Day and swing traders use the Taylor trading technique for several favorite trading setups. Traders benefit by positioning their trades in sync with the “ebb and flow” of the markets, defined by the “3-day cycle” of the Taylor trading method.
George Taylor’s book method, known as the Taylor Trading Technique, captures the inflow and outflow of “smart money” in what can be considered a repeating 3-day cycle. Simply put, institutional investors, or “smart money”, push the markets down to create a buying opportunity and then push the markets up to create a selling opportunity during the 3-day trading cycle.
The “3-day cycle” of the Taylor trading method can be defined as follows:
- A buying day, when the market dips to a low for a buying opportunity;
- A sell day, when the market moves up to get an opportunity to sell your long position; and
- A short sale day is when the market declines after setting a 3-day cycle high for a short sale opportunity.
Traders take advantage of the 3-day cycle by placing long and short trades according to the dynamics of the cycle. The following three favorite trades using the Taylor Trading Technique have been time-tested to offer traders a high probability of success.
The first favorite trade using the Taylor trading technique is to place a long trade at or near the low made on the Buy Day, i.e. the “Buy Day Low”. A trader will use all of his resources to find the low of the day because, according to Taylor’s Rules of Trading, there is a greater than 85% chance that the low of the day will be followed 2 days later by a higher market high on a Short Selling Day, even in the market with a downward trend. A trader can successfully close higher on a long trade on the day of the sell (the second day of the 3-day cycle) or wait to close on the day of the sell short (the third day of the 3-day cycle) when the markets are in a particularly bullish mood.
A second favorite trade using the Taylor trading technique is to place a long trade on a sell day when the market/trading instrument falls below the low of the previous day’s buy day. According to the Taylor Rules of Trading, there is a very good chance of at least retracing to the low of the buy day within the 3-day cycle, offering the opportunity to successfully close higher on the long trade at least until the sell-short day.
The third favorite trade using Taylor’s trading technique is the Market/Trade tool for the short trade. According to the “3-day cycle”, the market goes down after setting a high on the day of the sale, i.e. the “high of the day of the sale”. Therefore, if the market closes near the short sale high, it is possible that the market will gap above the short sale high at the opening of the buying day. According to the Taylor Rules of Trading, there is a very good chance of at least retracing the high of the short selling day on the way to setting the low of the buying day, offering the possibility of a successful closing of the short trade during the buying day.
Of course, a trader should evaluate other underlying market dynamics/trading instrument before considering whether to go long or short. A trader wants to place a trade that has the best chance of success in the shortest period of time. So it stands to reason that other sentiment indicators should be relevant to the decision to trade long or short.
For example, a trader should consider placing a trade – long or short – that is in sync with the prevailing short-term trend of the market/trading instrument. If the short-term trend is positive, then the trader should focus on those opportunities that favor long trades; if the short-term trend is negative, then the trader should focus on opportunities that favor short trades.
Additionally, evaluating Elliott wave patterns of a market/trading instrument is useful for identifying short-term bullish or bearish momentum potential. A trader may place more aggressive short trades when the market/trading instrument is embedded in a descending Elliott wave pattern, but on the other hand, he may be more willing to enter more aggressive long trades when the market/trading instrument is in an ascending Elliott wave pattern.
In any case, a trader can decide to trade long or short within the 3-day cycle of the Taylor trading method, given the following simple rules:
- If the market/trading instrument is trending up, then a long trade may be considered more because in relation to the 3-day Taylor trading cycle, the higher highs of the short sell day are reached relative to the shallower lows of the buy day.
- If the market/trading instrument is trending down, then a short trade may be considered more because in relation to the 3-day Taylor trading cycle, the lows of the buy day are set against the weak highs of the short sell day.
- If the market/trading instrument is in a sideways trend, then both long and short trades can be considered, because in the 3-day Taylor trading cycle, the difference between the lows of the buy day and the highs of the short sell day remains relatively constant. .
Traders consider Mr. Taylor’s “book method” as relevant in today’s markets as when it was first introduced in the early 1950s. , even though the speed of execution has increased tremendously, the human nature of trading according to the prevailing trend has not and continues to be the trader’s best attack and defense when trading along with “smart money”.