new high or low area.

Before 1990 there were very few published day trading sjstems. The more recent ones have had the benefit of sophisticated computer programs and laige historical databases. The following method precedes this era and remains unique and a valuable part of our literature.

TABLE 16-5 Trading December 75 Silver Using Support and Resistance

August 22 Sold at 503.00

Closed-out short and bought at 495.00 t«.00

August 25 Ooeed-out long and sold at 50200 7.00

Qosed-out short and bought at 496.50 1-5.50

August 26 Closed-out long and sold at 502.00 +5 0

Closed-out short and bought at 496.00 M.O0

Closed-out long and sold u 495.00 -3.O0

Open position + 1.20

The Taylor Trading Technique

In 1950, George Douglass Taylor pubhshed his book method of day trading, which he had been using for many years in both the stock and grain markets. The method is based on the experience of discipline and timing, but is carefully set down and can be implemented in either a sophisticated or simplified state. The sjstem is intrinsically cyclic, anticipating 3day movements in the grains. These 3 dajs can varj in pattem when they are within an uptrend oi downtrend. Taylors explanation of his method is thorough and includes many valuable thoughts for traders interested in woridng with the maiket full-time. The summarj and analjsis presented here cannot replace a reading of the original material.

Taylor developed his approadi to trading through experience and a belief that there is a basic rhjthm in the maiket. The dominant pattern is seen to be a 3-day repetition with occasional, although regular, intervals of 4- to 5-daj pattems. Taylors cycles are based on continuous trading dajs without regard to weekends and holidajs. The 3-day cycle varies slightly if prices are in an uptrend or downtrend. The uptrend is defined as having higher tops and bottoms over some selected time period such as a week, month, or season. A downtrend is the reverse. During an uptrend the following sequence can be expected:

1. A bujing day objective, where prices stop declining and a purchase can be made before a rally begins

2. A selling day objective, at which the long position is closed out

3. A short sale day objective, where prices meet resistance and can be sold prior to a reversal.

Following the third day, after a short position is entered, the cycle begins again with a bujing day objective. Because an uptrend is identified, Taylor has given exfra latitude to the long position with part of the day between the liquidation of the long (2), and entering a new short (3) reserved to allow the upward momentum to exhaust itself. Downtrends are the opposite, expecting some added time for the downward move to finish before the rally begins.

The actual objectives are exfremely short-term support and resistance levels, usually only the prior days high and low prices or occasionally the high and low of the 3-day cycle, which may be the same prices. On a bujing day, the objective is a test or penetration of the prior days low price, but only if it occurs first, before a test of the prior highs. Taylors method is then a short-term countertrend technique, which looks for prices to reverse direction continuously His belief was that speculation caused these erratic, sometimes large, cyclic variations above and below the long-term trend.

Taylor placed great emphasis on the order of occurrence of the high and low on eadi day. To buy, the low musl occur first. If this is a bujing day in an uptrend, a long position is entered after any lower opening whether or not the prior low is readied. Taylor reasoned that because an uptrend is generally stronger toward the close, the firsl opportunity must be taken on a buying day. However, if a high occurs first and prices then decline nearing the lows toward the end of the trading day, no long position is entered. This pattem indicates a lower open the following day, which will provide a better opportunity to buy. During a downtrend, the violations of the lows, or peneU-ations toward the close, are more common. By waiting until the next day to purchase, the 3-day cycle is shifted to favor the short sale

Consider the same problems with regard to closing out a long and entering a new short during an uptrend. If on the same day that the long was entered prices rallied sha ly, touching or penetrating prior highs, a hier opening would be expected the next day, at which time the long position would be closed out. Because of the uptrend, a small

The Taylor Trading Technique, by George Douglass Taylor (1950) (reprinted by Traders Press, PO. Box 6206, Greenville, SC 29606, in 1994).

setback and another test of the highs might be expected. It would then require another day to ensure that the strength was exhausted. If the highs of the selling day were tested on the open of the short sate day, a new short would be entered immediately. If the short sale day opened lower and finished higher, no position would be taken.

Shorter reactions to price moves are expected when a long position is entered on a buy day, or on the nexl open, when a downtrend exists. If prices rally sha ly on the same day, the position is closed out at a profit. This is important to remember, because trading against the trend does not offer the latitude of waiting for the best moment; time is woiidng against the position.

Taylor called this his book method because he recorded all the information necessary for trading in a small 3" x 5" spiral notebook that he carried. The organization of the book is shown in Table 16-6, an exanple that uses the November 75 soybean contract. Of course, in Taylors book, there would be only I month per page due to its size. The first five columns contain the date and day, followed by the open, high, low, and closing prices. The

TABLE 16-6 November 1975 Soybeans

first 10 dajs are used to ddermine where the cycle begins. Scanning the daily lows, circle the lowest of the first 10 dajs, in this case March 19. Then work ba(tavard and forward, circling every third low price. These are bujing dajs The sequences of two in-between dajs are circled in the high column and indicate the selling day and the short sale day, respectively. This example is especially simple because it assumes a consistent uptrend and shows no variation from the 3-day cycle.

To judge the opportunities for bujing and selling, the next columns, maited D and F, indicate the number of points in the decline from the short sale to the bujing day, and the number of points in the rally from the bujing day to the selling day. In both columns, the differences are taken using the highs and lows only. These values represent the

maximum number of points that could have been made in those trades, provided the highs and lows occurred in the proper order. An "X" or a -.P in the circle next to the high or low means that the opportunity to buy or sell occurred first (if an X) or last (if a v). In the case of the first, the trade would have been entered that day and in the other case, Taylorwould have waited.

The next two columns, BH and BU, show the adversity and opportunity of that days prices to the bujing objective. BH means a bujing day high and is entered with the number of points that the day traded above the prior days high (the short sale day); BU shows the opportunity to buy under, by recording the number of points by which the day sold under the low of the prior day-the area to buy if the low occurred first, if neither situation occurred, zeros were entered.

A wide column on the right is used to indicate the net weekly change in direction by taking the difference between the prior Fridays closing price and the current Fridays price. This should be used to compare with the trading performance.

By observing columns D and R in Table 16-6, it can be seen that there was ample opportunity for profits on both the long positions and short sales, with only one case of a zero entrj on April 3. The trades that would have been entered or liquidated can be approximated using the BH and BU columns and the x and wol notations. For consistency, it might be assumed that the w/ indicates that a position was taken on the next open, in either case, the results would have been good.

Taylors daily method requires care in monitoring the maiket, which only a full-time trader can provide. The order of the highs and lows must be observed, as well as whether the new low is going to pendrate or fail to penetrate the prior lows. The trades must be timed carefully for maximum profit. In addition, it would be helpful to combine this method with a good trend identification technique as well as observe seasonal pattems to improve the choice of the overriding maiket direction.

For those who caimot watch the maricet constantly, Taylor offers a rigid 3-Day Trading Method, which is a modification of his overall daily method. The cycles remain the same, but the bujing and selling objectives are entered into the maiket in advance. This method is expected to work on balance, as are other well-defined sjstems. What is primarily lost by this approadi is the order of occurrence of the highs and lows; otherwise, the concept of the sjstem remains intact.

It is interesting that this technique profits from penetration of support and resistance levels. Most other methods consider a breakout of prior highs and lows as a major frend change indication, but Taylor views it a? a bettei opportunity to do the opposite. It is one of the few examples of such an approadi and could only succeed in the shorl term, where the behavioral aspects of frading are dominant.

Infraday Breakout Sjstems

As discussed earlier in this chapter, there are unique intraday price patterns caused by an uneven distribution of volume throughout the day. By far, the most popular s;

approadi to day frading is the N-day breakout applied to intraday data; this transforms it into the Nbar breakout. Entry and exit signals occur during the trading session instead of only at the close; in addition, there may be more than one buy or sell during the day if prices have wide swings.

A variation of this technique intended for intraday data is the opening range breakout, which gives the underljing entry and exit signals based on how far prices move from the open of the day. The frader is then bujing when prices move up from the open by, for example, 8 ticks in bonds, in the same manner as a frend follower. If prices then decline to 8 ticks below the open, the long position would be reversed to a short. This approadi uses the opening price as the pivot point for the day, claiming that price direction, relative to that point, is important. Tests exited all trades on the close of the day.

it is also reasonable to use the close of the previous day as the pivot point. Most traders watdi todays prices to see if they are higher or lower than the prior close, wiiich connects todays price pattems to the previous day. In its basic form, the opening range breakout freats one day as independent to previous price movements. This seems unnecessarily resU-ictive. Crabel, in his extensive shidy of intraday pattems, has found that combinations of inside dajs, low volatility, bull and bear hooks, and other pattems that precede the current day, all confribute to a selection process that improves trading. Table 16-7 shows a comparison of an opening range breakout with and without a preceding inside day. The improvement due to selection is significant.

if you consider that infraday trading may give one new signal each day, any method that helps select the better trades is welcome. The intraday frading profile of many small profits and losses allows you to be more selective without fear of missing the one big trade of the year, which is a problem tjpical of a long-term frend-following sjstem.