The Taylor Trading TechniqueThe Taylor Trading Technique

With Linda Raschke’s Variations on the themeWith Linda Raschke’s Variations on the theme

Six Ways to Use Taylor’s MethodSix Ways to Use Taylor’s Method

1.1. Follow the system literally in exact detail (and make a Follow the system literally in exact detail (and make a viable living).viable living).

2.2. Follow the basic methodology with discretion.Follow the basic methodology with discretion.3.3. Trade selective “plays” only.Trade selective “plays” only.4.4. Use for accumulation/distribution in trend trading and Use for accumulation/distribution in trend trading and

intermediate swing trading.intermediate swing trading.5.5. Use as a departure point in developing short term Use as a departure point in developing short term

mechanical systems.mechanical systems.a)a) Price PatternPrice Patternb)b) Range expansion systemsRange expansion systemsc)c) 2 Day ROC2 Day ROC

6.6. Practice as a way to develop superior entry/exit Practice as a way to develop superior entry/exit technique.technique.

Main ConceptsMain Concepts

Trade within a 2-3 day time frameTrade within a 2-3 day time frame Watch price action around previous day’s high or lowWatch price action around previous day’s high or low Monitor the length of the last upswing relative to the last Monitor the length of the last upswing relative to the last

downswing (60 and 120 minute charts are optimum)downswing (60 and 120 minute charts are optimum) Determine what the “play” is for the day – i.e., the trend for Determine what the “play” is for the day – i.e., the trend for

the day or the “test” for the day.the day or the “test” for the day. Ignore all news and fundamentals. Focus on tape action.Ignore all news and fundamentals. Focus on tape action. Although trading on a 1-2 day basis, be aware of the bigger Although trading on a 1-2 day basis, be aware of the bigger

picture – the longer price structure, Don’t take picture – the longer price structure, Don’t take countertrend trades within the first 3 days of a breakout countertrend trades within the first 3 days of a breakout from a chart formation.from a chart formation.

The Classic CycleThe Classic Cycle

"Plays" — (Taylor Rules for each Cycle Day) "Plays" — (Taylor Rules for each Cycle Day) – Buy DayBuy Day

Low FirstLow First Big RallyBig Rally Flat CloseFlat Close

– Buy Day Low Violation Buy Day Low Violation – Selling DaySelling Day

Flat OpeningFlat Opening Down OpeningDown Opening

– Short Sale Day Short Sale Day Short Sale Day Short Sale Day High First High First Big Decline Big Decline

– Short Sale on Buy Day High First Short Sale on Buy Day High First Rules and Tools Rules and Tools

– Back to Basics — tape reading, volume, and % retracementsBack to Basics — tape reading, volume, and % retracements

““Ideal” 3-5 Day CycleIdeal” 3-5 Day Cycle The Method provides a game plan for every day. The Method provides a game plan for every day.

– "A trader who knows how to act when the expected happens, is in a better "A trader who knows how to act when the expected happens, is in a better position to act when the unexpected happens".position to act when the unexpected happens".

Stocks & commodities tend to follow a repetitive 3-5 day cycle Stocks & commodities tend to follow a repetitive 3-5 day cycle consisting of:consisting of:– A Buy Day (you go long); A Buy Day (you go long); – A Sell Day (you exit your longs from the previous day); and 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 A Sell Short Day ( you look to go short by fading the last bit of the rally

which began on the Buy Day).which began on the Buy Day). After the Sell Short Day, the cycle repeats itself, starting with a new 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. 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 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.day or two inserted on the long or the short side.

Basic PrinciplesBasic Principles

A trader must rely on his/her own judgment. A trader must rely on his/her own judgment. Listening to others will not give you an edge Listening to others will not give you an edge

but rather will serve as a distraction.but rather will serve as a distraction.

The Classic CycleThe Classic Cycle

““The market has a definite 1-2-3 rhythm, The market has a definite 1-2-3 rhythm, with at times an extra 1-2 beats.”with at times an extra 1-2 beats.”

The market goes up 1-2-3 days and reacts, The market goes up 1-2-3 days and reacts, the 4th and 5th figure is the variation when it the 4th and 5th figure is the variation when it runs that extra day or 2 in a trend. runs that extra day or 2 in a trend.

Start with three days as our trading cycle. Start with three days as our trading cycle. We use the first day for buying and the 2nd We use the first day for buying and the 2nd

and 3rd day for selling.and 3rd day for selling.

Daily FocusDaily Focus

Each day the main focus is on the Each day the main focus is on the "Objective levels" - the previous day's high "Objective levels" - the previous day's high and low. and low.

The Book Method trader places his orders The Book Method trader places his orders "at the market". "at the market".

Don't limit your orders. Don't limit your orders. Trading ranges have the most mechanical Trading ranges have the most mechanical

accumulation and distribution rhythm. accumulation and distribution rhythm.

Objective PointsObjective Points

Objectives for a trade are the resistance that comes in Objectives for a trade are the resistance that comes in around the Previous Day's high, and the support that around the Previous Day's high, and the support that comes in at or around the Previous Day's low. 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 Until a trader gains in experience, buy to cover or sell to exit just as

the objectives are reached. the objectives are reached. – Think only about exiting your trade as an objective area is Think only about exiting your trade as an objective area is

approached. approached. – Though Objectives may seem conservative, remember that the Though Objectives may seem conservative, remember that the

trader will get Positive slippage. trader will get Positive slippage. – In stronger trends, allow for deeper penetration of the objective In stronger trends, allow for deeper penetration of the objective

point. point.

FORGET ABOUT A TRADE AFTER YOU HAVE MADE IT!FORGET ABOUT A TRADE AFTER YOU HAVE MADE IT!

Rules for a Buy DayRules for a Buy Day Anticipate a Buy Day after one to two consecutive down Anticipate a Buy Day after one to two consecutive down

closes. closes. In an up-trend, a Buy Day might occur after only 1 down In an up-trend, a Buy Day might occur after only 1 down

close. close. A Buy Day can also occur after just one, wide-ranging down A Buy Day can also occur after just one, wide-ranging down

day such as an outside down day in a congestion area.day such as an outside down day in a congestion area. Watch for the market to open and test the previous day's Watch for the market to open and test the previous day's

low for support. low for support.

The ideal Buy Day includes:The ideal Buy Day includes:– A test of the previous day's low that finds support.A test of the previous day's low that finds support.– Lows made in the morning and high made in the afternoon.Lows made in the morning and high made in the afternoon.– A close in the upper end of the daily range. A close in the upper end of the daily range.

Rules for a Buy Day (Con’t)Rules for a Buy Day (Con’t)

Go Long on a test of the previous day's low.Go Long on a test of the previous day's low. Once a Once a long is entered, the low for the day should be considered a long is entered, the low for the day should be considered a support level. A stop should be placed beneath this area.support level. A stop should be placed beneath this area.

Hold Overnight: Hold Overnight: If the trade is going to If the trade is going to close with a profitclose with a profit, , it should be held overnight. Exit the position on the next it should be held overnight. Exit the position on the next day on any follow through momentum.day on any follow through momentum.

If price pushes too much below the previous day's low on a If price pushes too much below the previous day's low on a Buy Day morning before finding temporary support, the Buy Day morning before finding temporary support, the objective for the long trade is the previous day's low. objective for the long trade is the previous day's low.

If the market is closing "flat" or unchanged, it indicates If the market is closing "flat" or unchanged, it indicates further weakness. further weakness. Exit Long positions before the closeExit Long positions before the close..

Rules for a Buy Day (Con’t)Rules for a Buy Day (Con’t)

Same Day Exit:Same Day Exit: While the intent is to hold your position While the intent is to hold your position overnight, you should exit positions on the same day overnight, you should exit positions on the same day if the if the market has an extremely favorable move, handing you a market has an extremely favorable move, handing you a windfall profitwindfall profit. .

Large Opening Gap Down:Large Opening Gap Down: If a Buy Day is expected but If a Buy Day is expected but there is a large opening gap down below the previous day's there is a large opening gap down below the previous day's low, (Buy Day Low Violation) low, (Buy Day Low Violation) buy at the first signs of buy at the first signs of supportsupport and look to exit on a reaction back up towards and look to exit on a reaction back up towards yesterday's low. yesterday's low.

Large Opening Gap Up:Large Opening Gap Up: If a Buy Day is expected, but the If a Buy Day is expected, but the market gaps up by a large amount, there is risk that 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 high can be made first and the market will trade down from the opening price for the rest of the session (Buy Day Highs the opening price for the rest of the session (Buy Day Highs Made First). In this case, Made First). In this case, a trader can look for the short sale a trader can look for the short sale first.first.

Sell DaySell Day

Once a long position is established, your goal is to Once a long position is established, your goal is to exit on any follow-through the next dayexit on any follow-through the next day. .

The previous day's action indicates the most The previous day's action indicates the most probable opening move. If the Buy Day finished probable opening move. If the Buy Day finished with a strong close up with a strong close up continued strength the continued strength the next morning.next morning.

In a strong up trend, an upside penetration of the In a strong up trend, an upside penetration of the previous day's high can be expected. previous day's high can be expected.

Do not stay in a position that is acting opposite to Do not stay in a position that is acting opposite to what you anticipated. what you anticipated.

Sell Short DaySell Short Day

After the market has rallied for two to three days, After the market has rallied for two to three days, the short term up cycle should be close to the short term up cycle should be close to exhausting itself. exhausting itself.

A "Sell Short Day" will normally follow a Sell Day. A "Sell Short Day" will normally follow a Sell Day. The same characteristics of a Buy Day will be The same characteristics of a Buy Day will be

found on the Sell Short Day only in reverse. found on the Sell Short Day only in reverse. – The ideal Sell Short Day will open up from the previous The ideal Sell Short Day will open up from the previous

day's close, make its high first and its low last, and close day's close, make its high first and its low last, and close in the lower end of its range. in the lower end of its range.

– A weak close on a Sell Short Day indicates further A weak close on a Sell Short Day indicates further weakness and an opportunity to cover short positions weakness and an opportunity to cover short positions the next day.the next day.

Sell Short Day (Con’t)Sell Short Day (Con’t)

If price rallies sharply above the previous day's If price rallies sharply above the previous day's high before finding resistance, the objective for high before finding resistance, the objective for the short trade becomes a reaction back towards the short trade becomes a reaction back towards the previous day's high. In this case, the trade the previous day's high. In this case, the trade should be exited on the same day.should be exited on the same day.

If you are expecting a Sell Short Day but the If you are expecting a Sell Short Day but the market opens way down and finds support, the market opens way down and finds support, the possibility exists that a rally may ensue, and the possibility exists that a rally may ensue, and the high would be made last, indicating further high would be made last, indicating further strength. Wait and push the Sell Short Day strength. Wait and push the Sell Short Day ahead to the next day. Then look to short a test ahead to the next day. Then look to short a test of the previous day's high using the same rules.of the previous day's high using the same rules.

Sell Short Day (Con’t)Sell Short Day (Con’t)

If the market has just given a big decline, the If the market has just given a big decline, the shorts will be in no hurry to cover. Often, after a shorts will be in no hurry to cover. Often, after a bit of time, the market can recover with activity.bit of time, the market can recover with activity.

A Sell Short Day that has a fast decline and A Sell Short Day that has a fast decline and then rallies back forming a "V“ then rallies back forming a "V“ Expect a Expect a higher opening and a higher low on the higher opening and a higher low on the reaction for the Buy Day.reaction for the Buy Day.

Price PatternsPrice Patterns

The 2-Day Rate of Change (ROC) is a The 2-Day Rate of Change (ROC) is a useful tool which dovetails well with Taylor's useful tool which dovetails well with Taylor's in one day out the next technique. in one day out the next technique.

The 2-period ROC indicates whether the The 2-period ROC indicates whether the odds favor being a buy or a seller for the odds favor being a buy or a seller for the next day. next day. – Hold the trade overnight and exit according to Hold the trade overnight and exit according to

his guidelines. his guidelines.

Price PatternsPrice Patterns Three bar Triangle breakout patternThree bar Triangle breakout pattern: Price has a lower : Price has a lower

high then the 2 day high and a higher low then the two high then the 2 day high and a higher low then the two day low with a narrowing of the ranges.day low with a narrowing of the ranges.

Pinball:Pinball: A 3-period RSI of the 1-day ROC has a reading A 3-period RSI of the 1-day ROC has a reading of above 67 or below 33. of above 67 or below 33. – Look for buys when price is above the 20-period EMA and for Look for buys when price is above the 20-period EMA and for

sells when price is below the 20-period EMA.sells when price is below the 20-period EMA. Pinball2:Pinball2: Price has pulled completely away from a 5- Price has pulled completely away from a 5-

period simple moving average indicating momentum. period simple moving average indicating momentum. The first close in the opposite direction on the other side The first close in the opposite direction on the other side of a 4 SMA sets up a pinball sell.of a 4 SMA sets up a pinball sell.

5 SMA:5 SMA: Price closes above a 5 SMA for 7+ bars. Price closes above a 5 SMA for 7+ bars. – The first close on the opposite side sets up a Buying opportunity.The first close on the opposite side sets up a Buying opportunity.

Basic FlipsBasic Flips

There is a small positive expectation across all There is a small positive expectation across all markets when entering "long market on close" on markets when entering "long market on close" on the day the 2-period ROC first flips up and exiting the day the 2-period ROC first flips up and exiting on the next day's close. on the next day's close.

The ROC indicator turns up or down every 2 1/2 The ROC indicator turns up or down every 2 1/2 days on average. days on average.

The 2-period ROC has better statistical The 2-period ROC has better statistical expectation than either a simple price change (1-expectation than either a simple price change (1-period ROC) or a longer term oscillator such as a period ROC) or a longer term oscillator such as a moving average oscillator.moving average oscillator.

Short Term AntiShort Term Anti

An "Anti" trade occurs when the slopes of two An "Anti" trade occurs when the slopes of two oscillators which have different time frames, are in oscillators which have different time frames, are in opposition to each other. opposition to each other.

Wait for the 2-period ROC to correct two days in Wait for the 2-period ROC to correct two days in the opposite direction of the slope of an the opposite direction of the slope of an intermediate oscillator - I use the 16 period SMA of intermediate oscillator - I use the 16 period SMA of the 3/10 oscillator.the 3/10 oscillator.

The best trades occur when the slope of the The best trades occur when the slope of the longer-term indicator has just turned. longer-term indicator has just turned.

The choicest trades appear as a small shoulder or The choicest trades appear as a small shoulder or a 1-2 day drift pattern.a 1-2 day drift pattern.

ROC DivergenceROC Divergence

It is a reversal pattern. It is a reversal pattern. Don't look for this in the strongest trending Don't look for this in the strongest trending

markets. markets. The ideal time window is 5-days but this The ideal time window is 5-days but this

pattern can form over 4 or 6 days.pattern can form over 4 or 6 days. If the pattern does not work within 1-2 days, If the pattern does not work within 1-2 days,

the primary trend is going to reassert itself!the primary trend is going to reassert itself!

Volatility Breakout SystemsVolatility Breakout Systems

A % of the previous day's range or a % of A % of the previous day's range or a % of the previous N-bar range is added or the previous N-bar range is added or subtracted to the closing price or the next subtracted to the closing price or the next day's opening price. day's opening price.

This level is used as a buy or sell stop to This level is used as a buy or sell stop to enter in the direction the market is moving.enter in the direction the market is moving.

Exit on next day's open/close or an ATR Exit on next day's open/close or an ATR function. function.

Risk n% ATR.Risk n% ATR.

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

Think of Ticks as Think of Ticks as correlating with the strength of buy or sell programscorrelating with the strength of buy or sell programs. . Ticks can be used as a Ticks can be used as a momentum indicatormomentum indicator or an "overbought/oversold" or an "overbought/oversold"

indicator in a trading range environment. indicator in a trading range environment. Ticks represent Ticks represent how much how much buying or selling powerbuying or selling power has been used to push has been used to push

the market up or down on a particular swing. the market up or down on a particular swing. Ticks must be watched with respect to overall market tone or type of Ticks must be watched with respect to overall market tone or type of

environment (trading range or trending). environment (trading range or trending). Ticks can be used in a Ticks can be used in a countertrend countertrend manner by looking to fade the extreme manner by looking to fade the extreme

readings when in a trading range. readings when in a trading range. Ticks have an Ticks have an upward bias upward bias and are highly correlated with market breadth. and are highly correlated with market breadth. Ticks function as a Ticks function as a confirmation/non-confirmation indicatorconfirmation/non-confirmation indicator. If the market . If the market

makes a new high, the ticks should also make a new high. makes a new high, the ticks should also make a new high. The market alternates between a trending and a consolidation mode. The day 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 following a trend day or wide range day tends to be a particularly good one for using the using the ticks in a countertrend mode.ticks in a countertrend mode.

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

Trend Day: Trend Day: Ticks reaching extreme readings on a single day indicate Ticks reaching extreme readings on a single day indicate a a trend daytrend day. There are good odds of follow-through the next morning . There are good odds of follow-through the next morning after a day where the ticks hit +/- 1000 in the afternoon. after a day where the ticks hit +/- 1000 in the afternoon.

Buy on Pullbacks: Buy on Pullbacks: If Ticks make new highs above +1000 after 10 If Ticks make new highs above +1000 after 10 AM, look to buy the first pullback. If they make new HIGHS after 2 PM, 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 buy the first pullback. An extreme tick reading in the first 30 minutes should be questioned.should be questioned.

Extreme Tick Readings: EExtreme Tick Readings: Extreme tick readings between 10 - 12 EST xtreme tick readings between 10 - 12 EST indicate that the market may resume the trend in the afternoon, usually 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 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-when in a downtrend), then the afternoon leg will not have any follow-through. Extremes Tick readings in the afternoon favor a market through. Extremes Tick readings in the afternoon favor a market follow-through into the next day.follow-through into the next day.

If price rises and falls as the tick rises and falls, the day should be a 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 normal trading day. If the market has had a strong trend the day before, the odds of having morning follow through are very high. before, the odds of having morning follow through are very high.