A primary concept of the Taylor Trading Technique is that markets make highs and lows when they “overshoot value”- they make an excess high (a Market Profile buying tail) or an excess low (a MP selling tail) before they reverse direction. Identifying and trading these moves is a broad brush explanation of the TTT.
Much of the time there a couple of sessions between when a market bottoms and then rallies (a Taylor Trading Technique Buy day) to a session when a market tops out and then sells off (a TTT Sell short day). However, I’ve found that sessions where a breakout move occurs often create the “excess” high or low that results in an opposing TTT move in the following session, regardless of the TTT cycle.
This tends to be especially prevalent when the breakout move is in the opposite direction of the higher timeframe (30, 60 minute or daily) trend, where the breakout move can give traders an advantageous trade entry in the direction of the prevailing trend.
The natural gas futures were a good example of this setup. November natural gas futures had a breakout setup for Monday, which resulted in a good directional move higher- it opened at the low of the session and rallied over the day to close near the session high.
However, Monday’s rally didn’t change the daily trend which is still down, and this move gave the “exit breakout buys, Taylor Trading Technique Sell Short day” setup that was identified in last night’s Swing Trader’s Insight and this morning’s STI watch list (the STI watch list is here).
For a Taylor Trading Technique Sell Short day we use the previous session high as our “reference price”. We look for the market to show upside follow through with a rally above our reference price giving us a heads up to look for a downside reversal.
On a Sell Short day, our trigger for a short sale is a subsequent move back below our reference price; this is our evidence that the trend has turned down. If the market continues to move higher we don’t take a trade; we initiate trades only when we have confirmation that the market is beginning to trend in the anticipated direction.
Natural gas futures continued higher last night and early this morning, trading below Monday’s high of 3.927 before the 8 AM CT pit open. The 8:15 AM rally above Monday’s high gave us our “heads up” signal and the 9 AM move back below the Monday high was our trigger for a short sale (I usually prefer to use resting stop orders to enter these trades; that way I’m not making trading decisions in a fast moving market.)
Today’s session high of 3.955 was the initial stop loss for the short sale, giving an initial risk of about $300. We put the stop above the session high because if the market made a new high after our short sale it would mean that the down trend was ended; we would take our loss and look for another entry later.
In this case the market moved quickly in our favor and continued to move lower this morning. I circled the intraday highs and lows; today was a good example of the “three pushes” pattern that Linda Raschke looks for to anticipate when a move may run its course. It also gives an idea for how stop losses could be lowered as the market dropped.
Last Thursday’s low of 3.813 was a good reference price to use to determine whether the market would continue still lower or whether we should cover shorts; the successful low test told us to cover shorts to take profits.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
Risk Disclosure
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