Swing trading can be challenging (heck, trading in any timeframe is challenging!). It takes discipline to wait for the right setups; I’ll often be looking to make one play in a market in a given day. Day traders tend to be busy-placing orders, cancelling, looking for setups, monitoring the indicators. All this activity at least gives the trader the illusion that they’re doing something, and I’ve found many traders need to have activity to get out of trading whatever they’re hoping to get. (Not everyone is really trading to make money, in spite of what they say.)
For those that can master it, one of the strengths of swing trading is that the framework for trading requires waiting for ideal setups. That’s one of the best lessons from the Taylor Technique-he generally concentrated on looking for a specific setup for a given day. If the market did what he expected, there was a plan of action to trade; if it did something else, he’d pass, or would have an alternate plan for a different exigency.
The basis for the Taylor Technique is the buy > sell > sell short cycle of the markets. Depending where you were in the cycle, the previous day high or low was the reference point for the “play of the day”, and the day’s trade (entry or exit) would key off that price, depending on how the daily action overlapped from one day to another.
Starting from a low, a market would generally rally over the course of a few sessions, generally exhibiting a pattern of higher closes than opens (positive intraday action). The Taylor Technique would attempt to determine where this rally would stop and reverse.
As I’ve said before, Taylor would attempt to identify where a rally would end, as the last bulls pushed the market to its peak. This peak marked an “excess” high, where price would overshoot value. It’s at this point that Taylor would look to sell short, as the market’s momentum reversed field near the highs. This would result in a low risk entry and a potentially lucrative trade if the trend in fact reversed.
A classic Taylor Technique short entry was what he called a “sell short day with high violation”. The reference price was the previous day’s high. A high violation day has early upside momentum, following through on the previous day’s strength. It carries over the previous day high; trade above the previous high (the “high violation”) tentatively formed the “excess” high to be rejected.
On a “sell short, high violation day”, Taylor viewed a move back under the previous day high to be the sign that the “excess high” was being rejected, so a short entry trigger for a high violation day was the move back under the previous day high. The current day high area is used as the stop loss for this entry.
This brings us to the Treasury Bond futures today. Last Thursday’s low marked the beginning of a buy cycle; the low to high price action on Friday through Tuesday shows the positive price action. If bonds were strictly following a 3 day Taylor cycle, yesterday would have been the sell short day (see the ROC indicator in the middle panel). However, yesterday saw a strong early rally (nearly a point), which is contradictory to the high to low price action expected on a sell short day. Monday’s high of 120-29 was violated, but the close over Monday’s high negated the sell short signal for that day.
Daily chart of USZ
However, the kind of price action we saw yesterday did not cancel the sell short signal; it merely pushed it back a day. In this case, it also let us play for a better entry-today’s reference price for a short sale was yesterday’s high of 121-07.
Below is a 10 minute intraday chart for the December T Bonds for today. I drew a line at yesterday’s high of 121-07, our reference point for a short sale today. At around 8:15 this morning that price was violated; the short sale was taken when it came back below the 121-07 high. Given that 121-09 was today’s high, an extremely tight stop could be used.
10 minute chart for USZ today
With the TT, profit targets are a bit less clear. Taylor’s “Book Method” involved measurement of the average of the swings, then using those averages to determine trade objectives. I don’t use this part of Taylor’s method; it seemed like a lot of work for the payoff. Plus what happened three or four swings ago would have limited indicative power for a current move.
For profit objectives for this trade, refer back up to the daily chart above. The first I used was the Fibonacci retracement level at 120-18; this also roughly lines up with the up trend line off the recent lows, coming in at 120-16. Additional targets are yesterday’s low of 120-05, and Fib support at 119-23. The midpoint of this rally is at 119-09.
Swing trading requires some trade discipline; the point is not to catch all the intraday wiggles that markets make. To me, the Taylor Technique helps filter out some of the marginal entries that day traders often take. By giving you a mental roadmap for the markets, it can help improve your ability to anticipate what a market may do, then give you a trading plan. Better anticipation helps give you the confidence to pull the trigger when the right setup occurs.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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