Taylor Trading Technique Nov 2007

[Dogpile 10]

This thread is to discuss Swing Trading from a George Taylor perspective.

[Dogpile 10]

So today looks big and scary. But actually, we are in 'balance'. This kind of day reminds me of the big down days last August. big down move, sideways chop for a few hours until 40k+ contracts build up at a single price... then trend away in the afternoon from VWAP. note that:

Price=VWAP=PVP <--- this signals 'balance. From balance comes a directional move.

 

I am look for a trending move away from 1532.50 of ~10 pts, perhaps more

 

so, break up could lead to 1542.50+

break lower could lead to 1522.50

 

note we could break one way, do a trap and then rocket the other way. This would be most evident if we make a 'higher low' after breaking lower.

 

a break in one direction should not return to 'accept' the VWAP price -- it should break and trend away so this should be a clue that a trap may have just occured.

[RAVIN 10]

Well quite a drop on the Dow yesterday, can be considered as a SS day, in which case today would be a buy day. Basically I have lost the TT count:D

 

OTOH as per Linda Raschke, today is most likely to be zig zag day, i.e narrow range day, testing of lows of yesterday is the place to watch.

[Dogpile 10]

My version of monitoring Taylor concepts:

 

Week in Review:

 

 

I have plotted at the bottom what I think is a helpful indicator to help with 'location'. This has to do with 'location'. Thus, I have plotted an indicator that shows where price is starting the day relative to the 15-min 20 period exponential moving average. The market will 'test' this 15-min 20ema almost every day. One idea is to counter-trend trade the morning session (like Taylor did) if the market is starting FAR away from the 15-min 20ema. This cannot be taken in isolation -- it depends on the last few days of action but this is a good additional indicator to think about as you review the action going on, IMO.

 

So here are my concepts to monitor:

 

1) do you have a high or low 'violation' (violation of previous day high or low)?

2) what has been the recent action (last few days) in terms of trading 'high to low' or 'low to high' (this is the first indicator)

3) is price starting the day FAR away from the 15-min ema?

 

If you have had 1 to 2 'High to Low' days, then a low violation with price starting far away from 15-min EMA, be careful of shorting and consider the long-side.

[RAVIN 10]

Thanks Dogpile,

It is beginning to sound more logical now. You are right about getting the concepts right rather than focussing on the labels (buy day or ss day etc).

 

o.k now we have 2 days of High to Low, hence for 5-11, Monday's probable price action, we should be looking for a Low violation to go long.

[Dogpile 10]

o.k now we have 2 days of High to Low, hence for 5-11, Monday's probable price action, we should be looking for a Low violation to go long.

 

that is right. however, given the location of the close relative to the intraday low, we seem unlikely to get that 'low violation' as we are actually closer to a 'high violation' than a 'low violation' given the closing price.

 

note we made an afternoon 'higher low' as there appeared to have been a wall of buyers down near 1503.00. when you build up a lot of volume low in the recent range and form a late afternoon 'higher low' --- this generally means the market will attempt to auction up next -- which aligns nicely with the 2 recent 'high to low' days.

 

So we are in the situation of having a bullish bias but we might get a 'high violation' first, which for Taylor is short-term bearish. Thus, what do you do?

 

Plan B would set-up something like this (keep in mind Fridays closing price of 1517.75):

 

1) You get a high violation above 1520.50 into the mid-1520's, call it 1525.

 

2) 15-min 20ema closed near 1511 -- thus a big premium to that is short-term bearish as we tend to move back towards this EMA IF we start out really far away from it. 1511 + ~13pts = 1524.00 --- this might be a shortable level. (Note 15-min EMA will be moving up so call it 1524-1526 zone for now)

 

3) You look at support/resistance: this is not super clear but I do see a lot of past volume occured in the 1530-1532.50 zone. 1525-30 has been very 'noisy' (tricky) as well.

 

So if we trade directly up toward 1525-30 area, I would not want to be long and would consider a short but only for a short-term trade back towards the 15-min 20ema. (note this is just in the morning, as Taylor likes to stress looking for 'morning reversals' on tests of key levels). If trades into 1525+ zone, right away -- then we 'could' have a 'high made first' and make the high for the day there. We also might just need to trade down from there to test lower before going back up for a 'low to high' day. But either way, the location slightly favors shorting there.

 

The better trade would be for it to trade back down towards the '15-min 20ema' and then potentially go long in hopes of a 'low to high' day. This is consistent with 2 high to low days, the Friday buying that occured low in the recent range and buying on a correction would be consistent with buying a 'higher bottom' vs Fridays low --- Taylor talked a lot about buying 'higher bottoms'.

 

Thus my initial gameplan is:

Look to be a buyer on Monday as the day looks to have a constructive set-up,

but

in back of mind, consider a short if the market starts out 'too high' and play for a short-term trade back towards the 15-min ema - then potentially look long.

 

I think this thinking is similar thinking to Taylors core concepts of:

'buying a higher bottom'

and/or

'buy day, high made first'

 

After that initial gameplan, its about reading the intraday action.

[waveslider 10]

Hey Dogpile, When taylor was around there wasn't a VWAP.

During the past 10 years it seems like VWAP has gotten more and more attention, and become a real psychological point that many traders watch.

I have been watching a modified idea of Taylor's, using the VWAP instead of highs and lows.

The idea is that following a buy or sell day (for our interpretations here, a low to high day or high to low day respectively) should come a test and rejection of the previous day's VWAP.

Does this spark any ideas?

[Dogpile 10]

Does this spark any ideas?

 

I am watching VWAP to help read 'the tape'. Reading the tape was a crucial aspect to Taylors trading as he said it over and over again.

 

A few rules of thumb I use to keep you out of trouble:

 

If price is spending even 'some' time above VWAP -- then the day is likely not that bearish. A big correction is probably a buy.

 

I also find it a nice reference level in terms of 'todays vwap' vs 'yesterdays closing vwap'. If todays VWAP is greater than yesterdays closing VWAP value, then a good correction is also a buy.

 

If todays VWAP is less than yesterdays VWAP and price is not strongly rejecting the current day VWAP, then the market is again, likely a buy.

 

These rules of thumb keep you looking long most of the time.

 

The only time to look short then is when price is strongly rejecting VWAP AND vwap is building less than yesterday VWAP. These are those really bearish days to be short.

 

This doesn't mean can't short other select times (for instance I also like shorting a 'high violation' into resistance -- in the morning session (regardless of VWAP).

[Dogpile 10]

let's review today.

 

The market closed high in its range on Friday. But the market gapped down big this morning. Despite the large gap down, we did not have a 'low violation'. The market traded UP off of the opening price and spent a long-time above the opening price.

 

There was a low violation later in the day. This low violation is not a Taylor type of buy because a Tayor 'low violation' should come in the morning.

 

Note that the day was just not THAT bearish relative to opening price and relative to intraday VWAP.

 

The market did end up trading 'low to high' after 2 high to low days. Personally, I made 1 trade today and then couldn't find another good entry. Very tricky 'structure' and I am sure today tore up a lot of traders. Patience and discipline.

 

by the way, this is something I have noticed:

 

the market will spend most days chopping sideways in the middle of the day. my rule of thumb is to NOT expect trending price action until AT LEAST 40,000 contracts have traded at a single price. If less than 40k have traded at a single price -- as they did today before the move back UP into the range --- then don't expect a move to carry. Once 40,000+ contracts have traded at a single price, then that is a signal that a 'trend' could develop. It's like the market MUST chop enough people up each day in the middle of the day before it can really move. If it starts before that, it is likely a fake.

 

Just something I have noticed to watch for.

[WHY? 16]

Today nov 5 was a ss day and price action was consistent with that. It wasn't an ideal ss day in terms of entry but in terms of price movement it was close to an ideal day. That is: it opened, traded up, then down. The gap down open was the second alert of a possible failure penetrate the high of the previous day (i.e. 11/02). The first alert was the downtrend of 11/01 and 11/02. So, while 11/5 was an ss day one shouldn't have expected an ideal day with a penetration of the prevous days high. That is..... one would be ready to short on a failure to penetrate, if made early in the session. Shorting around 1511 ...1512 early in the session after tape goes dull and covering around 1:30 around ..1496 was the move for the day.

 

Tomm 11/6 is a Buy day. I would be looking to short around 1511 to 1515 (if early in the session) and cover on any decent decline. If the decline is made early in the session i would then reverse and go long 1491 to 1493 area. If it trades down first on 11/06 i would look to to take the long position mentioned above. Of course, final entry point is determined by the intraday tape but this gives general areas that I would be looking at to take positions.

 

Any short must be covered same session and any subsequent long sold if a late afternoon rally comes in strong. Otherwise, I would hold the long for selling the following day. However, if I went long in the a.m. part of the session and no afternoon rally takes place and it looks like it will close weak I would scrap the long position (cut losses or dump the long) and look to re-enter long on a possible bv on 11/7. This is taylor...also looking to position ones self for the more probable move.

 

WHY?

[waveslider 10]

Hi Dogpile,

 

You offered some interesting and unique ideas. Question for you, how do you quantify the 40k share volume at one price? I guess you would use the matrix window?

 

The one caveat I would add to what you said about the need to chop would be regarding run-away days. For a bullish move, a gap in the opposite direction of the previous day's close which forms a low to high day. Rare yes.

 

Interesting to note that ES price faked lower first, then faked higher. Failed both moves away from the opening range and then closed at exactly the 50% level on the day, exactly at VWAP.

 

As you mentioned, price spent more time above the 50% level, as seen in the market profile. There is support in the market here, but sellers are holding it down. A good washout bar below resistance could trigger a quick move higher. I think we will see that tomorrow, on "turnaround tuesday". Likely price will make some kind of attempt to close the gap overhead created by last Thursday.

 

More churning around 1505

[RAVIN 10]

let's review today.

There was a low violation later in the day. This low violation is not a Taylor type of buy because a Tayor 'low violation' should come in the morning.

 

The market did end up trading 'low to high' after 2 high to low days. Personally, I made 1 trade today and then couldn't find another good entry. Very tricky 'structure' and I am sure today tore up a lot of traders. Patience and discipline.

 

Great stuff, I am trying to understand this with some logic. Interesting to note that nuance regarding LV which has to occur in the Morning for a TT buy.

 

1. Well we had 2 H-L days last week, and yesterday was L-H I presume, as there was a low which tested friday's low, albeit in the afternoon, prior to the high later in the day.

 

2. Now strictly speaking that is not a buy day, then any test of the low should be viewed as a buying opportunity. Correct me if I am on the wrong track.

[RAVIN 10]

Dogpile,

Any LV today is what I meant. Perhaps you can outline "if-then" scenarios just as you did for Monday. That is a great learning process.

[RAVIN 10]

Today nov 5 was a ss day and price action was consistent with that. It wasn't an ideal ss day in terms of entry but in terms of price movement it was close to an ideal day. That is: it opened, traded up, then down.

Tomm 11/6 is a Buy day. . If it trades down first on 11/06 i would look to to take the long position mentioned above. and look to re-enter long on a possible bv on 11/7. This is taylor...also looking to position ones self for the more probable move.

WHY?

 

Good to have you back, thought you were on holidays for 2-3weeks.

 

Question:

Last Thursday and Friday were down days, so how does that make Monday a SS day, thought SS days came after a buy day and a sell day.

[Dogpile 10]

today, we are in 'breakout mode'. This is actually rare situation where we closed yesterday with LOW 15-min ADX. I think odds today are on a directional move away from the 1507 area. My guess is up towards 25-30 but I will remain flexible and just 'go-with' the momentum. I am not going to fade a move this morning as I see no significant resistance above yesterdays high. If we break lower, I will go with that too but be mindful of action relative to VWAP to signal that the 'tape' is not signalling a big dynamic down day.

[Dogpile 10]

how do you quantify the 40k share volume at one price? I guess you would use the matrix window?

 

yes, 40k is watched in my matrix window (ES.D not ES).

 

The one caveat I would add to what you said about the need to chop would be regarding run-away days.

 

yes, this is 'breakout mode' --- I won't look for this on days where I would expect a directional move to be likely. but this condition is the exception, not the rule.

 

Have noticed that often best to wait for volume to build about 30k contracts at one price --- then expect back & fill until it becomes 40k. I faded a move yesterday for 5 pts based on this tendency. Caveat is that once it builds to high 30k zone, even a 'fake' move can go quite a ways before reversing --- so I like playing this fade just maybe 1 time and then stop once it starts to close in on 40k. After 40k, I will look for an afternoon trending move.

[RAVIN 10]

Dogpile,

What software you use to generate VWAP, was under the impression that this is mostly employed by passive traders such as pension funds etc. Is there a site for more info. on strategies with VWAP

my datafeed is esignal and charting software is Tradeguider.

[Dogpile 10]

What software you use to generate VWAP

 

Tradestation has it as a free add-in. just google it for information.

 

was under the impression that this is mostly employed by passive traders such as pension funds etc.

 

I have found VWAP to be an important measure for the S&P futures... not for the other futures contracts though.

 

I used to follow market profile POC but have switched to VWAP. I don't use it for 'set-ups' -- I use it for 'context'.

[waveslider 10]

check out the vwap color gradient I put in the coding section last night, a fun way to see it.

[Dogpile 10]

Tuesday review:

 

gap up led to morning high violation which led to test down toward 15-min 20ema and test of major support area 1503-05

 

market made 'higher bottom' vs previous day low and traded up

 

went 'low to high' for second day in a row

 

[Dogpile 10]

for today (Wednesday):

 

1) Market is starting LOW relative to 15-min 20ema but not 'extremely low' (location does however argue for a buy trade first)

 

2) The last 2 days have been 'low to high' (arguing for a 'high to low' day = bearish)

 

3) Violation of 1503.50 to downside sets up a 'buy' for a trade back towards 1503.50 (arguing for a long-side trade)

 

4) Support-Resistance:

The market has not been able to stay below 1503 and not stay above 1514 area. These are the support and resistance levels.

 

------------

Summary:

If we trade UP towards 15-min EMA, location for a short would improve to play for a 'high to low' day after 2 low to highs.

 

If we trade DOWN first and violate the 1503.50 low, this would argue for a long-trade as you have good location on your side and a standard 'low-violation' buy set-up. I prefer these if done into big support area -- and I don't see a big obvious one below the 1503 number.

 

As always, be aware of possible 'trend-day' conditions. If extremely strong range expansion off opening price to downside then the best play might be to wait for a reaction up toward 15-min EMA to short. Admittedly, this would be a tough set-up to trade as it would be right into a 'low violation' -- which is a Taylor 'buy-factor'.

 

I think I have listed the factors to weigh though. Watch price action vs vwap and volume/breadth for further 'intraday clues'.

[Dogpile 10]

here is example of same tape-reading:

 

note how ES futures are not 'strongly rejecting' VWAP. this indicates to me that we are likely in sideways chop chop mode. Given very bad 'internals' (breadth -2100 and VIX +10%) it seems that we SHOULD come out of this sideways chop to the downside this afternoon.

 

The signal for me is to wait until 40k contracts trade at a single price. Until then, the 'tape read' is that we should fade the edge of the range. Right now, the most likely price to hit 40k is 1508.00 because its at 29 now. Thus, think this market is a short near ~3+ pts above that (1511+ area) and a buy ~3+ pts below that (1504.50 area). Once we get close to 40k contracts, no more fading, time to look for a breakout. It often needs 45 or 50k so 40k is my absolute minimum.

 

This would be different situation if we were strongly rejecting VWAP.

 

[waveslider 10]

dogpile, have you found a way to get this info from the matrix w/o having to leave it on all the time (cumulative data)?

[Dogpile 10]

well, went long 1504.50 expecting it to chop back up... instead it impulsed down. but then let me out for breakeven. we have renewed momentum away from VWAP here.

[Dogpile 10]

dogpile, have you found a way to get this info from the matrix w/o having to leave it on all the time (cumulative data)?

 

no, but I have picked up some things by watching the distribution develop so I just keep it on side of my screen most of the day and take note of tendencies.