Although the Taylor Trading Technique was developed before the days of around the clock electronic trading, it can still be effective today. Overnight trading can give you additional patterns for trade setups during the regular trading day, especially for markets like the stock index futures.
In last night’s Swing Trader’s Insight advisory I labeled today a Taylor Trading Technique (TTT) Sell Short day for the eMini S&P futures. A Sell Short day tells us to anticipate that the market will trend lower during that session. This selloff is often preceded by a small rally, which serves to push out weak shorts and pull in momentum chasing buyers.
As Taylor wrote it up, he watched the previous session high as a “reference price” on a Sell Short day. An initial rally above the previous day high was a signal to look for an opportunity to get short and a subsequent move below the previous day low was the trigger for a short sale.
This setup is an instance where overnight trading has meant a change in trading approach is in order. Overnight market movements can give us other patterns to apply to the TTT.
This brings us to today’s trade in the eMini S&P. The eMini had a Sell Short day signal but last night it never reached the Wednesday high of 1978.00. However, if we treat the overnight trade as a distinct trading session then we can consider overnight highs and lows as TTT reference prices in the same manner we would normally use the previous day high and low.
1972.75 was last night’s high for the September eMini S&P futures; this was the first reference price we would use for today’s TTT Sell Short day setup. (Had the market rallied above 1978.00 during the day session we would have used that for our reference price.)
At the 8:30 AM stock market open the ES was below the 1972.75 reference price but within about 20 minutes it had rallied above the overnight high. This was our first signal to look for a short sale; a drop below the reference price about 20 minutes later was the first trigger for a short sale.
The low of that dip was 1972.00 and the preceding high had been 1975.25. I generally suggest a stop loss above the session high so depending on how tight you placed your stop you may or may not have been stopped out of the first short. (For my trading timeframe I generally use about a 6 point stop; this would have put your stop above the eventual session high of 1976.00).
If you did get stopped out of the first short, there was a second short sale signal around 10 AM. This selloff took off to the downside after the news about the airliner incident in Ukraine. By 10:30 it made a day session low of 1961.75, just above the overnight low. This was a drop of 10 points in about half an hour; a hit and run trader could cover shorts when the overnight low held. Longer term / more patient traders could stay short as the market continued to make lower highs and lower lows over the morning.
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.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF THE HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
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