[WHY?]

Originally Posted by Dogpile »

In my view, Linda Rashke wrote a book about Taylors book that is much more useful than the original book. Thus, I will try to intertwine the two.

Taylor’s method implies that markets move with a natural rhythm that is made up of a buy day, sell day and sell short day.

Rashke pg 51:
“One of the most confusing aspects of Taylors trading technique is knowing whether it’s a buy day or a sell short day.� --- Taylor would often short on a buy day or buy on a sell short day due to a laundry list of complex rules. Thus Rashke came up with some explicit indicators.

concept 1 is the 2-ROC buy day.

"On the Buying Day Objective we expect support and we watch the tape to confirm this buying for support and for a rally to start" TTT, pg 9.

Here is an idealized version of this 2-ROC buy day concept.

What book are you talking about where she writes of Taylor strategies? I have Street Smarts and do not recall much of Taylor in there.

[Reaver]

Hmm maybe I am wrong, I know in the TTT book I have, she has a section she wrote in the book regarding her opinions of the technique...

[WHY?]

When one discusses Taylor and the thoughts that others had/have on his system such as George Angell and Raschke one has to first of all realize that Taylor quantified the market. He measured rallies and declines and averages and kept track of it in what he called a "book". IMO what Taylor did was "clock" the price on a market. He had a full set of rules he used and strategies on what to do when the unexpected happened. All of these things together kept him on the right side of the market. Apparently, that is, for we have no real record that I know of, showing his abilities in the markets with actual money. Taylors system was comprehensive. It gave him a view on the market and a way to "anticipate" what would probably happen next. Now a sentence such as the last sentence usually provokes arguments on whether or not the markets can be predicted or not. I have tired of going around and around on this subject so I will use the softer language of "anticipate". I thiink we are all positioning ourselves to anticipate the next move and to cover our hide if we are wrong??? Anyway, Angell and Raschke both only used bits and pieces of Taylor system. I have never seen either one of them encouraging use of the whole system. I suppose it would be too tedious??? Nevertheless, some of the concepts that Taylor expressed are crucial to the integrity of his system. Angell toyed with some and changed them. Perhaps for the good, perhaps for the worst. However, I prefer "pure" Taylors way on those crucial concepts. One area was the way Taylor measured rallies as opposed to the way Angell adapted a way to measure rallies. I prefer Taylors method. Angell measured rallies as the difference bewteen todays high and yesterdays low. Taylor on the other hand measured the rally as being from the buying day low to the sell day high. The decline for Taylor was from the short sell high to the buying day low. For Angell the decline was the difference between yesterdays high and todays low (or previous days high and yodays low). Taylor says that the rally shows how much of the decline has been recovered. So, the way you measure rally the also affects how you see the decline. So if you slip in another way of measuring a rally such a Angell did then you have to change the way you measure the decline which is what he also did. Then it no longer is a primarily swing trading system but a day trading system. In addition, it also is not really a 3 day cycle system any more. Personally I prefer Taylors type of measurements as they are important to the heart of the 3 day cycle. Now while Taylors was primarily a swing trading system he had a method to use it as a daytrading system and in addition as a longer trend trading system. Why someone would want to change it up I do not know. Anyway, these are some of my thoughts on Taylor. I have many more.

[WHY?]

For whatever reason, this three day cycle does exist in most stocks and commodities. Taylor identified this cycle and devised a system of what to do for each day of the cycle. Each day in the cycle has a distinct name and specific strategies.

The first day is called a BUY day. This is when the market is taken down by the "smart money" to create a buying opportuntity for themselves. The next day is the SELL day and this is when they run the stock up to create a sell opportunity. On the sell day they sell the long stock they just bought on the buy day. The third day is the SHORT-SELL day. On this third day they run it up a little more and dump the rest of long stock they have left over from the sell day. Finally, they then short the stock on the SHORT-SELL day. The weight of this shorting puts too much supply on the market. When supply outstrips demand the rally of the SHORT-SELL day stops and prices fall. They then cover their short on the same day or next day (which is a new buy day in the cycle). The order is generally BUY day, then SELL day, then SHORT-SELL day. That completes a cycle. Then the cycle starts over again with BUY day and goes on.....There are variations to this theme but that is the basic theme under ideal conditions. However, conditions aren't always ideal in the market and Taylor devised means to deal with less than ideal circumstances.

How can knowledge of this three day cycle benefit you as a trader? By helping you to profit from the daily price movements that take place over the three day cycle. It is necessary to understand that the rise and fall of daily prices are after a PATTERN, tend to be REPEATABLE, and because of this they become somewhat PREDICTIBLE. These patterns tend to STABILZE the market, otherwise, prices would shoot straight up one day and straight down another day. They also create trading opportunities for the astute trader. Remember this: Profits in all stocks and commodities are only made possible when prices move. If it can be established that most of these movements have a pattern and this pattern tends to repeat itself, over and over again, then a case can be made for ANTICIPATING probable prices in the near future. Check it out for yourself. Most stocks and futures follow a 3 day cycle. Sometimes there is a variation of this cycle and it may be 4 or 5 days instead of three days but the point is the cycle exist. When there is a variation Taylor had rules to deal with it. What is important to understand is that a short-term trader can capitalize on this cycle to make money.

Three ideas explain the existence of this three day cycle, the structure of it, and the purpose for it. The FIRST idea is that prices in the stock market and in commodities are MANIPULATED. The three day cycle results from "smart money" moving prices to their advantage. There may be differences of opinions as to whether or not manipulation exist. I believe it does exist on almost a daily basis in individual stocks and commodities. One thing we do know. The three day cycle does indeed exist. Maybe you feel that if such a cycle does exist, then it must just be the pressures of supply and demand in a free market that causes the cycle. Who knows? What really matters is that they do happen and you can make money on them. Whether or not they are actually caused by manipulation is hard to determine, but manipulation does fit well in the theory. If you subscribe to the idea that stocks and commodities are manipulated then the appearance of these three day cycles will probally make more sense to you and the cycle will be understood as something created by the manipulators. Their reason for doing so is to create buying and selling opportunities for themselves. You might say that "smart money" has the muscle, and reason, to move stock prices. A SECONDARY idea is that this manipulation is carried out in STAGES over a period of 3 to 5 days. These stages become the elements of the three day cycle. Understanding the stages and knowing how to recognize them gives you an idea about what will most likely take place next, in terms of prices and direction of movement. A THIRD idea is that since the cycle is usually done in stages then prices will tend to form in a REPETIOUS manner. In other words, pricing action will tend to repeat because the manipulators are doing the same thing over and over. The manipulators may move the market down but they also have to support the market if they wish to continue using the cycle to make money. They may start a rise in prices but they must be able to stop the rise by selling the market with their long stock to realize profit and then shorting the stock. These two actions together increase the supply and result in lower prices. They make profits on their long stock which they sold during the rise. Then they short-sell and prices fall under the weight of all their short-selling. However, they must be able to stop the decline so they can go long again. They do so by covering their shorts. Then as they go long their buying stops the decline. This support created by short-covering and long buying stops the decline, and stabilizes the market. Thus the cycle is started over again. Smart money realizes they must be able and willing to STABILZE the market if they want to keep the cycle repeating. An unstable market can hardly develop discernable cycles. It would be risky for them if the market were unstable. In an unstable market they might short a stock and it keep going up causing them to incurr great losses. Or they might go long and it keep going down. So, it is to their benefit to have a stable stock that goes up and down in cycles. They just create the cycle and make sure they are on the right side of the cycles.

All stocks and futures have many rallies and declines within their longer uptrends or downtrends. Also the cycle appear in times of accumulation or distribution. In fact being aware of the larger context of what is happening (such as accumulation...distributi on...uptrends..downtrend. .) helps one to understand "why" variations take place in the 3 day cycle and in fact can be very useful in helping you anticipate variation. For instance, Taylor talks of what he calls a buying day low violation. This is when early in the session of the second day of the cycle (sell) a low is made BELOW the low of the previous day (which was a buy day). These violation appears more frequently in markdowns from distribution or longer term downtrends. So by seeing the larger picture it helps you to even anticipate these sort of violations before they happen. Taylor took several measurements when "clocking" the price action of a market. Over the 3 day cycle the main rally and the main decline become the basis of swing trading. Since they can be measured and quantified, and since they follow patterns, they can be projected into the near future. Notice I said projected not predicted. Perhaps a better word is anticipated. The three day cycle gives you a handle on anticipating probable prices at which to buy and sell the stock. Based upon the day of the cycle the stock is in, and the price action from the day before, the 3 day cycle projects into the near future (tommorrow) the most likely stopping points at which you would want to buy, sell, and short-sell the stock. Thus, in effect, the three day cycle helps you to anticipate what prices to buy and sell a stock at BEFORE the market ever opens the next day. When the market opens you already know what you are looking for. You are better prepared to face the open of the stock market than the average investor. You are in a better position to discern what is happening as the day progresses. When the market opens, if the stock is fitting the anticipated pattern, then you will already know at what price to get in and out of the stock. These price levels at which to buy and sell at are called target points. Taylor called them objectives for each day. In other words, the objective is to buy and sell at these price levels. To sum up Taylor is about discovering this cycle and seeing it in the larger context of this (accumulation, markup, dist, markdown..resistance..sup ply demand....pivot points ...etc), understanding why it is created, and capitalizing on it's repetitious nature.

[Reaver]

Thanks for taking the time to post all that info.

[Dogpile]

ok, great.

whether you call it 'manipulation' or just the natural cycle of buying and selling is just nomenclature. the market has a tendency to surge and then do 'shakeouts' --- its just the nature of a market. sometimes the shakeout is just sideways chop-chop. other times it is hard counter-trend moves to shakeout the weak hands. to me, this is just 'to be expected'... occassionally, you will get those non-stop one-direction type of moves --- but those are the exceptions. clearly, you need to develop rules so you don't get run-over in the exceptions -- but you also need to stay in the 'rhythm' of the natural buy/sell pressure of the market for we are in that type of choppy daily market the majority of the time.

Here is a 'Taylor Book' I have been working on and will be forever-refining.

http://bp2.blogger.com/_5h-SWVGx6Ms/...thru+10-12.png

This past week had some Taylor aspects to it. Sticking with a Taylor bias would have made you money and just as importantly, kept you out of trouble.

Note that a core part of Taylors technique is to look for 'tests'. Test the previous day low, test the previous day high etc.... I would add to this a common tendency to go test the previous days 'high volume price' --- marked in bold as the number in the middle of each 'bar'. This is the price of peak volume (Peak Volume Price = PVP) for the day. This number very often tends to get tested the next day. Thus, if a buy day, I am looking to go long on a test of the low or a test of a previous PVP. Test means higher low or lower low -- just testing action is what you are looking for.

Review for the week:

Friday had been a strong up day and the first up day after a downswing. Monday was therefore a 'sell day' -- note this is very, very different than a 'sell short day'. don't confuse a 'sell day' with a 'sell short day'.

Monday you would expect the market to get marked up a bit so that smart money could then sell. The day was a holiday though (Columbus Day) and had low volume -- there was a gap down and it was a negative day. Thus, this was not consistent with Taylor but the day was inherently screwed up by the low-volume holiday. Note, Monday 'built lower value' than Friday. Thus we have a down day and the closing 'pinball reading' is 35. Note 'Pinball' is defined by Linda Rashke as the 3-period RSI of the 1 day change in price. Essentially, it is a calculation that, when low, shows that there is underlying momentum in the market --- consistent with Taylors comment about how in an uptrend, the low will often be made in 1-day.

Thus, we enter Tuesday on a 'pinball buy'. This is the same idea as a simple 'buy day'. You expect a test of the low (can be lower low or higher low) and you will look to get long. The market gapped up and then tested the low by making a higher low and then surging. This was classic 'buy day' action. Note that the market 'built higher value' versus Monday.

Now you enter Wednesday after a 'buy day'. This again is a 'sell day' -- you expect some buying pressure. The market gapped down, tested the previous days 'value zone' at 1567.00 and then traded up. Note that Wednesday 'built higher value' than Tuesday. It was not a classic 'sell day' --- it was a variation on it. The close was < previous day close so this is a bit screwy -- but the play was to buy on a test of the previous days 'value zone' and this worked. We thus enter Thursday with 2 up days -- 2 days of building higher value. Thursday is a potential 'sell short' day -- though not such a clean signal due to the lower close on Wednesday (versus Tuesdays very high close).

Thursday the market gaps up big. It builds value at the marked-up level (1581.25). It then attempts up out of that and gets very, very strongly rejected. It tested up out of the 1581.25 zone and drove lower. Thus, this is consistent with the Taylor Rhythm of it beign a 'sell short day'. This is a variation of the 'testing' concept. The market 'tested up' away from 1581.25. This 'test' up was the spot to short on a 'sell short day'.

Note that the market did pause in the 1570 'value zone' on the way down before shooting all the way down to 1556.25 on Thursday. Thursday closes with a '37' pinball reading. This is generally a buy signal for ES. Note that both RUS and NQ had pinball readings right near 30. 30 is number Linda Rashke uses in her book. But the S&P futures rarely go as low as 30 -- much more common for more volatile indices like NQ and ER2 to print those more extreme pinball readings.

So we enter Friday on a 'pinball buy day'. The play is to look for a 'test' lower and then go long. Well, we tested down but not much. This was tricky action due to the fact that we had just dropped from 1586 to 1556 intraday the previous day. We also 'tested up' into that important 1570 pivot. Thus, this is tricky structure to go long not far under a high-volume resistance zone.

The market did close Friday above its PVP, consistent with a 'Taylor buy day'. Thus, we enter Monday expecting buying pressure to continue. It will be a 'sell day' but not a 'sell short day'. Note that the 'sell day' label is really misleading in my opinion -- it really kind of means, 'we expect continued buying but the time to buy was yesterday, not today -- get out into the expected strength and then wait for a sell short day to go ahead and get short'.

[Reaver]

Hey Dog that's pretty sharp man!

[WHY?]

Here is a 'Taylor Book' I have been working on and will be forever-refining.

You have an interesting way of looking at Taylors concepts. I can see you have put alot of thought into Taylor. Could you please post a simple bar chart of the last 20 days (if possible) of the trading sessions that would also include the days of your last chart? Also include the volume and the open and close on the barchart. I want to check something out and need more days. Thanks!