In the Monday night edition of Swing Trader’s Insight, I labeled the eMini S&P futures as having a breakout setup for the Tuesday session. This led to a big downside move on Tuesday, which in turn meant we should look for a Taylor Trading Technique Buy day for Wednesday.
On the daily chart above we can see how the past couple days have gone. On Tuesday, there was a big downside move when the eMini broke below the Monday low, resulting in a 40 point move down.
It can be tough to know what to do in the session following a big directional move – will it continue or reverse and retrace some of the previous day movement? Here lies one of the strengths of the Taylor Trading Technique – it allows you to anticipate a trend change but you don’t act on this until we get an actual trend change single.
The logic of this is that a large directional move day often “uses up” the market’s momentum, although no one can be sure of that until they have evidence of its occurrence. For some traders, the end of a big move results in disaster. It’s what gets them to buy a top or sell a bottom as they either get in on a move too late or the market moves past their pain point and they get stopped out at a high or low (something I think we’ve all done).
The TTT tells us to anticipate a reversal in the following session but it goes one step farther, it tells us to enter a trade only when we have evidence the trend has changed. We’re not trying to pick a top or bottom, we look to enter a trade shortly after a trend change.
In this case, the downside breakout move on Tuesday meant the Taylor Trading Technique told us to anticipate a Buy day for Wednesday. On a Buy day, we look for an initial move below the previous day low, the reference price, to give us a heads up to look for a trend reversal. (This initial down move gets some weak longs to sell out and some traders to sell in the hole.)
After we get the move below our reference price, we then look to go long when the market moves back above the previous day low, which is our evidence of trend reversal. We then look for the market to continue higher and hold longs until the upside momentum runs out.
For the eMini S&P today (see above), the market sold off from the 8:30 AM open, breaking below the Tuesday low around 8:40. This gave us our heads up to go long, and we got our buy signal a few minutes later as it moved back above our reference price. For about 25 minutes it moved back over and under the reference price before beginning a more energetic rally. The series of higher swing lows showed waning selling interest, giving us confidence in our long entry.
The initial stop loss for the trade went below the session low of 2611.25; a new low would signal a new downside trend reversal. For eMini S&P swing trades I normally like to use a stop loss of about 6.00 point ($300) so this trade fit our risk criteria.
Around 9:45 the market began a strong rally, reaching the day session high of 2634.75. In the STI morning comment I said we should watch the 2635 level as a pivot point for the rally; the market’s inability to clear it was a signal to take profits and a lower high 15 minutes later reinforced this idea. The 2635 level had been resistance yesterday afternoon as well; I might look to go long later today if it ends up rallying above this level.
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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.
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