This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Thursday, March 20, 2014.
There are two steps to using the Taylor Trading Technique (TTT) to trade. For the first step, we look at a futures market’s chart and price action to determine that market’s predominant direction (bullish, bearish or neutral) for a given session. We use this to determine where a market is in the TTT cycle and in turn, which TTT cycle day we should anticipate for the next trading session.
However, we don’t act on our anticipation until we have confirmation that the market is beginning to move in the direction we anticipate. The market is never wrong but sometimes our analysis is incorrect. We make the market “prove” our hypothesis correct (at least when entering a trade) before we actually pull the trigger.
We anticipated that today would be a Sell Short day for the May soybean futures. (Tuesday and Wednesday both had bullish price action.) The Sell Short day signal meant that for today we might anticipate bullish action early in the session but as the session developed we would anticipate bearish action to begin to show; this bearish action would be our trigger for a short sale.
For the Sell Short day of the TTT, the “classic” setup is for an initial up move to rally the market above the previous session high (what I call a “reference price”). On a Sell Short day we anticipate this early rally will fail, and a move back under the previous session is our signal to short the market. If our trade is correct, we get short in the early stages of a selloff and we are able to ride the market lower as the session progresses.
Today’s intraday chart of May soybeans is below. We did get bullish action overnight; this rally followed through for the first hour of the day session. It peaked around 9:20 AM and it began to sell off. This was the first signal that our Sell Short day idea might be correct; we now needed a move to confirm it.
I used 1442-0 (the previous session high) as the reference price; a move below that level would “confirm” the down trend and be the trigger for a short sale. This entry was triggered around 9:45 AM. For a stop loss level I used the midpoint between the session high and the short entry price.
1431-4 (the last overnight low) was the first downside reference. A decisive drop below that level would signal that the selloff was continuing, while holding that level would signal that we might look to cover shorts. This level held (for a time) and exiting the trade here gave us a profit of about 10 cents per bushel in about 15 minutes. If you chose to stay short I would suggest moving a stop down to break even. As is sometimes the case, the down trend reasserted itself about 20 minutes later and beans dropped to a new session low of 1422-2.
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STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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