DEFINITION of 'Tape Reading'

Tape reading is an old technique that day traders used to analyze the price and volume of a given stock. From around 1860s through the 1960s, stock prices were transmitted over telegraph lines on ticker tape that included a ticker symbol, price and volume. These technologies were phased out in the 1960s with the rise of personal computers and electronic communication networks – or ECNs.

BREAKING DOWN 'Tape Reading'

Ticker tapes were invented in 1867 by Edward A. Calahan, who was an employee of the American Telegraph Company. Thomas Edison developed the first practical stock ticker two years later that helped the market became more efficient. These machines were soon installed across all major brokerages as the primary means of price and volume dissemination.

Many famous traders made a name for themselves by tape reading, including Jesse Livermore who pioneered momentum trading. Several books were also published about tape reading, including Tape Reading and Market Tactics and Reminiscences of a Stock Operator. Many terms also remain in common use since then, including ticker symbol, stock ticker and phrases like “don’t fight the tape” (meaning don’t trade against the trend).

Tape reading eventually became obsolete in the 1960s and 1970s with the rise of television and computers, but the terms ticker symbol and stock tickers remain in use and traders employ many of the same techniques with more modern technology.

Modern Tape Reading

Modern tape reading involves looking at electronic order books to analyze where a stock price may be headed. Unlike stock tickers, these order books include non-executed trades, which provides a higher level of detail into the market at any given time.

For example, a trader may look at a security’s order book and see that there are large limit sell orders at a certain price level across multiple exchanges. This may indicate that the stock will experience significant resistance at these levels. The opposite may be true if there are large limit buy orders below the current price, which could indicate strong support at a given price point and give a trader the confidence to buy knowing there’s a price floor.

Many brokers provide access to these order books in the form of Level II quotes. In advanced cases, programmatic traders may use the information when building trading algorithms. Interactive Brokers, for example, provides a function called “reqMktDepth” that lets traders stream order book data for analysis. These insights can prove extremely helpful when developing modern trading algorithms.

The Bottom Line

Tape reading is an old technique that day traders used to analyze the price and volume of a given stock by looking at ticker tape sent through a telegraph. While tape reading was phased out in the 1960s, similar strategies are used by electronic traders and many of the terms originating from the time are still widely used.

RELATED TERMS
  1. Tape Is Late

    A situation on the trading floor where trading volume is so heavy ...
  2. Consolidated Tape

    An electronic program that provides continuous, real-time data ...
  3. Painting The Tape

    Painting the tape is a form of market manipulation whereby market ...
  4. Taping Rule

    The taping rule requires special monitoring of FINRA registered ...
  5. Tape Shredding

    When a broker divides an order for securities into a number of ...
  6. Fast Tape

    A type of futures market that occurs when a single traded price ...
Related Articles
  1. Investing

    Tape Reading Can Improve Your Investing

    Tape readers interpret complex background data during the market day to gain an edge.
  2. Investing

    Translating Ticker Talk

    Stock tickers can say a lot about a company in just a few letters. Find out how to read them.
  3. Insights

    The Evolution Of Ticker Symbols

    The stock market has changed dramatically since its inception, but the use of ticker symbols has remained largely unchanged.
  4. Trading

    Break Down Modern Market Trends To Grasp Movement

    Convergence points to dynamic conditions that can elicit strong trends while divergence suggests conflict, more typical of rangebound price action.
  5. Investing

    What The Market Open Tells You

    The first few moments of trading provide a lot of information. If a trader analyzes this information, it can give a lot of insight into the market's moves for the day.
  6. Personal Finance

    Top 5 Books to Become a Professional Trader

    For people who want to learn how to trade and invest for themselves, there are a wealth of excellent books on trading available to learn from.
  7. Trading

    Rise and Shine With This Pre-Market Checklist

    Your pre-market routine sets the stage for the rest of the trading day. Use this comprehensive checklist to get up to speed, ahead of the opening bell.
RELATED FAQS
  1. What is a stock ticker?

    A stock ticker is a report of the price for certain securities, updated continuously throughout the trading session by the ... Read Answer >>
  2. Why did my stock's ticker change?

    When a ticker symbol of a publicly traded company changes, it generally means one of a few things. Read Answer >>
  3. What does churning mean?

    A. Trading with yourself, or with someone else in attempt to make the tape appear more active than it really is.B. Trading ... Read Answer >>
  4. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  5. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  6. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center