11/2/2019

Linda Raschke (Day Type, Taylor Trading, Trade Location)

Daily bar charts provide initial context—is there a chart formation?

SLIDE #1

Is the market trending (a la an “extend run”)? Are there momentum divergencies or continuation
patterns?

1. I approach the market analyzing the Daily Structure first. I use a moving average oscillator that is
the difference between a 3 and 10-period simple moving average and then a 16-period moving
average of this. I use the oscillator to help confirm the bar chart structure. It is a pattern
recognition tool only to add confidence, and is not something that will test out with quantitative
modelling.
2. I use it to support the weekly chart structure as well. Currently, weekly sell divergencies have
been the dominant technical.

Comments: 3/10 oscillators are extremely useful in highlighting chart formations, which are very
important in the big scheme of things.

THINKORSWIM

The Three Ten Oscillator study comprises four plots, the combination of which is used
to determine Buy and Sell signals. These signals are related to two plots of the study:
the Fast Line plot and the Slow Line plot. There are two modes of calculating the Fast
Line plot.

In normal mode, the Fast Line plot shows the difference between the two simple moving
averages of price: 3 period and 10 period ones. In the alternate mode, this plot
represents a 2 period moving average of difference between the price and a 3 period
moving average of price from 3 bars ago. In both modes, the Slow Line plot is a slow
(16 period) simple moving average of the first plot.

When the Fast Line overtakes the Slow Line, it is interpreted as an uptrend, while the
Fast Line falling below the Slow Line signifies a downtrend. Thus, the corresponding
crossovers of the two plots are considered to indicate Buy and Sell signals.

For additional confirmation, the mentioned plots are complemented with Zero Line and
Hist plots (the latter represents Fast Line values in the histogram form). Positive values
of the histogram confirm the Buy signal and negative values confirm the Sell signal.

SLIDE #2
Comments: The 3/10 oscillator is really there to just support what the eye sees. The best chart patterns,
that happen on a daily chart, do not happen that often. There is a lot of noise between the observations
of the best daily chart patterns. Lots of noise between. So we are going to look at the 2-3 daily cycle. Up
1, 2, 3 days, down, 1, 2, 3 days.

I always want to put the market in context, so I always start with the daily and weekly chart formations.
I am looking for buying and selling divergencies—these are important.

One of the things I like about the 3/10 oscillator is monitoring the slow line. The slow line represents the
higher time frame. SO comparing the daily and weekly, you can see how the weekly fast line has
corrected down. So the slow line on the weeklies continues to work back down. This means that we may
be in a sloppy environment for weeks to come. But the beautiful thing about taylor, is finding the
opportunities in both directions.

For the weekly charts, look for a broader cycle at work. When the slow line on the weeklies starts to
work back down, that means that we could be a in sloppy environment for a few weeks to come.

SLIDE #3

The basics of classic technical analysis have not changed. Follow momentum until there are momentum
divergencies on the higher time frame.

The best position trades really only happen about once a quarter. So you need to have another stable
way of money waiting for these best trades.

Nearly all of the position trades come from using the 2 time frames, the dailies and the weeklies. For
example, the weekly chart had two higher lows—very very powerful. On the daily chart we say a wedge.
The reason want to identify these types of formations, in addition to having the opportunity is for
something we will look at later, cases where you get persistency of trend for an extended run which is
going to be the second half the slide presentation. So even though by my nature I am a trader of these 1,
2, or 3 day cycles, up and down, or looking for the buy or sell short day type. I love doing the overnight
trades, buy 1 day and exit the next day. The reason why it is so important to identify these points where
we can have an extended run—which are cases where you get multiple closes on 1 side of a 5 period
simple moving average (5 period SMA).

STOPPED 8:53 (https://www.youtube.com/watch?v=yHJDIWSIKvE )

11/3/2019

https://lindaraschke.net/swing-trading-rules-and-philosophy/

Style based on the “Taylor Trading Technique”, a short-term method for trading daily price movements
that relies entirely on odds and percentages. It is important to know the “correct plays” to lock in
profits, and to seek “the trend.” One trades strictly for probable future results, not for what the market
might do. This method teaches you too anticipate, and not react. Never trade in narrow, dead markets.
Time 19:25

Six Ways you can use Taylor’s Methods

 Follow the system literally in exact detail

 Follow the basic methodology
 Trade selective “plays” only (this is what Linda does)
 Use for accumulation/distribution in trend trading and intermediate swing trading
 Use as a departure point in developing short term mechanical systems
o Price Pattern
o Range Expansion systems
o 2 Day ROC
 Price as a way to develop superior entry/exit technique

The swings are too small. Never chase a market. Short term trading rules

 If the trade moves in your favor, carry it overnight. The odds favor a follow-through. Expect to
exit the trade the next day around the objective point. An overnight gap presents an excellent
opportunity to take profits. Concentrating on only one entry or one exit per day relieves the
pressure.
 If your entry is correct, the market should move favorably almost immediately. It may come
back to test and/or exceed your entry point a little, but that’s OK
 Do not carry a losing position overnight.
 A strong close indicates a strong opening the following day.
 If the market doesn’t perform as expected, exit on the first reaction.
 If the market offers you a windfall of big profits, take them to the bank on the close.
 If you are long and the market closes, indicating a lower opening following day, exit the trade.
 It is always OK to exit a trade.
 Use tight stops when swing trading (wider stops when trading trend).
 The goal is to minimize risk and create “freebies”
 Place orders at the market
 When the trade isn’t working, exit on the first reaction
 The Taylor method works the same as it did 10, 20, even 50 years ago. It involves discretion in
assessing where the market opens relative to the previous day’s close and range, and how the
market trades off the opening price. You can use the evening’s start time or the 7am CST
reading and the approach will not change.
 Anticipate!

Taylor Concepts

 Technique classifies days into 3 labels: “Buy day”, “Sell Day”, “Sell Short Day”. We use these
labels to anticipate what our core play will be for that day, and use that structure to identify and
execute trade opportunities.
  A “high to low” or “low to high” rhythm: most of the time, markets generally alternate in a 2-3
day high-to-low or low-to-high intraday rhythm. We compare the open to the close for this
observation.
 Swing Highs and Swing Lows. These are made one of two ways, either with a “violation” (a test
above/below the previous day high/low) or a “good gap” (the market gaps the other way,
trapping the previous day’s players.) A Swing High or Swing Low is marked by “excess” as the
market “overshoots” this is the false move the Taylor Technique seeks to identify.
 Residual momentum: markets tend to exceed the previous day’s high or low in the majority of
days.
 Inside days/2-day ‘balance’: I expanded this to a broader range of “breakout” setups; days to
forget the “taylor count” and “go with” a move out of close in support or resistence.
 Key reference point: the use of a price for a “reference point” helps you interpret the market’s
action. It is usually the previous day’s high or low, depending on whether you anticipate buying
or selling. These five concepts help you identify where the market is by the taylor cycle, and
gives you price levels to identify places of opportunity.
 Buy Days: We look for a buy day 2 days after a swing high (a swing high is either a violation of
the previous day’s high, or a gap higher). On the Buy Day we anticipate the end of a decline (a
selling auction in Market Profile) as the last sellers get in. We generally use the previous day’s
low as the reference price. A move below the previous day’s low create the excess low that
marks the end of the decline and we seek to buy as the market rejects lower prices and begins
to rally. On a classic buy day we look to buy when the market trades back above the previous
day’s low, thus trapping the last sellers. This rally continues, and the resulting low-to-high action
is evidence of Buy Day action (and a successful long entry). On successful. On a successful Buy
Day, we have established profitable long positions that we took home, anticipating upside
follow-through on the Sell Day.
 Sell Day: can be confusing because, in spite of its name, it is generally not a day to establish a
short portion (although there are exceptions). On a Sell Day, we anticipate residual momentum
to rally the market to the high of the previous Buy Day session. This rally to the “Buy Day” high is
used to liquidate the long positions purchased in the previous session.
 Sell Short Day: incredibly similar to a Buy Day. Look for a sell short day 2 days after a swing low.
We look for residual momentum to produce a move above the previous day’s high to create the
excess high that traps the last of the bulls. At this point, the rally (a “Buying Auction” in Market
profile) terminates, and a decline ensues. On a classic Sell Short Day we use a move back below
the reference price—usually the previous session high—as a trigger to enter a short position.
 Inside Day: We generally use the previous session high or low as our reference point, but an
Inside Day poses a different situation as there is no violation to create an excess high or low.
Taylor viewed Inside Days as a sign the market was at a short-term balance point. For this
reason, Taylor would view both the previous session’s high and low as reference points. We
anticipate a move above the previous day’s high to be a “go with” move to buy, anticipating the
start of a rally. A move below the previous day’s low would be the same “go with” move.

Another Explanation of Taylor

Taylor observed that the market tended to make a swing high or swing low every two to three days.
The market would alternate between this buying pressure and selling pressure, which could then be
captured by entering a position on one day and taking it off the next. Thus, a market could be traded
back and forth systematically regardless of the overall trend or fundamental outlook. Taylor labelled the
days as a "buy" day, "sell'' day, or "sellshort" day, and gave each one specific rules for entry. We are
going to concentrate on the rules for a buy day and a sell short day. A buy day sets up after the market
has sold off for one to two days. (In a downtrend, the market might need one more additional day to
sell off.)

The ideal buy day opens on its low and closes on its high. In the morning, a buy day should find support
at the previous day's low. Sometimes it will make a slightly higher low or a lower low, but this test (i.e.,
the low made first on the buy day) is what defines the support level. This then allows us to see our risk
point where we can place a protective stop and to enter a long position.

After a buy day entry, we monitor the market to see if it closes higher than its opening. If it does, we will
carry the trade home overnight. The market should not make new lows in the afternoon after we
bought it. If it does, we will be stopped out since our morning support stop will have been penetrated. If
the trade is a winner, we will look to exit the next day. The ideal spot to exit is above the high of our
entry day. The trade is trying to take advantage of the tendency for morning follow-through as
demonstrated in the test profiles we looked at for the 80-20's days. On a sell-short day, the market
should make its highs first in the morning. The previous day's high is the resistance level that the sell-
short day then tests. The sell-short day does not have to exceed the previous day's high; it may make a
lower high. If the market makes a morning test of the previous day's high and reverses, we will go short
"at the market and put a stop just above this test point. If the trade closes with a profit, we carry the
trade home overnight and look to exit the following day. If it starts to make new highs in the afternoon,
our stop will take us out. The market will then probably close higher and it would be better to try,
shorting the market the next day (hopefully at higher levels) than to carry a losing trade home overnight.
This is the essence of Taylor's trading method. The most important concepts are looking for morning
tests (just as in Turtle Soup), and trading off morning reversals (just as the 8020's bars do).

Concentrating on just one entry or exit each day is much easier psychologically than day trading which
has the stress of monitoring both the entry and the exit on the same day. Carrying winning trades home
overnight is a good habit you should form. What is amazing are the additional profits which can be made
playing for the next morning's follow-through. The biggest obstacle people have in using Taylor's
methodology is figuring out which day should be a buying day and which one should be a shorting day.
As we've said, Taylor kept a rigid mechanical trading book, but he also had all sorts of quirky rules for
shorting on buying days and vice versa. We do not want to get that complicated.

29:00 on video

There is nothing more easy than finding low to high days, or high to low days--The trend for day. There is
nothing more simple then finding a down trending market, and where there are two low to high days in
a row, and the next day is going to be a sell short day. Or finding a up trending market, and where there
are two high to low days in a row, and then next day going to be a buyer

3 bar triangle: 3 bar triangle = high below 2 day high, low above 2 day low - was written about 60
years ago. Another explanation: The three bar triangle is when the current bar’s high is
lower than the 2 day high and the low is higher than the two day low. Breakouts
from this formation have better odds of follow through than breakouts from a one
bar NR7.