The Taylor Trading Technique
Understanding and using George Taylor's time tested Taylor market rhythm
Theories to capitalise on trade opportunities have their roots stretching back several decades.
In this regard, names like Elliott, Wyckoff, Gartley, and Gann come to mind.
However, George Douglas Taylor is a far less popular trading innovator.
Still, his work endures today for astute chartists thanks to the Taylor trading technique.
It’s yet another interesting framework to tackle the chaos of the financial markets.
Let’s explore…
Table of Contents
What is the Taylor trading technique?
The ‘Taylor technique’ (or the ‘Book method’) is a trading theory created by George Douglas Taylor in the 1950 222-page book entitled ‘The Taylor Trading Technique.’
Analysts consider this content the ‘Bible of Swing Trading,’ a particular favourite of legendary trader Linda Bradford Raschke.
Given the work was released nearly 75 years ago, investors can read Taylor’s book and access the same time-honoured information in a more accessible re-issue from 2016.
The latter is the second re-issue after the 1994 edition.
Taylor’s trading technique refers to a specific three-day rhythm describing trends and trading ranges. The trading technique initially stemmed from Taylor’s experience as a grain trader observing grain market cycles.
Taylor concluded that financial assets were driven by ‘market engineering,’ where large players manipulate traders to buy when they should be selling or selling when they should be buying.
The market profile of the technique is that the price moves on a Buy Day, Sell Day, and Sell Short Day. Below is an image for a better demonstration:
The Book Method’s core premise is similar to Wyckoff’s theory in many ways. We may look at the three days as the accumulation phase, distribution phase, and markup/markdown phases, respectively.
This is a much simpler way to look at this trading technique.
Alternatively, markets move in:
- a day of trend
- a day of consolidation
- a day of reversal
A common complaint with the Taylor trading technique is that the original book is confusing.
Only a few analysts have been able to explain the material more understandably. Yet, expressing the market’s rhythm using Taylor’s work isn’t complex once you understand the basics.
The inner workings of the Taylor trading technique
Taylor practitioners speak of knowing the correct day in the cycle and acting accordingly. Hence, there are vital market concepts to know about the Taylor trading technique:
A ‘high-to-low’ or ‘low-to-high’ rhythm: Markets generally move in a 2-3 day high-to-low- or low-to-high trading day rhythm. The key is to observe the open and close prices to figure out this pattern.
Swing highs and swing lows: These happen in two ways. The first is through ‘violation’ (a test below/above the previous day’s high/low) or a ‘Good Gap‘ (the market gaps the other way, a trap for the less savvy traders of the previous day).
Residual momentum: This refers to how a market often surpasses the previous day’s high or low.
Moreover, Taylor theorised a way to calculate areas of interest that traders should watch, similar to pivot zones.
- The rally number: today’s high – yesterday’s low
- The decline number: yesterday’s high – today’s low
- The buying high number: today’s high – yesterday’s high
- The buying under number: yesterday’s low – today’s low
- The pivot breakout number (refers to a point where support has turned to resistance and vice versa)
How to trade with the Taylor trading technique
The easiest way to use Taylor’s technique is to understand the characteristics of each day in the cycle.
A Buy Day represents the end of a decline and happens following one day (or sometimes three days) of high-to-low trading action.
The market will have opened and traded higher or lower compared to the previous day’s close. We should anticipate upside for quite some time.
Then, we have the Sell Day or consolidation day.
Despite its term, it doesn’t usually signal one should be selling (however, some exceptions apply). Rather, it’s a period when the market will trade in a narrow range.
The gains and losses produced on the previous Buy Day are consolidated. We identify this stage in the cycle by looking for a day when the market opens and stays within the range of the previous day’s close.
Finally, the Sell Short Day or reversal day is where the market reverses from an uptrend to a downtrend or vice versa. Identifying this is observing a day when the market opens and moves beyond the range of the previous day’s close in the opposite direction.
Once you’ve identified where you are in the cycle, the rest involves risk and trade management as part of your trading plan.
Another good tip is to use the daily time frame, a chart reference that swing traders prefer.
Given that the Taylor trading technique frequently references ‘days,’ it makes sense. It’s a time frame that makes it easier to view the different market open and closing prices.
With that out of the way, let’s look at visual examples of the Taylor trading technique in real markets.
Summary
The Book Method has remained under the radar throughout the decades with very few online resources. You may choose to read the original books even though they use complex vocabulary and outdated visual examples.
Despite the theory’s opaqueness, little separates it from Wyckoff’s teachings and other similar material.
As with any theory, Taylor’s work only provides a skeleton and shouldn’t be considered a strategy. It’s up to the trader to colour the outline with other ideas that complement the original concept.