In last night’s Swing Trader’s Insight update my comment for the gold futures was “Buy day, careful”. By the Taylor Trading Technique today is a Buy day meaning we should look for an initial move below yesterday’s low (the reference price) and then a rally back over it. The rally back over the reference price defines a trend change and is a signal to go long.
However, the Buy day signal was complicated by the fact that yesterday was an inside day. The TTT looks to see whether a daily bar exceeds the previous day’s high or low; which one is exceeded gives a clue as to what direction we anticipate the market will move in the following session. If neither one is taken out (an inside day) it may be a sign that the market is in balance; a “balanced” market often yields a breakout move.
Thus, yesterdays inside day in gold meant there was the potential for a breakout move. The most commonly used reference prices for a breakout setup are the previous session high and low; we anticipate a rally if the previous high is exceeded or a selloff if it breaks below the previous day low. This is the opposite of what we anticipate in a “normal” TTT day.
My decision to stay with the Buy day signal today (as opposed to labeling today a breakout day) was really a “feel” thing, not something based on quantitative evidence. I do find that breakout signals tend to have more validity if there is another pattern to go along with it-something like an NR4 / NR7 day or a daily doji bar. Although gold had an inside day yesterday the dominant intraday impetus was to the downside, making a reaction to that (a Buy day today) more likely.
When I put “careful” after a TTT signal in the comments section of the nightly STI update it means I think we should be more selective about taking entry signals and should err on the side of exiting profitable trades quickly. How do we make your entries more “selective”?
One of my favorite entry filters is an exponential moving average, specifically the 20 period EMA on a 15 minute chart. I often use this specific moving average combination to filter TTT entries. Sometimes this means we enter a trade later than we otherwise would but often it keeps us out of choppy market conditions. The TTT is works best in intraday trending markets, not choppy back and forth movement.
Today’s intraday chart is below. Besides yesterdays low, Tuesday’s low was also a reference price to monitor, in light of yesterdays inside day. When I started following the market (around 7 AM CT) it had already made the “low violation” to tell us to start looking for a Buy day reversal.
From 6:30 to around 8 AM it trade back and forth over the two reference prices. A few of those selloffs could easily have shaken out weak longs, especially in light of yesterdays inside day with its potential for a breakout move down.
The rally finally took hold around 8 AM, trading over the 20 period EMA shortly after that. The series of intraday higher highs and higher lows gave additional evidence of the uptrend; stop losses could have gone under any of these lows, giving the trade a pretty reasonable (depending on your definition of “reasonable”) amount of risk.
The previous session high at 1647.90 was the first profit target. Taking that out helped the rally; the inability to reach yesterday’s high was a signal that the rally might be ending.
© Scott Hoffman
This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog.
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