BY KEN CALHOUN

W
ith the inven-
tion of the
ticker tape in
the late 19th
c e n t u r y, tape reading
tracking the ebb and flow of
prices across the ticker tape
quickly became a popular
method to determine whether
buyers or sellers were in contro l
of a stock.
The technology may have
changed over the years, but
short-term traders in todays
online market enviro n m e n t
still use the same tape-reading
principles to manage trade
entries and exits. Now, howev-
er, they use the time and sales
screen instead of the ticker tape
to find patterns in stock prices.
Time and sales is the real-
time record of executed trades
(see Figure 1, right). It is typi-
cally provided by market data
vendors and trading platforms
and has become a staple on the
trading screens of intraday
(especially Nasdaq Level II)
traders. While some traders rarely con-
sult their time and sales screens, others
know it reveals important price dynam-
ics that do not appear on charts (or do
not appear as quickly on them).
The time and sales window provides a
running commentary on a stocks price
action by revealing buying and selling
p re s s u re. Because it shows actual trades
(rather than just bids and offers), time
and sales is much more important than
Level II; it is the ultimate determinant of
whether or not a trade is justified.
There are several time and sales pat-
56 www.activetradermag.com July 2002 ACTIVE TRADER
Time and sales:
THE TALE OF THE TA P E
Tracking momentum by reading the tape is a
long-standing market tradition. But instead of the
t i c k e r, todays traders can watch time and sales to decipher
the market.
Time and sales is the real-time record of trade executions. It is more important than
the Level II screen because it shows trades, not just bids and offers.
FIGURE 1 TIME AND SALES
Source: eSignal
TRADING Strategies
terns your can use, either independent-
ly or combined with other technical sig-
nals, to make intraday trades.
Integrate time and sales
with other market tools
To get the most out of time and sales,
you first need to set up your trading
screen professionally. Instead of using
the small default time and sales window
just to the right of a Level II box, it is
much more advantageous to set up an
expanded time and sales screen that is
separate from the Level II window (tak-
ing up as much as one-half of one trad-
ing screen).
Given the variety of potentially con-
fusing tools and indicators at a traders
disposal intraday charts, oscillators,
time and sales, sector indices, and so on
it is important to correctly integrate
stock chart patterns and time and sales
prints with broader market information,
such as the current Nasdaq Composite
indexs (COMPQ) level relative to the
prior day (close, open, high, low) and
price action at the sector level.
Think of each days trading as a pyra-
mid constructed of different market ele-
ments and indicators. The current major
trend in the COMPQ and Nasdaq TRIN
(an indicator that tracks intraday buying
and selling pre s s u re; see Indicator
Insight, Active Trader, December 2000, p.
88) provide the foundation that is used
to evaluate the current overall market
d i rection (long or short for the time
frame being traded), followed by know-
ing which sectors are strongest or weak-
est on the day.
Next comes chart patterns for
example, two-day-high volume break-
outs or breakdowns, or specific candle-
stick patterns. At the top of the pyramid
a re the Level II and time and sales
s c reens, which are used to gauge a
stocks buying or selling pressure at a
given time and to execute trades.
Many new traders incorrectly look at
the time and sales activity independent-
ly of other market indicators. This can
give the trader a distorted perspective of
price behavior and lead to whipsaw
trades. For example, its not enough that
the tape momentarily looks bullish it
must be confirmed by other signals, such
as a chart pattern breakout in the stock
and a new intraday high in the sector to
which it belongs.
Tape-specific patterns work best for
Nasdaq stocks in the semiconductor
(SOX), software (GSO) and biotech (NBI)
sectors with the following characteris-
tics: price in the $30 to $60 range; 2- to 4-
point intraday range; and average daily
volume of at least 1.2 million shares.
Examples of GSO sector stocks include
Adobe (ADBE), Brocade Communica-
tions (BRCD), Check Point Software
(CHKP), PeopleSoft (PSFT), Ve r i S i g n
(VRSN) and Veritas (VRTS). Stocks from
the SOX sector include A p p l i e d
Materials (AMAT), KLA-Tencor (KLAC),
Nvidia (NVDA), Novellus (NVLS) and
Xilinx (XLNX). The expected round-trip
duration of a trade based on these time
and sales patterns is approximately two
to 15 minutes.
Whos in control:
Net buying vs. selling
The most basic way to use time and sales
is to evaluate whether the transactions in
a stock re p resent net buying or selling
over a two- to three-minute interval. To
do this, see whether a string of, say, 15 to
ACTIVE TRADER July 2002 www.activetradermag.com 57
continued on p. 58
This intraday upside breakout corresponded approximately to the time and
sales screen in Figure 1. Time and sales confirms chart breakouts when there
are more trades in the direction of the trend/breakout and the transaction
speed increases.
FIGURE 2 BREAKOUT: CHART PERSPECTIVE
Source: eSignal
55.30
55.20
55.10
55.00
54.90
54.80
54.70
54.60
54.50
54.40
54.30
54.20
54.10
54.00
53.90
53.80
150K
100K
50K
Time and sales
with cup breakout.
54.5 long entry.
EBay (EBAY), one-minute
Volume
10:15 10:30 10:45 11:00 4/15/02
20 sequential trades is occurring primari-
ly at either the bid or the ask price (which
you can confirm on the Level II scre e n ) .
Values may vary depending on market
conditions, but a guideline for determin-
ing net buying or selling is when 70 per-
cent or more of the trades are occurring at
the ask or bid price, re s p e c t i v e l y.
Think of the flow of trades on the time
and sales screen like a river: You are
looking to see whether the water is flow-
ing left, right or churning in a
whirlpool, which on the time and sales
screen would be represented by neither
buyers nor sellers taking charge a
congestion zone. Once youve deter-
mined the flow, you can combine a spe-
cific chart pattern with a high or increas-
ing percentage of transactions taking
place in the direction of the pattern
setup. For example, a long trade might
be indicated when a chart pattern
implies an upside price move and the
time and sales chart is simultaneously
showing net buying.
Transaction speed
After observing the buying or selling
pressure in a stock over a specific time
interval, you can incorporate more
advanced tape-reading patterns.
For example, understanding transac-
tion speed the rate at which trades are
occurring and the size of those trades
will help you identify trade opportunities.
Market makers and individual traders
who trade size (more than 5,000 shares
in a short time) will likely use reserve
orders and work an order, showing
only several hundred shares at any
given time. (Areserve order is one that is
hidden from the public. Reserve orders
are used by traders who want to buy or
sell a large number of shares but do not
want to show their entire trade at one
time, for fear of significantly altering the
price and revealing their true inten-
tions.) This order flow is merged
with individual day-trader orders
i.e., 100- to 1000-share trades
in time and sales.
The key is to be able to spot
when the transaction speed is
i n c reasing in a given dire c t i o n .
Doing this correctly requires a great
deal of time and practice watching
the time and sales screens of a small
group of stocks. The goal is to be
able to distinguish between the
average tape speed that typically
occurs during a consolidation
(slower transaction speed and more
mixed bids and offers) and the
speedups or slowdowns that repre-
sent trading opportunities (such as
when trades occur with increasing
f requency and the trade size
increases). When you become inti-
mately familiar with the average
speed and size of transactions that
occur in a specific stock, you will be
much better prepared to spot breakouts
and shifts toward buyers or sellers in the
stock.
Responses to out-of-market
block trades
An out-of-market block trade is a
transaction that occurs at a price other
than the current inside bid or ask price.
Depending on the circumstances, the
implication of block trades varies. Often,
an out-of-market block trade is simply
one market maker selling to another
market maker with little or no relevance
to the price trend.
The important thing is how the cro w d
responds to out-of-market block trades.
For example, a buy signal would occur if
several large (20,000 to 50,000 share s )
out-of-market trades occurred two or
m o re price levels higher than the curre n t
o ffer price, followed immediately by an
i n c rease in the transaction speed at the
inside offer (or at a higher price), which
indicates buying pre s s u re. Also, if you
see Instinet ECN (INCA) inside off e r s
back away (i.e., fall back to two or
m o re price levels above the curre n t
inside ask), there might be continued
buying in the absence of selling pre s s u re ,
as reflected in time and sales. INCA i s
w h e re market makers are most likely to
hide out i.e., where they park
reserve orders and work large ord e r s
f rom when they dont want to tip their
hands on the Level II screen. In such sit-
uations, the crowd is reacting to the
l a rge blocks by buying more share s ,
which, when accompanied by a chart
pattern, provides a trade opportunity.
Identifying breakout entries
with time and sales
Chart pattern entries must always be
58 www.activetradermag.com July 2002 ACTIVE TRADER
The combination of alternating buying
and selling pressure and relatively low
trade size indicates a mixed market.
FIGURE 3 MIXED SIGNALS
Source: eSignal
After observing the buying or selling
pressure in a stock over a specific time
interval, you can incorporate more
advanced tape-reading patterns.
confirmed with time and sales. For
example, when a breakout occurs the
majority of trades should occur in the
direction of the trend, especially if the
trades are above or below the previous
days high or low, respectively (see
Mastering two-minute bre a k o u t s ,
Active Trader, September 2001, p. 66).
An indecisive tape, which is character-
ized by a Christmas tree pattern of
alternating green and red transactions, is
a warning not to enter a trade.
On the other hand, an upside break-
out on high volume accompanied by an
increase in transaction speed, in which
more rapid transactions are occurring at
the ask price or higher (which often
occurs at two-day highs), is an excellent
entry signal. Use the chart pattern as the
first signal the stock is likely to head
higher. Then watch the tape for at least
two minutes before entering a position
based on increased transaction speed.
F i g u re 2 (p. 57) shows the intraday
breakout that corresponds to the time
and sales screen shown in Figure 1.
The specific pattern to look for (for a
long trade) is a significant increase of
trades of more than 500 shares each
when the stock has just broken out
above the previous days high. A string
of 100- and 200-share trades is seldom
enough fuel to continue driving a stock
h i g h e r. Seeing a high percentage of
increasingly rapid transactions of 500
shares or more is a solid indication the
stock is good for at least another .25
move above the current price level.
This helps filter out head fakes that
occur when market makers use reserve
orders. For example, they slowly buy
100 to 200 shares at a time until theyre
totally filled, at which point a whipsaw
or reversal occurs in the stock. They then
go short and scare retail traders who had
gone long out of their positions.
Identifying pivots and trend
reversals with time and sales
Finally, you can use time and sales to
manage trailing stops and look for
fade (countertrend) entries by observ-
ing pivot patterns and reversals. Look
for the tape to slow down after having
moved strongly in the direction of your
trade. For example, if you were short a
stock from 42.60, it has quickly dropped
to 42.05 (just above the whole-number
support at 42), the tape starts to slow
down, and the transactions become
more mixed (alternating green and red
a sign of increased indecision), its
time to pocket the half-point profit while
its there, and get out. Another technique
is to close half your position when any
pause occurs on the tape and trail a 20-
cent stop behind the current inside mar-
ket for the rest of the position.
Trend reversals are trickier to spot
using time and sales alone. A s t o c k
should 1) begin to clear a resistance level
on its chart and, 2) show increased trans-
action speed on the time and sales screen
b e f o re you consider taking a trade.
Traders often try to outguess the market
and enter a countertrend trade when the
first small reversal occurs in a stock,
which usually results in a loss when the
stock resumes its previous move.
However, in general, buying bottoms
and selling tops is not how most profes-
sional traders make a living. Instead,
they buy strong, and sell stronger, and
short weak and cover weaker in rapid
time frame trades.
Making time and sales patterns
work for you
Heres a trading exercise that will help
you hone your tape-reading skills: Once
a week, follow the time and sales trans-
actions from 9:40 until 10:10 a.m. in one
of your favorite stocks. At the same time,
watch the stocks one-minute chart and
try to determine when tradable break-
outs and pivots vs. untradable consoli-
dation range conditions exist. Figures 3
and 4 (opposite page and left) show a
time and sales screen and its correspon-
ding tick chart, respectively. The mixed
buying and selling (and small order size
on the time and sales screen) reflect the
stagnant trading shown on the price
chart.
When youre in a position, watch time
and sales closely, keep a finger on the
mouse or hot key, and be ready to exit at
the first sign of trouble. You can manage
risk with time and sales by watching for
situations when the change from a most-
ly green or mostly red tape to a mixed
tape is accompanied by speed changes
as measured by the transaction speed
changes. When time and sales flashes
such a warning sign, its a good time to
tighten your trailing stop or exit the
position.
Some day-trading professionals trade
solely using time and sales its that
important. Even if it is not the only tool
you rely on, being able to correctly use
the tape-reading patterns weve dis-
cussed can help you maintain a more
consistent, careful trading approach.
For information on the author see p. 12.
ACTIVE TRADER July 2002 www.activetradermag.com 59
The mixed market signals from Figure 3s time and sales screen are reflected
in the sideways action on this tick chart.
FIGURE 4 TICK PERSPECTIVE
Source: TradeStation Platform by TradeStation Group
34.69
34.68
34.67
34.66
34.65
34.64
34.63
34.62
Qualcomm Inc. (QCOM), tick
10:42 10:42 10:42 10:43 10:43 10:43 10:43 10:43 10:43