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The Taylor Trading Technique

www.danielstrading.com /strategies/2011/07/07/the-taylor-trading-technique
Scott Hoffman
This article was originally written by Scott Hoffman on December 18, 2009.
The material below contains the opinions of the author.
In my opinion, George Douglas Taylor was one of the greatest trading thinkers, and luckily he left behind one book
on trading: The Taylor Trading Technique. 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.
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. Hedging programs in financial futures create self-correcting markets. Buying will create an advance
for a few days while hedging takes place to lock in gains and to sell options against a profitable position to earn
premium. Straight selling adds to the hedge sales, and a short-term top is created. This yields a repeating pattern of
a 2-4 day cycle of buying, followed by a 1-3 day cycle of selling (markets tend to fall faster than they rally).
Taylor labeled each trading day using 3 primary classifications: Buy Day, Sell Day, and Sell Short Day. These
labels were used to identify where the market was in the cycle and to align entries and exits with the markets
rhythm. If you read Taylors book, however, things become murkier. He describes situations in which you sell on
buying days or go long on selling days. In some sections it is hard to tell what he means or whether he is
contradicting himself. Additionally, he puts a lot of stock into measuring and recording previous swings, then using
past measurements to predict how far future swings may go. In my opinion, I have found these examples to be of
limited value.
This does not mean that his ideas are not useful; they are brilliant insights. The key is to think in Taylor concepts
rather than to follow it mechanically. I have found the Taylor technique to be much like Market Profile when using his
concepts to analyze markets in an anticipatory way. By anticipating upcoming market structure, you are armed with
a plan as to how a market may unfold, and how you can trade it.
Taylor sought to avoid intraday market noise and focus on a core play for the day. This is the same principle of
Market Profiles emphasis on trade location. As Jim Daltonone of the best minds in MPswrote: The end of an
auction offers the moment of greatest opportunityrisk and return are asymmetric at this point. Good trade location
is the key to managing risk.
This is the core premise of the Taylor technique, locating the end of a buying or selling auction and the beginning of
another. When you identify this correctly, potential rewards can be large as you enter at the start of a multi-day
move.

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There are five core Taylor Concepts that form the basis for the Taylor Technique. They are:
A high-to-low or low-to-high rhythm: Most of the time, markets generally alternate in a 2-3 day high-to-low or
low-to-high intraday rhythm. We compare the open to the close for this observation.
Swing Highs and Swing Lows: These are made one of two ways, either with a Violation (a test above/below
the previous day high/low) or a Good Gap (the market gaps the other way, trapping the previous days
players). A Swing High or Swing Low is marked by excess as the market overshoots. This is the false move
the Taylor Technique seeks to identify.
Residual Momentum: Markets tend to exceed the previous days high or low in the majority of days.
Inside Days/2-Day Balance: I expanded this to a broader range of breakout setups; days to forget the
Taylor count and go with a move out of close in support or resistance.
Key Reference Point: The use of a price for a reference point helps you interpret the markets action. It is
usually the previous days high or low, depending on whether you anticipate buying or selling. These five
concepts help you identify where the market is by the Taylor cycle, and gives you price levels to identify
places of opportunity.
These five concepts help you identify where the market is by the Taylor cycle, and gives you price levels to identify
places of opportunity. As I said above, the Taylor Technique classifies days according to one of three labels; Buy
Day, Sell Day, or Sell Short Day. We use these labels to anticipate what our core play will be that day, and to use
that structure to identify and execute trade opportunities.
The first type of day is the Buy Day. We look for a Buy Day after 1-3 days of high-to-low trading action. On the Buy
Day we anticipate the end of a decline (a selling auction in Market Profile) as the last sellers get in. We generally
use the previous days low as the reference price. A move below the previous days low creates the excess low that
marks the end of the decline and we seek to buy as the market rejects lower prices and begins to rally. On a classic
Buy Day we look to buy when the market trades back above the previous days low, thus trapping the last sellers.
This rally continues, and the resulting low-to-high action is evidence of Buy Day action (and a successful long entry).
On a successful Buy Day, we have established profitable long positions that we took home, anticipating upside
follow-through on the Sell Day. The Sell Day can be confusing because, in spite of its name, it is generally not a day
to establish short positions (although there are exceptions). On a Sell Day, we anticipate residual momentum to rally
the market to the high of the previous Buy Day session. This rally to the Buy Day high is used to liquidate the long
positions purchased in the previous session.
The final day of the Taylor Technique cycle is the Sell Short Day. A Sell Short Day is incredibly similar to a Buy Day.
We look for residual momentum to produce a move above the previous days high to create the excess high that
traps the last of the bulls. At this point, the rally (a Buying Auction in Market Profile) terminates, and a decline
ensues. On a classic Sell Short Day we use a move back below the reference priceusually the previous session
highas a trigger to enter a short position.
We generally use the previous session high or low as our reference price, but an Inside Day poses a different
situation, as there is no violation to create an excess high or low. Taylor viewed Inside Days as a sign that the
market was at a short term balance point. For this reason, Taylor would view both the previous sessions high and
low as reference prices. We anticipate a move above the previous days high to be ago with move to buy,
anticipating the start of a rally. A move below the previous days low would be the same go with move.
The Taylor Technique, combined with a traders tape reading skills, gives a trader the powerful conceptual
framework to categorize and understand market activity. This framework improves a traders ability to anticipate
market movement as well as to allow him or her to trade with the rhythm of the market.

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2011 Scott Hoffman


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