Advance
U.P. 84 1/4 12 3/8 14.7
Reading 73 1/4 26 3/8 33.6
Steel 36 1/4 16 1/2 44.6


The above shows that the public was heavily extended in Steel somewhat less loaded with Reading, and was carrying very little Union Pacific. In other words, Union showed technical strength by its resistance to pressure, whereas Reading and Steel offered little or no opposition to the decline.

Both the market as a whole and individual stocks are to be judged as much by what they do as what they do not do at critical points. If the big fellows who accumulated Union below 120 had distributed it above 180, the stock would have broken something like thirty points, due to its having passed from strong to weak hands. As it did not have any such decline, but only a very small reaction compared to its advance, the Tape Reader infers that Union is destined for much higher prices; that it offers comparative immunity from declines and a possible large advance in the near future. Even were Union Pacific scheduled for a thirty-point rise in the following two weeks, something might happen to postpone the campaign for a considerable time. But the Tape Reader must work with these broader considerations in full view. He has just so much time and capital, and this must be employed where it will yield the greatest results. If by watching for the most favourable opportunities he can operate with the trend in a stock which will some day or week show him ten points profit more than any other issue he could have chosen, be is increasing his chances to that extent.

A long advance or decline usually culminates in a wide, quick movement in the leaders. Take the break of February 23, 1909: Reading declined from 128 3/4 to 118 and Steel from 46 to 41 1/4 in one day. Southern Pacific, after creeping up from 97 to 112, reached a climax in a seven-point jump during one session.

Instances are so numerous that they are hardly worth citing. The same thing happens in the market as a whole - an exceptionally violent movement, after a protracted sag or rise, usually indicates its termination. A stock generally shows the Tape Reader what it proposes to do by its action under pressure or stimulation. For example: On Friday, February 19, 1909, the United States Steel Corporation announced an open market in steel products. The news was out. Everybody in the country knew it by the following morning. The Tape Reader, in weighing the situation before the next day's opening, would reason As the news is public property, the normal thing for Steel and the market to do is to rally. Steel closed last night at 48 3/8. The market hinges upon this one stock. Let's see how it acts." The opening price of U. S. Steel was three-quarters of a point down from the previous closing - a perfectly natural occurrence in view of the announcement. The real test of strength or weakness will follow. For the first ten minutes Steel shows on the tape:

200 @ 47 7/8
4500 @ 47 3/4
1200 @ 47 7/8
1500 @ 47 3/4

without otherwise varying. Eighteen times the price swings back and forth between the same fractions.

Meanwhile, Union Pacific, which opened at 177 1/2, shows a tendency to rally and pull the rest of the market up behind it. Can Union lift Steel? That is the question. Here are two opposing forces, and the Tape Reader watches like a hawk, for he is "going with the market" - in the direction of the trend. Union is up 7/8 from the opening and Southern Pacific is reinforcing it. But Steel does not respond. Not once does it get out of that 3/4 - 7/8 rut - not even single hundred share lot can be sold at 48. This proves that it is freely offered at 47 7/8 and that it possesses no rallying power, in spite of the leadership displayed by the Harrimans. Union seems to make a final effort to induce a following:

2000 @ 178 1/2

to which Steel replies by breaking through with a thud:

800 @ 47 5/8

This is the Tape Reader's cue to go short. In an instant he has put out a line of Steel for which he gets 47 1/2 or 47 3/8 as there are large volumes traded in at those figures. Union Pacific seems disheartened. The Steel millstone is hanging round its neck. It slides off to 178 ž, ź, 1/8 and finally to 177 7/8. The pressure on Steel increases at the low level. Successive sales are made as follows.

6800 @ 47 ˝
2600 @ 47 3/8
500 @ 47 1/4
8800 @ 47 1/8

From this time on there is a steady flow of long stock all through the list. Reading and Pennsylvania are the weakest railroads. Colorado Fuel breaks seven points in a running decline and the other steel stocks follow suit. U.S. Steel is dumped in bunches at the bid prices, and even the dignified preferred is sympathetically affected.

At the end of the two hour session, the market closes at the bottom, with Steel at 46, leaving thousands of accounts weakened by the decline and a holiday ahead for holders to worry over. It looks to the Tape Reader as though the stock would go lower on the following Tuesday. At any rate, no covering indication has appeared, and unless it is his invariable rule to close every trade each day, he puts a stop at 47 on his short Steel and goes his way. (His original stop was 48 1/8). Steel opens on the following session at 44 ž @ 1/2, and during the day makes a low record of 41ź.

A number of lessons may be drawn from this episode. Successful tape reading is a study of force; it requires ability to judge which side has the greatest pulling power and one must have the courage to go with that side. There are critical points which occur in each swing, just as in the life of a business or of an individual. At these junctures it seems as though a feather's weight on either side would determine the immediate critical trend. Any one who can spot these points has much to win and little to lose, for he can always play with a stop placed close behind the turning point or "point of resistance". If Union had continued in its upward course, gaining in power, volume and influence as it progressed, the dire effects of the Steel situation might have been overcome. It was simply a question of power, and Steel pulled Union down. This study of responses to stimulation or outside influences on stocks is one of the most valuable in the Tape Reader's education. It is an almost unerring guide to the technical position of the market. Of course, all responses are not so clearly defined.

It is a matter of indifference to the Tape Reader as to who or what produces these tests, or critical periods. They constantly appear and disappear; he must make his diagnosis and act accordingly. If a stock is being manipulated higher, the movement will seldom be continued unless other stocks follow and support the advance. Barring certain specific developments affecting a stock, the other issues should be watched to see whether large operators are unloading on the strong spots. Should a stock fail to break on bad news, it means that insiders have anticipated the decline and stand ready to buy.

A member of a trading syndicate once said to me: "We are going to dissolve tomorrow." I asked, "Won't there be considerable selling by people who don't want to carry their share of the securities?" "Oh!" he replied, "we know how every one stands. Probably 10,000 shares will come on the market from a few members who are obliged to sell, and as a few of us have sold that much short in anticipation, we'll be there to buy it when the time comes." This reminds us that it is well to consider the insider's probable attitude on a stock. The tape usually indicates what this is. One of the muckraking magazines once showed that Rock Island preferred had been driven down to 28 one August to the accompaniment of receivership rumours. The writer of the article was unable to prove that these rumours originated with the insiders, for he admitted that the transactions at the time were not fully understood. Perhaps they were inscrutable to a person inexperienced in tape reading, but we well remember that the indications were all in favour of buying the stock on the break. The transactions were very large - out of all proportion to the capital stock outstanding and the floating supply.

What did this mean to the Tape Reader? Thousands of shares of stock were traded in per day, after a ten-point decline and a small rally. If the volume of sales represented long stock, someone was there to buy it. If there was manipulation it certainly was not for the purpose of distributing the stock at such a low level.

So, by casting out the unlikely factors, a Tape Reader could have arrived at the correct conclusion. The market is being put to the test continually by one element of which little has been said, i.e., the floor traders. These shrewd fellows are always on the alert to ferret out a weak spot in the market, for they love the short side. Lack of support, if detected, in an issue generally leads to a raid which, if the technical situation is weak, spreads to other parts of the floor and produces a reaction or a slump all around. Or, if they find a vulnerable short interest, they are quick to bid up a stock and drive the shorts to cover.

With these and other operations going on all the time, the Tape Reader who is at all expert is seldom at a loss to know on which side his best chances lie. Other people are doing for him what he would do himself if he were all-powerful. While it is the smaller swings that interest him most, the day trader must not fail to keep his bearings in relation to the broader movements of the market. When a panic prevails he recognizes it in the birth of a bull market and operates with the certainty that prices will gradually rise until a boom marks the other extreme of the swing. In a bull market he considers reactions of from two to five points normal and reasonable. He looks for occasional drops of 10 to 15 points in the leaders, with a 25-point break at least once a year. When any of these occur, he knows what to look for next. In a bull market he expects a drop of 10 points to be followed by a recovery of about half the decline, and if the rise is to continue, all of the drop and more will be recovered. If a stock or the market refuses to rally naturally, he knows that the trouble has not been overcome, and therefore looks for a further decline.

Take American Smelters, which made a top of 99 5/8 a few years ago, then slumped off under rumours of competition until it reached 78. Covering indications appeared around 79 1/2. Had the operator also gone long here, he could confidently have expected Smelters to rally to about 89. The decline having been 21 5/8 points, there was a rally of 10 3/4 points due. As a matter of record the stock did recover to 89 3/8.

Of course, these things are mere guide posts, as the Tape Reader's actual trading is done only on the most positive and promising indications; but they are valuable in teaching him what to avoid. For instance, he would be wary about making an initial short sale of Smelters after a 15 point break, even if his indications were clear. There might be several points more on the short side, but he would realize that every point further decline would bring him closer to the turning point, and after such a violent break the safest money was to wait for an opportunity on the long side. Another instance: Reading sold on January 4, 1909, at 144 3/8. By the end of the month it touched 1311/2, and on February 23rd broke ten points to 118. This was a decline of 24 3/8 points (allowing for the 2 per cent dividend paid). As previously stated, the stock looked like an attractive short sale, not only on the first breakdown, but on the final drive. The conservative trader would have waited for a buying indication, as there would have been less risk on the long side.

It is seldom that the market runs more than three or four consecutive days in one direction without a reaction, so the Tape Reader must realize that his chances decrease as the swing is prolonged. The daily movements offer his best opportunities; but he must keep in stocks which swing wide enough to enable him to secure a profit. As Napoleon said: "The adroit man profits by everything, neglects nothing which may increase his chances".

I once knew a speculator who bought and sold by the clock. He had no idea of the hourly swing, but would buy at 12 o'clock, because it was 12 o'clock, and would sell at 2 o'clock, for the same reason. The methods employed by the average outside speculator are not so very much of an improvement on this, and that is why so many lose their money. The expert Tape Reader is diametrically opposed to such people and their methods. He applies science and skill in angling for profits. He studies, figures, analyzes and deduces. He knows exactly where he stands, what he is doing and why.