By Bob Moore
Successful traders are constantly searching for the ‘perfect’ set-up to win a trade. One such opportunity happened on Friday, January 7, 2011. And all the better, the opportunity can be replicated by trading instrument of choice and occurs time-and-time again.
Of course, to have the impetus to timely act on a trade, the trader needs to verify the opportunity by considering multiple vantage points. By combining the principals of Taylor Trading Method with Value Area Trading and overlapping Trade Triggers Buy/Sell signals, the trader can consider multiple vantage points to quickly and reliably conclude if the trade presenting itself is a worthwhile trade to act upon.
Even though the ETF, SPY (which is managed to replicate the S&P 500), has been used to describe the intricacies of Friday’s trade, many trading instruments could have been substituted in the SPY’s place to take advantage of the same trade.
The trading opportunity that occurred on Friday, January 7th actually started to develop on Thursday, January 6th. Thursday was a Taylor Trading Method Buy Day. According to Taylor Trading Rules, the Buy Day is the first day of the Taylor Trading 3-day cycle in which lows for the cycle are to be established.
On Thursday, SPY, along with many other trading instruments, opened above its close the day before gyrating above and below its Value Area (VA) High. (The Value Area of an instrument is unique for each trading day and is the price range in which 70% of the instrument’s trading volume took place the day before.) The SPY traded above its VA High at 10:30 US EST verifying that SPY traded a sufficient amount of time above its designated VA.
Then, Market sentiment began to change abruptly in which the SPY traded below its VA High at 11:00 and 11:30 US EST ½-hr Bars triggering VA 80% Rule to the downside. (According to VA Rule, if a trading instrument declines below its VA High for (2) consecutive ½-hr Bars then there is an 80% chance it will decline at least to its VA Low by close of next trading day.) In addition to the VA Rule being triggered, the Taylor Trading Method Buy Day Low was established between 11:00 and 11:30 US EST at a level of 127.01.
The rest of the day was non-eventful with the SPY trading within its VA and churning a slight recovery from the late morning decline. It is the non-eventful afternoon, however, that cued the trader to consider his/her trading opportunities for the next day:
- The trader understood, according to Taylor Trading Rules, that if the Markets declined below Thursday’s Buy Day Lows on Friday, the Sell Day, there is a good chance of rallying back up to the Buy Day Lows by at least Monday, the Sell-Short Day.
- The trader also understood, according to Value Area Rules, there is an 80 % chance of reaching Thursday’s VA Lows to fulfill the VA Rule triggered on Thursday but not yet fulfilled.
- Equipped with the above knowledge, the trader would patiently wait on Friday to see if Taylor Trading Method and Value Area rules played out.
The SPY traded in a choppy fashion near the open on Friday signaling red-color coded Taylor Trading Daily Extremes for the day. By late morning, it had not only declined below Thursday’s Buy Day Low of 127.01 but had reached Thursday’s VA Low of 126.75 to fulfill VA Rule triggered but not fulfilled on Thursday (as per VA Rule).
The trader was certainly sensing a Buy opportunity was about to unfold. The Markets were reacting to (3) negative news events: US job creation for December weaker than anticipated, Portugal debt concerns, and US bank-home loan foreclosure judgments that were not in favor of banking industry. The Markets were having a tantrum disturbing the natural evolution of a Taylor Trading Method Sell Day.
The trader monitors the SPY for a potential further decline. He/She overlaps Taylor Trading Potential Daily Extreme range of 126.61 – 126.09 over Trade Triggers 3rd Buy Signal range of 126.19 – 126.39 and sets a predetermined Buy Signal at 126.30.
The SPY reaches the Buy Signal ranges in early afternoon trading. The trader places the order to buy SPY at 126.30 shortly before 1:00 pm US EST, at which time the order is soon processed.
The SPY proceeds to rally the remainder of the afternoon eventually trading and closing above Thursday’s Buy Day Low.
The trader, not desiring to carry the trade over the weekend, closes out the trade during the last ½-hr of trading at the SPY level of 127.15 for a nice 0.85 profit.
The trader may have left some ‘profits-on-the-table’ by closing out the trade on Friday, the Sell Day. But to play it safe, that is exactly what Taylor Trading Method suggests to do, as the Smart Money tries to ratchet the Markets higher on the Sell-Short Day, but with increased volatility and the chance of being caught in the swing down that establishes the next 3-day cycle.
About the Author
Bob Moore is with Taylor Trading Plus, an international data-exchange trading service using George Taylor’s Book Method, Value Area trading, Elliott Wave analysis, and Short-Term Trend analysis to identify trading entries/exits in select instruments of Futures, ForEx, Commodities, Metals and Oil, ETF’s, and Stocks. To request visual aids that help with understanding of this article, please go to ‘Contact’ tab at: http://www.taylortradingplus.com.
