The Taylor Trading Technique

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The Taylor Trading Technique

• With Linda Raschkes Variations on the theme

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Six Ways to Use Taylors Method

• Follow the system literally in exact detail (and
  make a viable living).
• Follow the basic methodology with discretion.
• Trade selective plays only.
• Use for accumulation/distribution in trend
  trading and intermediate swing trading.
• Use as a departure point in developing short term
  mechanical systems.
• Price Pattern
• Range expansion systems
• 2 Day ROC
• Practice as a way to develop superior entry/exit
  technique.

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Main Concepts

• Trade within a 2-3 day time frame
• Watch price action around previous days high or
  low
• Monitor the length of the last upswing relative
  to the last downswing (60 and 120 minute charts
  are optimum)
• Determine what the play is for the day i.e.,
  the trend for the day or the test for the day.
• Ignore all news and fundamentals. Focus on tape
  action.
• Although trading on a 1-2 day basis, be aware of
  the bigger picture the longer price structure,
  Dont take countertrend trades within the first 3
  days of a breakout from a chart formation.

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The Classic Cycle

• "Plays" (Taylor Rules for each Cycle Day)
• Buy Day
• Low First
• Big Rally
• Flat Close
• Buy Day Low Violation
• Selling Day
• Flat Opening
• Down Opening
• Short Sale Day Short Sale Day
• High First
• Big Decline
• Short Sale on Buy Day High First
• Rules and Tools
• Back to Basics tape reading, volume, and
  retracements

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Ideal 3-5 Day Cycle

• The Method provides a game plan for every day.
• "A trader who knows how to act when the expected
  happens, is in a better position to act when the
  unexpected happens".
• Stocks commodities tend to follow a repetitive
  3-5 day cycle consisting of
• A Buy Day (you go long)
• A Sell Day (you exit your longs from the previous
  day) and
• A Sell Short Day ( you look to go short by fading
  the last bit of the rally which began on the Buy
  Day).
• After the Sell Short Day, the cycle repeats
  itself, starting with a new Buy Day on which you
  cover your shorts and look to go long.
• This is the "ideal" cycle. In a trending market
  there is sometimes an extra day or two inserted
  on the long or the short side.

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Basic Principles

• A trader must rely on his/her own judgment.
• Listening to others will not give you an edge but
  rather will serve as a distraction.

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The Classic Cycle

• The market has a definite 1-2-3 rhythm, with at
  times an extra 1-2 beats.
• The market goes up 1-2-3 days and reacts, the 4th
  and 5th figure is the variation when it runs that
  extra day or 2 in a trend.
• Start with three days as our trading cycle.
• We use the first day for buying and the 2nd and
  3rd day for selling.

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Daily Focus

• Each day the main focus is on the "Objective
  levels" - the previous day's high and low.
• The Book Method trader places his orders "at the
  market".
• Don't limit your orders.
• Trading ranges have the most mechanical
  accumulation and distribution rhythm.

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Objective Points

• Objectives for a trade are the resistance that
  comes in around the Previous Day's high, and the
  support that comes in at or around the Previous
  Day's low.
• Until a trader gains in experience, buy to cover
  or sell to exit just as the objectives are
  reached.
• Think only about exiting your trade as an
  objective area is approached.
• Though Objectives may seem conservative, remember
  that the trader will get Positive slippage.
• In stronger trends, allow for deeper penetration
  of the objective point.
• FORGET ABOUT A TRADE AFTER YOU HAVE MADE IT!

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Rules for a Buy Day

• Anticipate a Buy Day after one to two consecutive
  down closes.
• In an up-trend, a Buy Day might occur after only
  1 down close.
• A Buy Day can also occur after just one,
  wide-ranging down day such as an outside down day
  in a congestion area.
• Watch for the market to open and test the
  previous day's low for support.
• The ideal Buy Day includes
• A test of the previous day's low that finds
  support.
• Lows made in the morning and high made in the
  afternoon.
• A close in the upper end of the daily range.

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Rules for a Buy Day (Cont)

• Go Long on a test of the previous day's low. Once
  a long is entered, the low for the day should be
  considered a support level. A stop should be
  placed beneath this area.
• Hold Overnight If the trade is going to close
  with a profit, it should be held overnight. Exit
  the position on the next day on any follow
  through momentum.
• If price pushes too much below the previous day's
  low on a Buy Day morning before finding temporary
  support, the objective for the long trade is the
  previous day's low.
• If the market is closing "flat" or unchanged, it
  indicates further weakness. Exit Long positions
  before the close.

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Rules for a Buy Day (Cont)

• Same Day Exit While the intent is to hold your
  position overnight, you should exit positions on
  the same day if the market has an extremely
  favorable move, handing you a windfall profit.
• Large Opening Gap Down If a Buy Day is expected
  but there is a large opening gap down below the
  previous day's low, (Buy Day Low Violation) buy
  at the first signs of support and look to exit on
  a reaction back up towards yesterday's low.
• Large Opening Gap Up If a Buy Day is expected,
  but the market gaps up by a large amount, there
  is risk that the high can be made first and the
  market will trade down from the opening price for
  the rest of the session (Buy Day Highs Made
  First). In this case, a trader can look for the
  short sale first.

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Sell Day

• Once a long position is established, your goal is
  to exit on any follow-through the next day.
• The previous day's action indicates the most
  probable opening move. If the Buy Day finished
  with a strong close up ? continued strength the
  next morning.
• In a strong up trend, an upside penetration of
  the previous day's high can be expected.
• Do not stay in a position that is acting opposite
  to what you anticipated.

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Sell Short Day

• After the market has rallied for two to three
  days, the short term up cycle should be close to
  exhausting itself.
• A "Sell Short Day" will normally follow a Sell
  Day.
• The same characteristics of a Buy Day will be
  found on the Sell Short Day only in reverse.
• The ideal Sell Short Day will open up from the
  previous day's close, make its high first and its
  low last, and close in the lower end of its
  range.
• A weak close on a Sell Short Day indicates
  further weakness and an opportunity to cover
  short positions the next day.

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Sell Short Day (Cont)

• If price rallies sharply above the previous day's
  high before finding resistance, the objective for
  the short trade becomes a reaction back towards
  the previous day's high. In this case, the trade
  should be exited on the same day.
• If you are expecting a Sell Short Day but the
  market opens way down and finds support, the
  possibility exists that a rally may ensue, and
  the high would be made last, indicating further
  strength. Wait and push the Sell Short Day ahead
  to the next day. Then look to short a test of the
  previous day's high using the same rules.

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Sell Short Day (Cont)

• If the market has just given a big decline, the
  shorts will be in no hurry to cover. Often, after
  a bit of time, the market can recover with
  activity.
• A Sell Short Day that has a fast decline and then
  rallies back forming a "V ? Expect a higher
  opening and a higher low on the reaction for the
  Buy Day.

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Price Patterns

• The 2-Day Rate of Change (ROC) is a useful tool
  which dovetails well with Taylor's in one day out
  the next technique.
• The 2-period ROC indicates whether the odds favor
  being a buy or a seller for the next day.
• Hold the trade overnight and exit according to
  his guidelines.

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Price Patterns

• Three bar Triangle breakout pattern Price has a
  lower high then the 2 day high and a higher low
  then the two day low with a narrowing of the
  ranges.
• Pinball A 3-period RSI of the 1-day ROC has a
  reading of above 67 or below 33.
• Look for buys when price is above the 20-period
  EMA and for sells when price is below the
  20-period EMA.
• Pinball2 Price has pulled completely away from a
  5-period simple moving average indicating
  momentum. The first close in the opposite
  direction on the other side of a 4 SMA sets up a
  pinball sell.
• 5 SMA Price closes above a 5 SMA for 7 bars.
• The first close on the opposite side sets up a
  Buying opportunity.

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Basic Flips

• There is a small positive expectation across all
  markets when entering "long market on close" on
  the day the 2-period ROC first flips up and
  exiting on the next day's close.
• The ROC indicator turns up or down every 2 1/2
  days on average.
• The 2-period ROC has better statistical
  expectation than either a simple price change
  (1-period ROC) or a longer term oscillator such
  as a moving average oscillator.

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Short Term Anti

• An "Anti" trade occurs when the slopes of two
  oscillators which have different time frames, are
  in opposition to each other.
• Wait for the 2-period ROC to correct two days in
  the opposite direction of the slope of an
  intermediate oscillator - I use the 16 period SMA
  of the 3/10 oscillator.
• The best trades occur when the slope of the
  longer-term indicator has just turned.
• The choicest trades appear as a small shoulder or
  a 1-2 day drift pattern.

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ROC Divergence

• It is a reversal pattern.
• Don't look for this in the strongest trending
  markets.
• The ideal time window is 5-days but this pattern
  can form over 4 or 6 days.
• If the pattern does not work within 1-2 days, the
  primary trend is going to reassert itself!

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Volatility Breakout Systems

• A of the previous day's range or a of the
  previous N-bar range is added or subtracted to
  the closing price or the next day's opening
  price.
• This level is used as a buy or sell stop to enter
  in the direction the market is moving.
• Exit on next day's open/close or an ATR function.
  
• Risk n ATR.

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Using TICKS with Market Timing and Taylor Trend
for the Day!

• Think of Ticks as correlating with the strength
  of buy or sell programs.
• Ticks can be used as a momentum indicator or an
  "overbought/oversold" indicator in a trading
  range environment.
• Ticks represent how much buying or selling power
  has been used to push the market up or down on a
  particular swing.
• Ticks must be watched with respect to overall
  market tone or type of environment (trading range
  or trending).
• Ticks can be used in a countertrend manner by
  looking to fade the extreme readings when in a
  trading range.
• Ticks have an upward bias and are highly
  correlated with market breadth.
• Ticks function as a confirmation/non-confirmation
  indicator. If the market makes a new high, the
  ticks should also make a new high.
• The market alternates between a trending and a
  consolidation mode. The day following a trend
  day or wide range day tends to be a particularly
  good one for using the ticks in a countertrend
  mode.

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Using TICKS with Market Timing and Taylor Trend
for the Day!

• Trend Day Ticks reaching extreme readings on a
  single day indicate a trend day. There are good
  odds of follow-through the next morning after a
  day where the ticks hit /- 1000 in the
  afternoon.
• Buy on Pullbacks If Ticks make new highs above
  1000 after 10 AM, look to buy the first
  pullback. If they make new HIGHS after 2 PM, buy
  the first pullback. An extreme tick reading in
  the first 30 minutes should be questioned.
• Extreme Tick Readings Extreme tick readings
  between 10 - 12 EST indicate that the market may
  resume the trend in the afternoon, usually after
  a mid-day consolidation. If ticks do not make new
  highs (or lows when in a downtrend), then the
  afternoon leg will not have any follow-through.
  Extremes Tick readings in the afternoon favor a
  market follow-through into the next day.
• If price rises and falls as the tick rises and
  falls, the day should be a normal trading day. If
  the market has had a strong trend the day before,
  the odds of having morning follow through are
  very high.