TAPE READING (chat room cont.)

[maysumi]

Maverick74 - just wanted to chime in and also thank you for all of your great posts! I also watch out for many of these specialist patterns (double prints, perfect prints, etc). But the software I use, tymoraPRO (www.yourika.com) finds them for me automatically. I've included a screenshot so you can all see what I'm talking about. I like to find certain key patterns occurring at critical points in trading. It's amazing to me Maverick that you could manually follow and process every tick from open to close on certain stocks - what focus and stamina that would take! Luckily for me, I've found that I don't need to watch quite that closely for my style of trading, but regardless of that the platform also takes care of a lot of the work in keying in on some of the types of patterns I'm looking for. btw.. In the screenshot, the CleanupPrint alert is basically a "perfect print". It's also showing the last move on the bid, tick, and offer.

 

[Maverick74]

For those of you that are interested, I'm going to post an interview of the guy that taught me how to read the tape. Hopefully some of you will get some further insights from this. It's pretty long.

Think You Can't Make Money Daytrading? Think Again.
The Adam Wasserman Interview

Adam Wasserman is a trader and General Securities Principle at a major proprietary day trading firm and handles 60 traders in two offices. He's been trading since 1998, and as you will see, he puts in the hard work required to be successful--and he demands his traders do the same.

Dave: How are you Adam?

Adam: Excellent, thank you.

Dave: Let's start at the beginning. Can you give us a little bit of background about yourself?

Adam: Sure, I have two degrees of Mathematics--a degree in Pure Mathematics from UC Santa Cruz and a degree in Applied Mathematics from UCLA. With that said, nothing that I learned in graduate school or undergraduate school taught me what a stock was. After graduating, I got my Masters degree back in early 1998. I wanted to get into the field of Finance, just because it was a very sexy thing. I didn’t know what a stock was; I didn’t know what a dividend was--I didn’t know anything. I never took a finance course, I never took an economics course. It was never required as a Math major. I started submitting resumes and got called in from WorldCo, which was a start-up firm at the time. That’s really where I got my foot into the door.

Dave: Did you start out as a trainee?

Adam: No, I was doing exactly what I’m doing now. WorldCo's concept was if you learn how to hit the ball, they were going to give you the bat, have you step you up to the plate, and start you out swinging. You are going to learn how to hit the ball by striking out, as opposed to putting you into a batting cage and working that way. So it was live from day one. I learned a valuable concept there.

Dave: You basically started out trading from day one with real money?

Adam: That is correct, right from day one.

Dave: How long did it take you to become profitable?

Adam: It took me six months to get my first profitable month. The measure that I like to use for profitability is on a monthly basis. When I’m going to talk to a trader, or I’m sitting down with a group of traders, usually the measuring stick we use is the month.

Dave: After you had your first positive month, did the profitability continue, or did you have your ups and downs?

Adam: After I achieved my first positive month, I have never had a negative month since.

Dave: Wow, now that was back in 1998?

Adam: It might have been early 1999 actually, just after the six-month period. Is it a linear progression? I mean if one month I made X amount of dollars and next month I made Y amount of dollars, was Y always greater then X? Was the next month always more then the previous month? I don’t know, but if you look at it on a chart, it certainly went up exponentially. I did well one month and the next month I might have done well, but not as well. Then all of a sudden I just shot up through the roof, kind of bringing me to another level.

Dave: What was your position at WorldCo when you left them?

Adam: At WorldCo when I started, there were about 50 traders and it grew to over 1000. And as the profits were growing we hit the big markets, '99, 2000, 2001. In the process of the “trader boom” we realized we needed to get people in place as future managers. This was the only way to manage, mentor, and give attention to new traders coming in. So what we did was have an initial plan that there was going to be ten partners at WorldCo. These ten partners were then going to have their own branch and I was the 3rd partner at WorldCo. My branch was an office on 99 Wall Street and a year or two into that I opened up a branch in Los Angeles and commuted back and forth across country handling both branches.

Dave: In reference to the methodology of WorldCo, when you first started, what did you look at in the beginning? What did you trade?

Adam: The methodology of WorldCo was that there really was no method--unlike other trading firms that preach a particular method. If you pooled 50 successful traders at WorldCo, you would probably get about 30 different methods of trading. You aren’t necessarily going to get one style of trading. It pretty much depended on the type of style you adapted to or the type of style that somebody taught you. There are other firms that taught a particular style, but WorldCo itself did not teach a particular style.

Dave: Have there been any changes since then? What are traders doing now? Are they still developing their own styles or do you tell them how to trade?

Adam: To clarify what I’m saying, WorldCo did not teach their traders a style; however, I was taught a style myself by a Worldco trader. One of the first or second traders at WorldCo taught me a particular style of trading. That style of trading--which I used back in 1998--I still do the exact same thing today. I have 60 people working for me that implement that exact same style. That style of trading is called tape reading. We do nothing different than they did back in 1910 or 1920. I certainly did not reinvent the wheel. I cannot show you a style that you cannot otherwise learn. I do not have a secret or a method that works better than the next guy. I just do the meat and potatoes of the market, which is tape reading; it has always worked for 214 years, and will continue to work.

Dave: Let me see if I understand tape reading. You are watching prints and you are watching volume?

Adam: The variables are a lot more than just prints and volume. However, prints and volume are two variables in the equation. In tape reading, you are watching the whole tape. What consists of the whole tape? Well, you have the last trade, you have the bid, you have the offer, you have the bid size, you have the offer size, you have the last change. There are a lot of variables in that, not just trade and volume.

Dave: Does Level II still come into play in that?

Adam: Well, Level II might, but we don’t trade NASDAQ [NASDAQ:$COMPX] stocks. We only focus on listed (NYSE) stocks, so we don’t use Level II at all.

Dave: Is there anything in particular that you can share about what you look for when you are tape reading?

Adam: Yes, what you are doing is looking at the buyers and sellers of the stocks. You are sniffing that out by watching the tape. And you rely heavily on your feeling. From watching how things trade you are able to make calculated decisions. You are able to detect where the buyers and sellers are in any particular stock at any particular time. By just focusing and watching the tape.

Dave: So you are trying to join the buyers?

Adam: You are trying to join the aggressive buyer on the long side, or join the aggressive seller on the short side.

Dave: Is there a particular size that you need or a number of shares to properly trade using tape reading?

Adam: It all depends; each stock in each situation is different. Some stock that you are trading might be a very thick stock--a stock where you can take a lot of size. However, other times you might be trading a stock whose average daily volume is very low. And in that case, you might want to use lesser volume.

 

[maysumi]

btw, the "p" next to the price on some of the alerts means the stock can be shorted on a downtick, and the time (ie 2s) on the doubleprints is the time between prints.

Thanks for posting that interview too Maverick!

 

[Maverick74]

Dave: What do you consider a big position for your traders?

Adam: I would say about 5000 to 7000 shares.

Dave: Do you guys hold that for more than just a couple ticks?

Adam: We sniff the buyers and the sellers. By watching, you are able to feel where the buyer and seller are, and so you buy the stock because you are able to see the buyer. You exit that stock when that buyer is no longer there. That can be one second or it can be six-and-a-half hours. Each situation is different. If I notice there are buyers in a stock, I go ahead and buy it. I will then hold that stock until the buyer is selling. So that can be momentarily or four hours from now.

Dave: When you are choosing your stock to watch the tape on, how do you find those stocks?

Adam: I teach my traders how to find those stocks. I don’t necessarily provide which stock to trade. I teach my traders the methodology behind finding which stock to trade for that day.

Dave: Can you give us a basic idea of what to look for?

Adam: Sure, we look at stocks that can move. There is nothing more important in this business than where you are going to focus your time. If you focus your time on a stock which historically doesn’t move, then you are just wasting your focus. You need to make sure the stock has a good range and can move. You don’t want to end up trading a stock that historically moves 40 cents in a day.

Dave: What do you consider a good range? Maybe $2?

Adam: $2 is very good. Maybe $1.50, somewhere in those areas. If you just look at a daily chart of any given stock, you are able to tell that a stock has the potential to move $1.50 or $2.00 on any given day. Those types of stocks are the ones you want to focus your time and attention on.

Dave: Do you have a scanning program to help you find these things?

Adam: No. It’s just doing the hard basic meat-and-potatoes research. That means reading through every single news headline, reading through every single chart that falls within a certain range. For example, you might have 200 stocks that you know can move $2 a day. You need to go through those charts every single day. You need to read every single news headline. Any shortcut, any scanning, any website that is going to pick things is going to be helpful, but its like reading the Cliffs Notes--you aren’t reading the book. You are going to miss out on things. You are not going to have as good of a feel as the guy that sat there for four hours and read Macbeth--the entire thing. You read the Cliffs Notes and you know what happened, but you don’t dot every I and cross every T. So the one thing that I teach and encourage is sheer hard work. Do the work, and from that you are not going to miss anything.

Dave: And you find that that pays off?

Adam: Without any question. So many people nowadays are looking for the short cut. Show me the beautiful flag-pennant, show me the beautiful moving average. Any of this stuff maybe worked at one time, and didn’t work another time, but it really doesn’t do much for me.

Dave: Do any of your guys use technical analysis?

Adam: Well, there are hundreds of traders at my firm. For the ones that trade for my branches and me, it’s a different question. I’m sure many traders use technical analysis. My traders use technical analysis not to trade, but to pick stocks. We use technical analysis for research, but actually during the trading day, they aren’t using technical analysis to make decisions.

Dave: There is lots of talk about bullets or married puts being made illegal and how this has effected shorting for prop firms. Do you utilize any techniques like these when you short?

Adam: Well we definitely used to use married puts. Nowadays it doesn’t really matter because things like that were taken away from the entire street. So Goldman used to use them, and they no longer have them Morgan no longer has them. So the playing field is now set because nobody really has them. There are also some instruments out there that people use in moderation. But as a whole, everyone who is shorting nowadays is shorting naturally.

Dave: Meaning you are waiting for an up tick?

Adam: Exactly, you are waiting for that up tick.

Dave: Let's talk about your trading experiences a little more. Can you tell us about your worst trade ever? The most amount of money you ever lost, and also the stupidest thing you have done.

Adam: I can probably throw a couple out there. The most money, I don’t know. I don’t know what would be the most money I have lost on one particular trade. But I will tell you this: I lost $4500 in one day in eight years, and that is including fees. I don’t think I had seen that type of market in 8 years.

Dave: What would you say was your biggest day ever?

Adam: We had some big days back in our heyday. I would say somewhere in the 30 or 40 thousands.

Dave: Nowadays, do people have big up-days like that, or are they not as big anymore?

Adam: Sure, they aren’t as common, but people do. I preach and teach above all else, money is a habit and you need to learn that habit. You aren’t born with that habit. You need to learn that habit like you learn how to walk and you learn how to speak. If I ask you ‘What’s your phone number?’ you would just reiterate it for me because you know it and it’s a reaction for you. Making money, it’s a reaction; it’s a habit. It’s something you do everyday, period. And that’s what I convey to my guys, and I teach them how to do that.

Dave: So, it’s unconscious for you to make money?

Adam: Right, it’s a habit. That’s what I teach. You started off by asking, 'do guys have those big days now and then?' I have traders that are walking away with over $3000 every day. You take my good traders--my consistent traders--and they will lose money maybe 4 or 5 days in the year. Do I have traders making $50,000 a day? No. I haven’t had that. We don’t swing for the homerun; we don’t do that type of trading. We are very calculated. We move with the buyers and the sellers. We don’t do the contrary type of trading where you can catch the high and ride it down, or catch the low and ride it high. You get killed that way. None of my traders have big swings.

 

[Maverick74]

Dave: You teach consistent money making. Almost like a business.

Adam: Exactly, we nickel and dime the market. Any market. It doesn’t matter. Give us a good market and we will quarter and half-dollar the market, instead of nickel and dime-ing it. Give us a bad market and we will penny it.

Dave: Speaking of nickels and dimes, did you change your trading tactics when we moved from fractions to decimals?

Adam: There is no change in methodology. We continue doing the exact same thing--we are still tape reading. The difference that I have noticed with many traders who come in when they have never experienced a 1/16th--they have only traded a penny--it becomes more difficult for them to distinguish between when a stock is going against them or when a stock is down ticking. Because the increment is so small, they see it coming up or coming down but in all actuality, it's only coming down 15 cents; its not even an 1/8th of a point. That used to be just a down tick or vice-versa. If it went up 20 cents they might perceive that as a bigger jump, then in essence it really is, when it's just 3/16ths. I think the perspective on the movement is a little more difficult on the newer guys coming in because they are so penny-oriented than the guys that have traded with the 1/16ths. 1/16, 1/8th/ 3/16th, 1/4 you are already up a quarter in four ticks. Now it takes 25 ticks to get there. So it creates a lot of noise. For the new trader, I think it makes it more difficult for them because they have to filter out that noise.

Dave: The older guys just visualize it as 1/4s and 1/8ths.

Adam: Yes, the perspective is a little different. I think we are a little more patient. We just give it a minute and let it settle down. We would be saying things more like that because the patience is there.

Dave: Tell me a little bit about your traders' day. They come into the office and what do they do from the moment they sit down at their desk until the time the market closes?

Adam: Well the market opens for my Los Angeles guys at 6:30 (9:30 Eastern time). Two hours before the market, they get in there and start doing research. What does that mean? It means going through every single news headline. Every single Dow Jones headline, every single one.

Dave: And these are the headlines that come up on your list of the 200 stocks you are watching?

Adam: No, just scrolling the news. We will read things from Arafat’s life, what’s happening with his medical records in France, to Best Buy’s fiscal earnings. They read everything, and they need to read it all. There could be things that mean a lot. They read through every news headline. Write down things that might mean something. You don’t know, but it might mean something. ‘Hey, I just read that the Chinese are going to stop their importing of US steel.' Well, China is the biggest importer of US steel in the world. When you want to build a building here, you have to wait, because they might want it there first.

Dave: So you are pretty much just picking out anything that might have some possible impact?

Adam: Right, as you go through the news, every single news headline. Then about 40 minutes before the market opens, you go and individually look at those stocks to see what the news is on those stocks. So you picked out Best Buy because you saw there was some news on it. You ask yourself ‘Is this something that means something, or is this something that doesn’t mean something?’ If you think it is, you look at the chart. If the stock could move as we initially talked about, you pull Best Buy on the screen. Let's go to the next one that we pulled out of the headlines. If you do it that way, you miss nothing, ever. You go ahead and trade. Trade the way we teach you how to trade.

Now, the market closes, what do you do? You go through every single one of your trades with the time and sales. You look at every single trade you made and see why you got in, if it was the right reason and why you got out if it was the right reason. Now you are a Monday-morning quarterback. ‘Ah man, why did I get out of this thing? I knew the buyer was there. I got out because I was emotional.' The beautiful thing about it is that when you are looking back, you are taking the emotions out of trading. You are taking the excitement out of making money. So you are able to look at it with a clearer perspective, which is the way you want to see it. Number two what you do is you go look on the day at stocks that moved a lot that maybe you didn’t watch. ‘Look, all of a sudden Watson Pharmaceutical moves a lot. Why did it move a lot? Because it got an FDA approval on some drug you have never heard of, this 15-letter long drug. The stock moved up 4 points. Okay, fine.’ You add it. Three weeks from now you are doing your research and one scroll across the headline reads ‘Watson Pharmaceutical Loses FDA Approval.’ By the way, this happens every day with these drug companies. They get FDA approval and then they lose it. Watson Pharmaceutical loses their FDA approval with this 15-letter drug. Just one line in the news, but you remember that two months ago this thing was up $4 on the news. Now you know its big news. I don’t know where my guys went to school and I don’t know what they studied. But you don’t know everything about every single industry. You can’t. So by going back and looking, you are going to learn. For example, Coach Leather was up $3 to $4 because automobile sales were up. What the hell is going on? I did a little bit of research and found out Coach does all the leather for Lexus and Mercedes. But you aren’t going to know that unless you go back and look. So now, when automobile sales go down, while everyone is looking at General Motors and Ford, I’m looking at Coach, the easiest trade of the day. With 3000 stocks, there is an enormous amount of work, but when you do the work you’ll find the right stocks and do nothing but the right thing.

Dave: When you are hiring a new trader, what do you look for?

Adam: Hunger… Someone who is willing to put in the time, willing to learn, and do the hard work. I tell this to everybody who sits down at my desk. This is the hardest job you will ever do. If you came in here to make a quick buck, don’t waste my time and don’t waste your time. Save your money. This is the most difficult job. You come in here, you learn how to be a trader and you make a career out of it, not just a two-year gig out of it. Many of my traders have been doing this for many, many years and they make a great living, and they worked their ass off to get to that point. I want to convey that to these people that when I bring them in, I am investing in them. I am investing in them very much monetarily, but more than that, I am investing in them with my energy in teaching them. But if they are not here for the long haul to put in the work and to work their butt off, I don’t want them. When I first started hiring at 99 Wall Street, if you had a Wharton MBA, I’d let you work. If you had a Harvard MBA, I’d let you work. But I’ll tell you something, I'll take the kid any day who wants to work his butt off who is going to put in four hours pre-market and four hours aftermarket everyday over any Harvard or Wharton MBA. I got a guy sitting in Chicago with me right now who is doing very well--very, very, very well. He has been working for me from way back in the day. I hired him back in 1999. He is a year or two older than me and we are friends. He moved out to help me with the Los Angeles offices then, and one day he says he has to tell me something. He says 'I never actually completely college.' However, his resume shows him with all these credentials. He told me he feels bad that he lied on his resume. Back in the days of WorldCo we were inundated with resumes.

Dave: So he basically exaggerated his credentials to get his foot in the door?

Adam: Right, what that tells me is that this guy didn’t need to have an MBA. All this guy needed to have is hunger. And this guy is no smarter than any other guy, but he is harder working than any other guy. And no piece of news on any stock gets by this guy. Never did, and it never will. He puts in the time. I got hundreds and hundreds of people’s resumes through the years and I have some really sharp looking resumes. So to bring this full circle, when I look for a guy that I want to hire, I want to hire someone who is committed, who is going to be hungry and is going to work their butt off.

Dave: Are you guys hiring now?

Adam: I am always hiring.

Dave: Do you have remote traders?

Adam: I have tons of remote traders across the country.

Dave: So let's say a trader starts with you guys--he puts up $5000. Does he start with real money out of the gate like you did or does he start with a demo account of some sort?

Adam: We start them with a demo account. But I give them the option. I let them know that whenever you feel comfortable, you can just switch the button from demo to live. So I definitely give them the opportunity to stay on demo until they feel comfortable. Some guys come in and say they want to run demo for a month. I have never found a guy to do that. They are always very eager to start trading their own money.

 

[Don Bright]

Quote from Spxdes:

Maverick and Don,

What are your opinions on SHO stocks and tape reading them. How are they different and do you suggest attempting to trade them? Thanks.

-spxdes

The SHO stocks will not be reflecting the "following a short seller" down" observation, of course...but virtually everything else is the same. You'll see a bit more of a downward move vs. non Sho stocks on down market days, IMO.

Don

 

[maysumi]

Actually, I've found that these stocks love to spike up a lot more than their non-sho counterparts in order to scare weaker traders out, which in fact can make them sometimes more difficult to go short. You don't want to short them after they've moved down, especially with a nice size offer, because suddenly the offer will be pulled or even taken out. But then trying to short on the spike it can actually be much tougher than you'd expect to get a fill, even with NX, since the specialist will then go to a 100 share lot (which is un-NXable). The next thing you know the stocks back down trading lower in a blink. So, ironically enough, SHO stocks have in a way seemed to increase potential upticks, at least in my humble experience. If you're gonna try to short 'em, I would still suggest waiting for the inevitable spike.

 

[Don Bright]

Quote from maysumi:

Actually, I've found that these stocks love to spike up a lot more than their non-sho counterparts in order to scare weaker traders out, which in fact can make them sometimes more difficult to go short. You don't want to short them after they've moved down, especially with a nice size offer, because suddenly the offer will be pulled or even taken out. But then trying to short on the spike it can actually be much tougher than you'd expect to get a fill, even with NX, since the specialist will then go to a 100 share lot (which is un-NXable). The next thing you know the stocks back down trading lower in a blink. So, ironically enough, SHO stocks have in a way seemed to increase potential upticks, at least in my humble experience. If you're gonna try to short 'em, I would still suggest waiting for the inevitable spike.

Good points...and, for everyone's benefit, this shows how important it is to follow the stocks yourself, become very familiar with them, and see these types of trends.

Don

 

[maysumi]

don, what's your take on the effect the new nyse hybrid system will have for your style of trading? Do you think it will change a big part of the game for you and your traders? That's one thing I like with tymorapro, is that even if certain aspects of the game may change, there are still many other types of trade ideas to consider. It becomes mostly a matter of finding the patterns and setups that a trader is most comfortable with. Do you or any of your traders use tools like tymorapro for additional analysis or perhaps considering to in the future, possibly due to the changes coming down the pike? I think your traders now use mostly rediplus over there if I understand correctly.

 

[lakwan]

For an entry of any position, simply looking at the level I may be superficial. I don't think you can quite make an entry decision simply based on the structure of level I.