George Taylor’s reading is quite confusing, I’ll try to simplify his
method as much as I can.
Taylor states that on a normally advancing stock market, its ebb and flow is cycling in a 3 -5 day period, characterized by 3 consecutive days:
- The buy day (B), which comes after a short sell day, starts by stretching prices below yesterday’s low to inflict pain on yesterday’s long holders, followed by and advance which crosses yesterday’s low into yesterday’s range.
- The sell day (S), this is a so-so day, generally continuing the advance, which could extend itself for a couple of days.
- The short sell day (SS), where the day starts with an advance to inflict pain on yesterday’s short holders above yesterday’s high, followed by an abrupt reverse and decline into yesterday’s range.
(bolds highlight the prevalent opening behavior of any market, – it is a well known fact that beginners tend to hold to their losers, which is a very damaging proposition)
We can identify B days because they’re the lowest low of a hook (1 and 3); and SS days, the highest high of a hook (2).
If we traded Taylor’s method, I would first look to establish from past data (18 months, I like Joe Ross’s assessment regarding obsolete data), the maximum drop on a B day from the previous day’s low, as well as, the maximum bounce on a SS day from the
previous day’s high.
Drop = Low (B – 1 day) – Low (B day), and
Bounce = High (B day) – High (B – 1 day)
We should also check the minimum, average and maximum trading range of these B and SS days, in order to set our profit target exits.
As a matter of fact, Taylor suggests exiting a B day trade at the opening of the following S day; as well as, exiting a SS day trade at the opening of a B day.
It’s interesting how this information can be used to trade in several ways.
More on Taylor related trades later…
But, I found this article on swing trading from Linda Bradford Raschke enough to put Taylor’s method to rest.