The Taylor Trading Technique

1. The Taylor Trading Technique With Linda Raschke’s Variations on the theme

2. Six Ways to Use Taylor’s 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.

3. Main Concepts • Trade within a 2-3 day time frame • Watch price action around previous day’s 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, Don’t take countertrend trades within the first 3 days of a breakout from a chart formation.

4. 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

5. “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.

7. 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.

8. 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.

9. 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.

10. 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!

11. 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.

12. Rules for a Buy Day (Con’t) • 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.

13. Rules for a Buy Day (Con’t) • 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.

14. 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.

15. 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.

16. Sell Short Day (Con’t) • 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.

17. Sell Short Day (Con’t) • 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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!

23. 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.

24. 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.

25. 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.