The Taylor Trading Technique

With Linda Raschkes Variations on the theme

Six Ways to Use Taylors Method

1. 2. 3. !. &. Follow the system literally in exact detail (and make a viable living). Follow the basic methodology with discretion. Trade selective plays only. "se #or acc$m$lation%distrib$tion in trend trading and intermediate swing trading. "se as a depart$re point in developing short term mechanical systems.
a) b) c) 'rice 'attern (ange expansion systems 2 )ay (*+

,. 'ractice as a way to develop s$perior entry%exit techni-$e.

.ain +oncepts
Trade within a 2/3 day time #rame 0atch price action aro$nd previo$s day1s high or low .onitor the length o# the last $pswing relative to the last downswing (,2 and 122 min$te charts are optim$m) )etermine what the play is #or the day 3 i.e.4 the trend #or the day or the test #or the day. 5gnore all news and #$ndamentals. Foc$s on tape action. 6ltho$gh trading on a 1/2 day basis4 be aware o# the bigger pict$re 3 the longer price str$ct$re4 )on1t take co$ntertrend trades within the #irst 3 days o# a breako$t #rom a chart #ormation.

The +lassic +ycle

7'lays7 8 (Taylor ($les #or each +ycle )ay)
3 9$y )ay
:ow First 9ig (ally Flat +lose

3 3 3 3

9$y )ay :ow ;iolation <elling )ay

Flat *pening )own *pening =igh First 9ig )ecline

<hort <ale )ay <hort <ale )ay <hort <ale on 9$y )ay =igh First 9ack to 9asics 8 tape reading4 vol$me4 and > retracements

($les and Tools

3

5deal 3/& )ay +ycle

The .ethod provides a game plan #or every day.
3 76 trader who knows how to act when the expected happens4 is in a better position to act when the $nexpected happens7. 3 3 3 6 9$y )ay (yo$ go long)A 6 <ell )ay (yo$ exit yo$r longs #rom the previo$s day)A and 6 <ell <hort )ay ( yo$ look to go short by #ading the last bit o# the rally which began on the 9$y )ay).

<tocks ? commodities tend to #ollow a repetitive 3/& day cycle consisting o#@

6#ter the <ell <hort )ay4 the cycle repeats itsel#4 starting with a new 9$y )ay on which yo$ cover yo$r shorts and look to go long. This is the 7ideal7 cycle. 5n a trending market there is sometimes an extra day or two inserted on the long or the short side.

9asic 'rinciples
6 trader m$st rely on his%her own B$dgment. :istening to others will not give yo$ an edge b$t rather will serve as a distraction.

The Classic Cycle

The market has a de#inite 1/2/3 rhythm4 with at times an extra 1/2 beats. The market goes $p 1/2/3 days and reacts4 the !th and &th #ig$re is the variation when it r$ns that extra day or 2 in a trend. <tart with three days as o$r trading cycle. 0e $se the #irst day #or b$ying and the 2nd and 3rd day #or selling.

Daily Focus
Cach day the main #oc$s is on the 7*bBective levels7 / the previo$s dayDs high and low. The 9ook .ethod trader places his orders 7at the market7. )onDt limit yo$r orders. Trading ranges have the most mechanical acc$m$lation and distrib$tion rhythm.

Objective oints
*bBectives #or a trade are the resistance that comes in aro$nd the 'revio$s )ayDs high4 and the s$pport that comes in at or aro$nd the 'revio$s )ayDs low.
3 "ntil a trader gains in experience4 b$y to cover or sell to exit B$st as the obBectives are reached. 3 Think only abo$t exiting yo$r trade as an obBective area is approached. 3 Tho$gh *bBectives may seem conservative4 remember that the trader will get 'ositive slippage. 3 5n stronger trends4 allow #or deeper penetration o# the obBective point.

FORGET ABOUT A TRADE AFTER YOU HAVE MADE IT!

!ules "or a #uy Day

6nticipate a 9$y )ay a#ter one to two consec$tive down closes. 5n an $p/trend4 a 9$y )ay might occ$r a#ter only 1 down close. 6 9$y )ay can also occ$r a#ter B$st one4 wide/ranging down day s$ch as an o$tside down day in a congestion area. 0atch #or the market to open and test the previo$s dayDs low #or s$pport.

The ideal #uy Day includes$

3 3 3 6 test o# the previo$s dayDs low that #inds s$pport. :ows made in the morning and high made in the a#ternoon. 6 close in the $pper end o# the daily range.

!ules "or a #uy Day %Cont&

'o (ong on a test o" the )revious day*s lo+, *nce a long is entered4 the low #or the day sho$ld be considered a s$pport level. 6 stop sho$ld be placed beneath this area. -old Overnight$ 5# the trade is going to close with a pro#it4 it sho$ld be held overnight. Cxit the position on the next day on any #ollow thro$gh moment$m. 5# price p$shes too m$ch below the previo$s dayDs low on a 9$y )ay morning be#ore #inding temporary s$pport4 the obBective #or the long trade is the previo$s dayDs low. 5# the market is closing 7#lat7 or $nchanged4 it indicates #$rther weakness. .xit (ong )ositions be"ore the close.

!ules "or a #uy Day %Cont&

Sa/e Day .xit$ 0hile the intent is to hold yo$r position overnight4 yo$ sho$ld exit positions on the same day i# the market has an extremely #avorable move4 handing yo$ a wind#all pro#it. (arge O)ening 'a) Do+n$ 5# a 9$y )ay is expected b$t there is a large opening gap down below the previo$s dayDs low4 (9$y )ay :ow ;iolation) b$y at the #irst signs o# s$pport and look to exit on a reaction back $p towards yesterdayDs low. (arge O)ening 'a) U)$ 5# a 9$y )ay is expected4 b$t the market gaps $p by a large amo$nt4 there is risk that the high can be made #irst and the market will trade down #rom the opening price #or the rest o# the session (9$y )ay =ighs .ade First). 5n this case4 a trader can look #or the short sale #irst.

Sell Day
*nce a long position is established4 yo$r goal is to exit on any #ollow/thro$gh the next day. The previo$s dayDs action indicates the most probable opening move. 5# the 9$y )ay #inished with a strong close $p contin$ed strength the next morning. 5n a strong $p trend4 an $pside penetration o# the previo$s dayDs high can be expected. )o not stay in a position that is acting opposite to what yo$ anticipated.

Sell Short Day

6#ter the market has rallied #or two to three days4 the short term $p cycle sho$ld be close to exha$sting itsel#. 6 7<ell <hort )ay7 will normally #ollow a <ell )ay. The same characteristics o# a 9$y )ay will be #o$nd on the <ell <hort )ay only in reverse.

3 The ideal <ell <hort )ay will open $p #rom the previo$s dayDs close4 make its high #irst and its low last4 and close in the lower end o# its range. 3 6 weak close on a <ell <hort )ay indicates #$rther weakness and an opport$nity to cover short positions the next day.

Sell Short Day %Cont&

5# price rallies sharply above the previo$s dayDs high be#ore #inding resistance4 the obBective #or the short trade becomes a reaction back towards the previo$s dayDs high. 5n this case4 the trade sho$ld be exited on the same day. 5# yo$ are expecting a <ell <hort )ay b$t the market opens way down and #inds s$pport4 the possibility exists that a rally may ens$e4 and the high wo$ld be made last4 indicating #$rther strength. 0ait and p$sh the <ell <hort )ay ahead to the next day. Then look to short a test o# the previo$s dayDs high $sing the same r$les.

Sell Short Day %Cont&

5# the market has B$st given a big decline4 the shorts will be in no h$rry to cover. *#ten4 a#ter a bit o# time4 the market can recover with activity. 6 <ell <hort )ay that has a #ast decline and then rallies back #orming a 7; Cxpect a higher opening and a higher low on the reaction #or the 9$y )ay.

rice atterns
The 2/)ay (ate o# +hange ((*+) is a $se#$l tool which dovetails well with TaylorDs in one day o$t the next techni-$e. The 2/period (*+ indicates whether the odds #avor being a b$y or a seller #or the next day.
3 =old the trade overnight and exit according to his g$idelines.

rice atterns
Three bar Triangle brea0out )attern@ 'rice has a lower high then the 2 day high and a higher low then the two day low with a narrowing o# the ranges. inball$ 6 3/period (<5 o# the 1/day (*+ has a reading o# above ,E or below 33.
3 :ook #or b$ys when price is above the 22/period C.6 and #or sells when price is below the 22/period C.6.

inball1$ 'rice has p$lled completely away #rom a &/ period simple moving average indicating moment$m. The #irst close in the opposite direction on the other side o# a ! <.6 sets $p a pinball sell. 2 SM3$ 'rice closes above a & <.6 #or EF bars.

3 The #irst close on the opposite side sets $p a 9$ying opport$nity.

Basic Flips
There is a small positive expectation across all markets when entering 7long market on close7 on the day the 2/period (*+ #irst #lips $p and exiting on the next dayDs close. The (*+ indicator t$rns $p or down every 2 1%2 days on average. The 2/period (*+ has better statistical expectation than either a simple price change (1/ period (*+) or a longer term oscillator s$ch as a moving average oscillator.

Short Term Anti

6n 76nti7 trade occ$rs when the slopes o# two oscillators which have di##erent time #rames4 are in opposition to each other. 0ait #or the 2/period (*+ to correct two days in the opposite direction o# the slope o# an intermediate oscillator / 5 $se the 1, period <.6 o# the 3%12 oscillator. The best trades occ$r when the slope o# the longer/term indicator has B$st t$rned. The choicest trades appear as a small sho$lder or a 1/2 day dri#t pattern.

RO Di!er"ence
5t is a reversal pattern. )onDt look #or this in the strongest trending markets. The ideal time window is &/days b$t this pattern can #orm over ! or , days. 5# the pattern does not work within 1/2 days4 the primary trend is going to reassert itsel#G

4olatility #rea0out Syste/s

6 > o# the previo$s dayDs range or a > o# the previo$s H/bar range is added or s$btracted to the closing price or the next dayDs opening price. This level is $sed as a b$y or sell stop to enter in the direction the market is moving. Cxit on next dayDs open%close or an 6T( #$nction. (isk n> 6T(.

Using T5C6S +ith Mar0et Ti/ing and Taylor Trend "or the Day7
Think o# Ticks as correlating +ith the strength o" buy or sell )rogra/s. Ticks can be $sed as a /o/entu/ indicator or an 7overbo$ght%oversold7 indicator in a trading range environment. Ticks represent how m$ch buying or selling )o+er has been $sed to p$sh the market $p or down on a partic$lar swing. Ticks m$st be watched with respect to overall market tone or type o# environment (trading range or trending). Ticks can be $sed in a countertrend manner by looking to #ade the extreme readings when in a trading range. Ticks have an u)+ard bias and are highly correlated with market breadth. Ticks #$nction as a con"ir/ation8non9con"ir/ation indicator. 5# the market makes a new high4 the ticks sho$ld also make a new high. The market alternates between a trending and a consolidation mode. The day #ollowing a trend day or wide range day tends to be a partic$larly good one #or $sing the tic0s in a countertrend /ode,

Using T5C6S +ith Mar0et Ti/ing and Taylor Trend "or the Day7
Trend Day$ Ticks reaching extreme readings on a single day indicate a trend day. There are good odds o# #ollow/thro$gh the next morning a#ter a day where the ticks hit F%/ 1222 in the a#ternoon. #uy on ullbac0s$ 5# Ticks make new highs above F1222 a#ter 12 6.4 look to b$y the #irst p$llback. 5# they make new =5I=< a#ter 2 '.4 b$y the #irst p$llback. 6n extreme tick reading in the #irst 32 min$tes sho$ld be -$estioned. .xtre/e Tic0 !eadings$ .xtreme tick readings between 12 / 12 C<T indicate that the market may res$me the trend in the a#ternoon4 $s$ally a#ter a mid/day consolidation. 5# ticks do not make new highs (or lows when in a downtrend)4 then the a#ternoon leg will not have any #ollow/ thro$gh. Cxtremes Tick readings in the a#ternoon #avor a market #ollow/thro$gh into the next day. 5# price rises and #alls as the tick rises and #alls4 the day sho$ld be a normal trading day. 5# the market has had a strong trend the day be#ore4 the odds o# having morning #ollow thro$gh are very high.