By Bob Moore
Successful traders take signals from the Taylor Trading Method 3-day cycle–Buy Day, Sell Day and Sell-Short Day–to place trades in sync with the dynamics of the cycle. For example, according to Taylor Trading Rules, if Markets trade below Buy Day Lows on a Sell Day, a buying opportunity is signaled because there is a good chance the Markets will rally back up to Buy Day Lows by at least the Sell-Short Day.
Case in point occurred on Wednesday, November 10, 2010, a Taylor Trading Method’s ‘Sell Day’. Since Markets closed on Tuesday near Taylor Trading Method’s Buy Day Lows, it was possible they would trade below Buy Day Lows during the day.
Using the S&P 500 eMini (ES) as an example, the ES (along with the Markets in general) did indeed trade below its Buy Day Low of 1206 near the open on Wednesday, signaling a buying opportunity!
The ES plunged to 1202–just 2-pts above Taylor Trading Plus’ designated extreme low range for the day–and then bounced several times without declining below 1204 signaling support was being established.
As the trader interprets establishment of support at 1204 as a buying opportunity, he/she responsibly determines a Stop Loss Limit to cover the trade in the event of a reversal. The trader justifies an abnormally ‘short-leash’ on the Stop Loss Limit–just under 1200–to coincide with Taylor Trading Plus’ designated extreme low for the day. The trader also mentally establishes a sell target of just under 1212–ES’s Value Area Low and anticipated level of resistance. The trader acknowledges the trade has a minimally acceptable reward/risk ratio of 2/1 (i.e., potential 8-pt profit/potential 4-pt loss).
The Trader buys ES at 1204. The S&P 500 eMini then trades in zigzag fashion stair-stepping up–a good sign positive momentum may continue.
As the Markets play out during the noon hour, the trader considers selling at 1210 for a 6-pt profit. After-all, the ES is 4-pts above its Buy Day Low and the ES is exhibiting slightly reversed action between 12:00 and 1:00 pm. He/she wonders, “Is this the ‘hump’ for the day in which the ES reverses direction?”
The trader decides to stay in with a raise in Stop Loss Limit to just under 1206–the Buy Day Low and anticipated level of support–to cover his/her trade in case of a reversal. The trader is rewarded shortly after 1:00 pm US EST, as ES quickly penetrates its Value Area Low of 1212 and is exhibiting potential of staying above its Value Area Low for (2) consecutive 1/2-hr Bars.
The S&P 500 eMini does stay above its Value Area Low for (2) consecutive ½-hr Bars triggering the Value Area 80% Rule! According to the Rule, if the trading instrument is trading below its Value Area Low, then rallies above its Value Area Low for (2) consecutive ½-hr Bars, there is an 80% chance of rallying up to its Value Area High by at least the end of the next trading day.
The trader feels more confident in staying in the trade because the Value Area 80% Rule has been triggered with a target price of 1221–Value Area High–to fulfill the Rule. Again, the trader raises the Stop Loss Limit to just below the Value Area Low (and current support level) of 1212 to at least lock in his/her predetermined sell target.
The trader patiently waits to see if the ES will continue its momentum up. The trader starts to reconsider his/her decision to stay in the trade as the regular trading session nears its last hour of trading. During the past 1 1/2-hrs, the ES has been trading in sideways fashion between the range of 1213 and 1217.
The trader also takes into consideration that the current status of the S&P 500’s Elliott Wave pattern on a 6-month chart appears to be transitioning from upward intermediate Wave 1 (which has persisted for over 2-months) to sideways-downward intermediate Wave 2. In other words, it looks like the ES is changing from an upward short-term trend to sideways-downward short-term trend.
The trader decides not to hold onto the trade overnight so he/she sells the trade at just over 1215 for an 11-pt profit.
The S&P 500 eMini declines to Buy Day Low of 1206 shortly after the regular trading session closes and then rallies to just over 1213 the next trading day. It does not reach yesterday’s Value Area High, however; therefore, the Value Area 80% Rule triggered on Wednesday was not fulfilled on Thursday, either.
The trader made the right decision to close the trade. The trader now starts considering his/her next trading opportunity with the aid of Taylor Trading Technique, Value Area Trading, and Elliott Wave analysis.
About the Author
Bob Moore is with Taylor Trading Plus, an international data-exchange trading service using George Taylor’s Book Method, Value Area trading, Elliott Wave analysis, and Short-Term Trend analysis to identify trading entries/exits in select instruments of Futures, ForEx, Commodities, Metals and Oil, ETF’s, and Stocks. To request visual aids that help with understanding of this article, please go to ‘Contact’ tab at: http://www.taylortradingplus.com.
