In my opinion, George Douglass Taylor was one of the greatest trading thinkers, and luckily he left behind one book on trading: 'The Taylor Trading Technique' (1950). This book lays out his 'Taylor Book Method' for swing trading in futures. Taylor postulated that the markets had patterns based on "market engineering" from the "powers that be" in the grain markets. These insiders would frequently cause prices to decline to set up a buying opportunity for themselves. Then, after the market rallied sufficiently to yield profit for these insiders, a short-term top was created to give them a selling opportunity. The market would sell off, and the cycle would start again.
George Douglass Taylor was a grain trader in the 1940s and 1950s at the CBOT pit
and is the original author of the 3 Day Cycle Short-Term Trading System.
and is the original author of the 3 Day Cycle Short-Term Trading System.
The effect of this engineering was to amplify the natural rhythm of the market, creating false moves that would fool traders into buying when they should be selling, and vice versa. The thrust of the Taylor Technique is to identify this rhythm and take advantage of the "false moves". I have long maintained that if an individual could identify moves in the market that would serve to inflict the most pain on unwary traders then they would have a great trading system. I believe the Taylor Technique does that. Taylor created this method for the grain futures markets, but I find it equally applicable in the financial futures markets today.
George Douglass Taylor’s system of short-term swing trading is based on the premise that the market moves in two to three day timeframes, moving from a low to a high and back to a low. The other important concepts are the importance of the previous day’s high and low, the length of upswings relative to downswings, and being a solely technical trader (ignoring fundamentals).
Cycle Day #1 – Buy Day
The first day of the cycle is the buying day. Look for a Buy Day two days after a swing high (the highest high of the past few days). On a Buy Day, look for the market to make its lows first, finding support around yesterday’s low. If the market opens flat to higher, look to buy the first sell off towards the previous low. If the market trades under yesterday’s low, be careful about going home long. The market should close higher than where it opened. If it is making new lows late in the day, it is usually best to exit. You can often get in the next day at a better price.
Cycle Day #1 - Buy Day two days after swing high.
Generally, it’s good rule of thumb not to buy late in the day on a buy day if the market is heading lower or closing lower than where it opened. Odds favor a lower opening the next day, giving you a better enter price. Likewise, if the market is going to close lower than it opened, don’t be afraid to liquidate your position. Odds are in your favor that you’ll be able to buy at a lower price the next day.
Cycle Day #2 – Sell Day
If you are long and the market is closing in your favor, carry your long position overnight. Odds favor a higher opening the next day setting up the Sell Day, the second day of the cycle. On the Sell Day you should look to sell into strength, liquidating your position, and going home flat. Often, the sell day trades on both sides in what I call a 'fade' day. A fade day often follows a trend day and can be traded from either side.Cycle Day #3 – Sell Short Day
The third day of the cycle is the Sell Short Day. The Sell Short Day is the mirror image of the buying day. On a sell short day, you should be looking to sell early morning resistance, looking for resistance around the previous day’s high. The market should not be making highs late in the day, if it is you should be able to get a better entry point the next day. On a Sell Short Day, the market should close lower than it opened. The Sell Short Day is often followed by a 'Fade' day.
Cycle Day #3 - Sell Short Day two days after Buy Day.
That is the gist of Taylor’s technique - a rhythm of buy-sell-sell short. I don’t always recognize where we are in Taylor’s cycle (you’re always learning!), but on days when it is clear, at the least it gives you a good indication of the market’s bias for that day. In swing trading, the relation of the open to the close should indicate the direction of the next morning’s opening. This helps you determine whether the odds favor being a buyer or a seller on a given day. Learn to anticipate what the market will do, not just react to what it does.
The previous days high and low are in the first columns of the trade sheet because that is where I start with my analysis. In the comments section I may point out a previous high or low because they are the next layer of support and resistance I look at. A test of a previous swing high or low is analogous to buying a previous day’s low. Tests of previous swing highs and lows often are good trading opportunities, and have natural stop points.
Swing
trading is a good trading system most of the time. However, there are
times when a market will stop its swings and move sharply in one
direction. Knowing when these moves are coming can not only help keep
you from stepping in front of a developing trend, they often give you an
opportunity to catch a breakout. Fortunately, the market often tips its
hand that such a move may be coming. Larry Williams observed that volatility is cyclical, that a period of low volatility is often a precursor to an increase in volatility.
» Never try and anticipate the market farther ahead than your signals. «
George Douglass Taylor
George Douglass Taylor
A reliable indicator of market activity and/or volatility is the day’s trading range. In his book 'Day Trading with Short Term Price Patterns and Opening Range Breakouts', Toby Crabel gives an alternate way to look for impending sharp moves. Crabel looked at daily trading ranges and found that days having small ranges in relation to recent days are often a good indicator of range expansion moves. He compared a day’s trading range to that of the previous seven and found that a day that had the smallest range was often followed by a sharp move.
Trading Breakout Days
A Narrow Range Day signal is a good sign to not take swing trades. On these days (which I indicate in the range column), look to trade a breakout of the previous day’s range. Alternatively, you could look to trade a breakout of the first hour’s range the day after the signal day (this is how Crabel traded it). We don’t know the direction the market will breakout, so approach these with an open mind!
Two Narrow Range Days in a row.
On a Breakout Day, I generally would look to enter the long side at the previous day’s high, and to enter the short side at the previous day’s low. On the day of entry, the opposite side will serve as the stop loss. If you are brave, stop and reverse at the other extreme. Reversals often tend to be even stronger signals as those who are suddenly on the wrong side of the market bail out pushing the market further.
Assuming the market is closing in your favor, carry the position home overnight. On the second day, move your stop to the low of the entry day (for a buy), or the high (for a sell). The objective for a long trade is the high of the entry day. I try to hold out for this objective. You are often catching a strong trend, and will likely get stronger movement in your favor.
Trading Fade Days
Conversely, a day that has the largest range of the previous seven has often spent its energy. These days are often followed by a day where moves tend to fizzle out and the market returns to where it started. On these days, morning moves can often be faded looking for the market to return to where it started. These Wide Range Days often occur in conjunction with a 'Fade' Day.
Fade Day following a Wide Range Day.
1. NR7 (Narrowest Range of the past seven days)
2. ID (Inside Day)
3. ID/NR (a combination of the two).
2. ID (Inside Day)
3. ID/NR (a combination of the two).
A Fade Day will be noted as WRD (Wide Range Day). If none of these patterns are present, I will leave this column blank.
Reference:
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