Have you ever done your analysis, spotted a market whose chart looks great, bought it, only to see it turn around and sell off?  Have you ever had one of those streaks where you think ‘if only I had done the opposite on those trades’?  As a broker, if I had a nickel for every time a client said that to me, right now I’d be on a beach somewhere, holding a drink with a little umbrella in it.

Maybe you should look at the Taylor Technique.

Below is the daily chart for the Canadian Dollar futures.  Yesterday morning I had a client call me to buy them.  They had broken out over the recent highs and he bought the breakout.  I had misgivings about him buying it, and talked to him about risk management for it.

Canadian Dollar futures chart

click to enlarge

I had my doubts about the ability of the breakout to continue the rally because yesterday was the Sell Short day in the Taylor Technique cycle. (For the basics of the TT, go here.)

Taylor was a conspiracy theorist of sorts.  He believed that the markets were manipulated by ‘insiders’, who would ‘engineer’ rallies and selloffs to buy low and sell high.  In the process of their manipulation, they would end up inducing the public to buy at the top and sell at the bottom.

I’m not really a believer in the ‘insider’ part of Taylor’s theory, but I find that thinking in terms of ‘insiders vs. the public’ often helps understand the method.  You don’t need to believe in conspiracies top use his methodology.   I find that the TT does a good job of taking advantage of trader psychology, giving a method to successfully go against the grain.

The Canadian Dollar was on the Sell Short day of the TT cycle yesterday.  The Sell Short day occurs after an upswing on a daily timeframe.  Taylor believed that on the Sell short day the ‘insiders’ engineered one last push up in order to be able to sell at higher prices. At the same time, this last push up tends to be the move that gets the ‘public’ to go long.

This last push higher usually entailed rallying the market above the previous session high.  This created an ‘excess’ move; the excess is got the public to go long at the high.  Taylor would then wait for a reversal back under the previous day high, selling short when it broke back under the high.

Yesterday’s initial rally took the Canadian well beyond Tuesday’s high.  In this case, I viewed the April 14 high at 10047 as the ‘reference price’; the move over that level was the ‘excess’ rally.  As it turned out, the move back under that high could have been used for an aggressive Sell Short day entry.  Later in the session the standard ‘previous session high’ short entry was hit as well.

Trading literature is full of aphorisms about the dangers of trying to pick tops and bottoms.  That’s true; it’s often a sucker’s game to trade this way.  The Taylor Technique gives you the next best thing. Learning to anticipate trend changes, then acting on them shortly after they occur allows you to enter trades close to tops and bottoms. For those who don’t want to explicitly follow the Taylor Technique, following TT can help you anticipate trend changes, allowing you to find better entries and exits.

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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