Taylor Trading Technique

The Taylor Trading Technique
George Douglass Taylor
Traders Press, Inc

Greenville, SC
Copyright © 1950 George Douglass Taylor
Reprinted 2007 by Traders Press, Inc.®
All rights reserved. Printed in the United States of America. No part of this publication
may be reproduced or transmitted, in any form or by any means - electronic, mechanical,
photocopy, recording, or otherwise - without prior written permission of the author.
ISBN 10: 0-934380-24-4

ISBN 13: 978-0-934380-24-9
This publication is designed to provide accurate and authoritative information with regard
to the subject matter covered. It is sold with the understanding that the publisher is not
engaged in rendering legal, accounting, or other professional advice. If legal advice or
other expert assistance is required, the services of a competent professional person should
be sought.
Cover design and layout by Shelley Mitchell, editor.
Traders Press, Inc.

PO Box 6206
Greenville, SC 29606
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Publisher’s Foreword
I first learned of Taylor’s “BOOK METHOD” in 1975, from a colleague’s client who
had traded commodity futures for over 40 years. At this time, I was early in my 22 year
career as a futures broker. This trader, Charles Ballentine, to whom I dedicated my 1979
book, The Trading Rule That Can Make You Rich*, was the most astute, knowledgeable,
and “market-savvy” trader I met during my brokerage career. He considered the method
described herein as one of his most valuable tools as a short term trader. The “dog-eared”
and coffee-stained copy of the book that I obtained from him was the only one I was able
to obtain for many years to come, as it was out of print and virtually impossible to find.
In more recent years, this method has been re-popularized by George Angell in his books:
Winning in the Futures Market and How to Triple Your Money in Stock Index Futures Every
Year, in which he retitled it the LSS Method. Linda Bradford Raschke, one of the “New
Market Wizards” uses Taylor’s methodology extensively in short term trading and has
highly recommended this book during her speaking engagements.
Since Taylor was similar to the legendary W. D. Gann in that he appears to have been a
far better trader than writer, this book is NOT easy reading. In order to facilitate an easier
understanding of this material, I am reprinting comments from Linda Bradford Raschke
on how to use this method published in the Club 3000 News, and George Angell’s 40-page
section on Taylor’s technique in his Winning in the Futures Market. Though placed at the
back of the book, the reader may find it easier to understand Taylor’s writing if Raschke’s
and Angell’s comments are read first.
Edward D. Dobson, President

Traders Press, Inc.®
Preface
In preparing this work the author has felt the difficulty which arises in a theoretical
dissertation on so practical a subject as speculation.
While trying to describe the action around one kind of trading objective, it is, also, necessary
to try to describe the nearby future ‘play’ at the same time, since, the entire method is
anticipatory and forecast.
This accounts for much of the repetition for in trying to describe the action around a Buying
Point, for instance, we must, also, try to describe the action that precedes and leads up to
this point, what action, should it occur, it forecasts for the next nearby future move.
Though theory and practice are not at variance when combined, yet either without the other
proves very unsatisfactory. Thus, the reader should he start with only the theory, will find
himself for some time pretty much “at sea” when he comes to actual practice.
As, however, he gradually obtains some practical experience, he may find this method
of trading some use to him. So, also, the seasoned trader, who before, entrusted to luck,
keenness of observation, intuition and experience, may find himself in the future much
better equipped by acquiring a little theory.
While the statements in the work are predicated upon fundamentals, no reader should accept
them as hard and fast rules, without exceptions. Statements that have been made are based
on a long period of observations of what generally takes place, around these objectives
but a trader must not be so rigid as to stick to a stubborn theory. Successful speculation
is not based on any one set of inflexible rules and a trader must be ready to change when
conditions change, however, the trader who knows how to act when the expected happens,
is in a better position to act when the unexpected happens.
We have included just as much material as we think would be interesting and useful, saving
a lot of time and the trouble of wading through a vast amount of superfluous and irrelevant
matter, so far as trading with this method is concerned.
George Douglass Taylor

Table of Contents
Part I: The Taylor Trading Technique
Chapter 1 – How the Market Trend Is Made………………………... 7

Chapter 2 – How to Make up the Book……………………………… 15
Chapter 3 – Uses for the Columns and Marks………………………. 19
Chapter 4 – The Symbols (X) and ( ) as Trend Indicators………….. 24
Chapter 5 – A Buying Day…………………………………………... 27
Chapter 6 – Buying on a Buying Day Low Violation……………….. 31
Chapter 7 – A Selling Day…………………………………………... 36
Chapter 8 – A Short Sale Day……………………………………….. 39
Chapter 9 – A Short Sale at High of Buying Day Made First……….. 42
Chapter 10 – Failures to Penetrate…………………………………... 45
Chapter 11 – The Trend Line and Trading Areas…………………… 48
Chapter 12 – Limit Day Moves……………………………………… 62
Chapter 13 – The Three Day Trading Method……………………….. 63
Chapter 14 – The Investor and Swing Trader……………………….. 68
Chapter 15 – Pertinent Points………………………………………... 70
Part II: Additional Material
Figures……………………………………………………………….. 77
Portfolio……………………………………………………………… 87
Part III: Supplementary Articles
Linda Bradford Raschke

Taylor’s Swing Trading Method…………………………… 101
George Angell
“The LSS 3-Day Cycle Method: A Day Trading Approach
to the Markets” from Winning in the Futures Market: A
Money Making Guide to Trading, Hedging and
Speculating………………………………………………………. 103
Chapter 1
How the Market Trend Is Made
The “TAYLOR TRADING TECHNIQUE” move with greater assurance and safety than on
[is] a book kept in tabular form to anticipate and the daily ‘dope’ he reads.
follow the trend of prices as they appear on the The trader does not reach for the gossip file
‘tape’ and to point out the important, stopping when he comes in, his decision has been reached
places, for buying and selling, wholly concerned before the market opening—he is ready to trade
with the technical side of the market for trading or not to trade—at the opening or shortly after—
in grains, stocks and other commodities. unencumbered by comments or opinions from
The BOOK Method is particularly adapted to any source.
the daily trading in grains—for normally there is Of course, a trader should study and know all
more activity and it does not require so great an about his business the same as in any other line
investment—and to the daily trader who aims to of endeavor but he must not permit any outside
profit by the rise and fall of the daily movements influence to interfere with these Objective
and who trades in from One to Twenty Thousand Points as they appear on the tape, for he will find
Bushels or the price equivalent in stocks. These that, as they appear and pass that they will have
are not limits but about the average trading discounted all the nearby news, and he must not
orders. and cannot ignore the prices as printed on the
The trader who uses the short term method tape, and these prices will appear contrary most
does not need to look very far ahead, therefore, of the time to the news he has just read in the
the Book Method, does not concern itself with ‘daily dope sheets’ around the board room.
commodity economics nor speculation in [its] A Grain-Stock Trader, Operator, is exactly
broader sense nor does it require the keeping of what a speculator should be, an operator,
daily charts—it is not a charting system—the manipulator and a trader and he must understand
reading of or dependence on daily telegrams, the fundamentals of manipulation to be a good
weather reports, open interest and the mass of trader since manipulation enters into the market
other market comment put out each day. at all times.
It is concerned entirely with Objective Points In other words a good manipulator would be
for Buying, Selling and Short Selling one the a good trader but it does not follow that a good
Minor Movements of the market and in training trader would be a good manipulator, however,
a trader to depend upon his own judgment and they would both be well versed in the manner
from his book he can and will get his own ‘tips’ of how buying and selling moves prices in the
on the movement of prices and in advance of markets.
any of the published ‘chatter’ provided each day Before organized buying or selling, that is,
for the traders and he can depend upon them and pools, were prohibited a manipulator working
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with a stock or commodity would be compelled selling takes place—and this is why the BOOK
to trade in thousands of shares or bushels, as TRADER need not pay, too much, attention
the case may be in the course of putting up the to these matters—he knows that once a trend
price and much of this trading was for his own starts—Bull or Bear—that it will continue for
account, in order to make money for himself, an indefinite period of time and that either way
in addition to the accumulated commodity he it will contain many Trading Areas, rallies and
hoped to sell at higher prices for his associates, declines.
however, with all the prohibitions the action Now accumulation of grains and other
of the market then and now, is just about the commodities are for the major part for purposes
same in [its] movements. Prices still continue other than speculation, in fact only a small
to move up and down at regular intervals when percent is for speculative purposes, however,
individuals are independently working towards this small percent does at times cause prices to
the same end. move violently both up and down.
Now suppose the speculator that understood Let us assume that conditions are favorable
the fundamentals of manipulation wanted to and a move is about to start, demand from some
do some trading, what would he look for, well, source and for some purpose starts it—and here
he would first look for inside buying or selling again the BOOK TRADER is only interested
and since this is all revealed by the tape, this in [its] starting, the movement, and not much
is just what he would do—he would read the concerned with which way it goes—now what
tape trying to discern the buying and selling happens, well, some day on the tape you see that
and which way prices were moving or more apt a particular stock or future has become quite
to move, in other words the trend—The trader strong and active with the price rising, now, you
using this method would look for a movement observe this action for a few days and you will
more or less mechanical in [its] action for tactics see that it only goes up so far, stops, then starts
of manipulation do take on a mechanical action down. It reacts a little, something seems to arrest
after awhile and for the simple reason of the the downward movement and then it starts up
pattern prices form through repetition. again but notice it goes up a few cents or points
Let us look at the manipulative side of the or more then it goes down a few cents or points
market and what takes place preparatory to move more but if you analyze the movement from the
in a stock or commodity and the tape action is the time it starts from the bottom of the minor move
same for all, grains, stocks and commodities. up to the top of the minor move, you will notice
We will start with a stock during accumulation, that it required about three days on the average,
for our trading we are not concerned with why while the corrective decline was completed in
it takes place nor for what purpose but we know one or possibly two days.
that periods of congestion are for accumulation Let us suppose this stock or future was being
or distribution but what interests the BOOK manipulated with the intent to put up the price,
TRADER at these times is the type of trading, just how would it be done, well, one of the
the buying and selling, and the way it moves ways and perhaps a method employed by most
prices and it is at these times when the action manipulators both past and present would be
becomes most mechanical as the book shows. for him to start buying, assuming of course that
Now let us assume that all the preliminary he already had accumulated his line and other
work has been done, general and special conditions were right for a move.
information on a particular stock or commodity, He would FIRST start by buying all the
together with all other information pertaining stock or grain above the market, for some little
to crops, supply and demand, and earnings and distance, say, four or five cents or points or more
business conditions on stocks, and you can —this stock is the resting orders of those traders
be sure that these matters will be studied and that are ‘hung up’ and others that would like to
analyzed before any concentrated buying or get out of the market, relieves the market of that

Chapter 1 How the Market Trend Is Made
pressure, clearing the way for trading purposes This is the reason why the book becomes
and establishes the price trend as up. The buying mechanical in [its] recordings of the minor
of this stock would not take place, unless it was trends—it points out the Main Objectives on the
the intent to try to put the price higher. respective trading days, even though, any one
By making the stock active, coupled with the of these sessions may be filled with currents or
rising prices, the traders, professionals and the cross-currents, smaller rallies and declines.
buying public, attracted by this activity come On the Buying Day Objective we expect
in as buyers. This outside demand is filled with support and we watch the tape to confirm this
the stock the operator was compelled to buy in buying for support and for a rally to start.
starting the move and the demand for the stock On the Selling Day Objective we expect
caused by this buying should be more than he selling and we watch the tape for confirmation
was forced to accumulate in the earlier stages of this selling and a reaction to follow.
of the movement. When this happens he sells it On a Short Sale Day Objective we expect
short and this is just what the experienced trader a hesitant action of the rise and we watch the
reading the tape would do, he would notice the tape to see if the selling is stronger than the
slackening of the rise and the fact that there was buying and if the buying is being overcome by
no inside buying and he would sell it and sell it the selling, in which case we expect a decline to
short. start when the action slows down or stops.
The market being deprived of the buying Now we understand how a stock or future
power in starting the move by those making the starts up when the move is on, then reacts, then
market plus the stock fed out from the inside, starts up again and as the bottoms are edged
fills the demand by the traders and with this higher the tops have to be broken to go higher.
demand filled the stock ceases to advance. The bottoms are support levels, temporarily, and
The experienced traders noting the lack of on the tape you will usually see a little trading
buying orders and the slowing down or checking around a point like this, the same when a stock
of the rise sell out and take their profits and they, gets up to the top of a minor move, a supply
also, sell the stock short. The weight of this point, here again a little trading takes place. This
selling starts the stock or future down and when is not always the case for at times the low will
this happens the operator starts to support it—he have been reached on the down side by each
buys back from the traders the stock or grain he transaction dropping the price lower until it is
sold them a few cents or points above the market supported.
and he, also, covers the short sales he put out At times when the way is clear and there are
when the stock was in demand—This buying few or no selling orders for some little distance
back of the long stock and the covering of the above the market, the operator will run the price
short stock checks the decline. up fast, this action creates interest among the
The operator then follows the same procedure traders and brings in buying, the stock of which
all over again, he takes all the stock or grain in turn is supplied by the operator and gives him
offered on the way up and the price begins to a chance to sell a little long stock and to put out
rise a second time. He repeats this process of some short sales.
alternately buying and selling, he buys on the With the Book Trading we are concerned,
way down and sells on the way up but always only, with the Objective Points and we don’t
working higher, he supports the stock at higher care much whether the price goes straight up
levels on the declines and this may be weekly or down to reach them. Of course, when these
or monthly. This procedure continues all the Objective Points are reached by a little trading
way up to the top of the rise, this buying and it gives the trader more opportunity to buy and
selling keeps the market in check and helps to sell and he can usually get better executions but,
stabilize it and the rise and fall of prices causes also, when the stock goes straight up or down to
the trading market. these Objective Points it is the strongest action

for a quick and sure play. “not so you could notice it”—it depends entirely
The book trader just simply follows the trend on how the trader thinks and his experience
of prices as they are recorded in his book and and patience. The trader depends on his book
the book more or less records the rhythm of the and his book depends on him, by this is meant,
market for Buying, Selling and Short Selling that he must keep his daily entries correct, the
and once into this swing it records it in a very openings, highs and lows and the closing prices
dependable manner. and carefully enter and watch the trend signals,
It is a fact and the records show it, for many the (X) and ( )marks for they point out and keep
years back that the market has a definite 1-2-3 him on the correct trend at all times.
rhythm, varied at times with an extra beat of The Book Method follows the average of about
1-2-3-1 and at times 5, these figures represent a one day reaction for a decline and at times,
days. The market goes up 1-2-3 days and reacts, usually in a strong uptrend the decline low will
the 4th and 5th figure is the variation when it runs be made in one session, the low will be made on
that extra day or two on the way up and on the the Short Sales Day, however, another decline
way down in both Bull and Bear trends. This will generally take place from this low and the
beat of the market subject to these occasional testing of this low will come on the next day,
variations occur with surprising regularity, so on the Buying Day, at which time the decline
it seems that the same methods of manipulation will generally stop—at, a little above or slightly
used in the past are still used today, that is of penetrate this low. When the price holds above
buying and then selling every third or fourth day this low on a Buying Day, we call it Buying a
in an uptrend and reversed for a downtrend and Higher Bottom.
this action the book records very faithfully. We accept profits on a one day rally and this
We consider 3 days as a trading cycle—the 4th is the spread from the Buying Day Low to the
and 5th days are the (1st) and (2nd) days of a new High on the Selling Day.
cycle. We use the 1st day for buying and the 2nd We allow one day more of rally to exhaust
and 3rd days for selling. This holds true in our 3 the movement and put the stock or future in a
Day Trading Method and has but one exception position for a Short Sale.
in our daily trading which is explained in the We treat a Bull and Bear Market as one
chapter—Buying Day Low Violation. continuous trend and we trade all the up and
The Book Method of trading is based on this down movements in a Rally or Decline Area
rhythm and repetitious movement in the market with one exception, as will be explained in the
but the tabular form with [its] columns and rings chapter on trends.
around the highs and lows on the respective In an Uptrend Trading Area, we know the
trading days, with the trend signals for Buying, tops and bottoms are progressively higher and
Selling and Short Selling were devised and we allow this one day more of rally, this is the
designed from observation and research over a move from the Selling Day low to or through the
number of past years. Selling Day high on a Short Sale Day, we allow
To the Book trader each day is a complete this one more day of rally to exhaust the swing
cycle—he has an Objective that he anticipates, upward—for a Short Sale.
he is always looking for it, it means to him a In the Downtrend Trading Area, we know the
Buying or Selling Point or a place at which to tops and bottoms are progressively lower and
Sell Short. we allow this one day more to exhaust the down
There is no more asking anybody what they swing to buy on. This buying ‘spot’ is explained
think of the market—for having read these pages under the chapter of Buying on a Buy Day Low
up to this point, you can guess just about how Violation.
much their opinions would be worth, unless they The trader using the Book Method must do his
were greatly experienced traders and in that case trading ‘at the market’ never limit an order nor
they probably wouldn’t have an opinion to offer, use ‘stops’ and he must not expect to get tops or
10
bottoms but it is surprising how many times he or slightly exceeded for after the future gets
will get them after a little experience and even swinging he will find that his Objectives, will
to the last eighth. After a little experience and not only be reached and passed but will run
practice he will begin to get that ‘feel’ of putting through for much deeper penetrations than in the
in his order at exactly the right time. earlier stages of the movement and these are the
This is the kind of mood a trader should be in, real profit making plays.
not worrying because he did not get the extreme
of either play, he needs to ‘feel’ he is right when Never Make a Trade Unless It
he makes his play and when it turns out just as Favors Your Play
he anticipates it will, he has an intangible far
greater than the material gain and there is no If you can’t ‘feel’ or see a profit in the market
profit that gives greater satisfaction to a trader or if the spread is, too narrow, between the
than the one he makes by being right. Objective Points, wait for a more favorable
He will find that after a little study of the position, for a study of the summaries of the
Decline and Rally Columns in his book that past expired grain futures and stocks, will
he can gauge and average the spreads, from show the great number of trading opportunities
lows to highs and highs to lows, as the stock or and how frequently they come along—by this
future moves along, and can see his Objective, is meant that—the Objective Points—will be
in a certain range as the stock or future starts to made FIRST ‘X’ or LAST ‘Y’ and the correct
move and in the earlier stages, and will see the determination of these signal marks reveal the
prices swing wider as the future gets further into Real Trading Trend and show it as weak or
the delivery month, and near the expiration date, strong in the direction it is moving.
and as stocks get away from their bottoms and If your Objective is to Buy or Sell, wait, for the
into higher ground. Buying or Selling Objective, don’t be tempted to
He has these columns to show him the spread sell short just because the market looks so strong
from the narrowest move to the widest move, —for you will probably be making a trade on a
from a rally to a decline and from a decline to a strong cross current and against the Real Trend.
rally and, also, his rules that point out the Buying Many times when we are expecting a decline
and Selling Objectives automatically. and ‘feel’ sure the stock or future will decline,
In the beginning or early stages of a move the price will hold tight near the top and use up
and in periods of congestion, accumulation or most of the trading session in doing it, only to
distribution, his Objective Points will just be ‘roll over’ and decline near the close. The same
about reached and exceeded by small fractions, with a rally, the stock or future will trade most
they just about penetrate on both rallies and of the session near the low, then rally near the
declines but as the movement opens up and close. Don’t be impatient because the market,
becomes active, he must not be too anxious to temporarily, seems to be going contrary to your
buy or sell, he must hold himself in check, for Objective.
as a trader develops and learns and begins to The Objective Point when made FIRST—
anticipate the moves, he will find that he must on a Buying, Selling or Short Sale Day, is the
tone down his courage and the impulse to make strongest and nearly always results in a quick
a trade too soon. profitable trade.
Right here it must be pointed out that the The Real Trend of the market is the trend
Grain Market is a fast mover when it gets going between these Objective Points and this is the
but the Trader’s Book, is faster than the market, trend we try to buy and sell on, as distinguished
it is always anticipating the future trade, as is the from the many currents and cross-currents,
trader. He knows what to look for and expect, small rallies and declines, first one way and then
therefore, he must allow the market time to a reversal and then a swing back to the trend,
trade a little when his Objective Points are near before this deviation—towards the Buying or
11
Selling Objective. These smaller currents only probability and that he can trade at a price that
confuse and do not change the course of the will show him a profit and that in the longer term
ultimate direction towards the Buying or Selling of trading the average will be in his favor.
Objectives. A great amount of research has been devoted
The uniformed trader buys into the market to this action with the results, that over a long
more because it is on a reaction or a low point period of time, stocks and all grain futures have
and by luck he hits the real trend just as the shown the same pattern of movements with little
stock starts to rally, then he sells out with a or no variation, so it is reasonable to suppose,
few points profit but on his next trade, he buys that the action in the future will continue to
or sells on one of these cross currents and the follow this same pattern of the past
trade promptly shows him a loss not only of his There is enough similarity in the actions
recently won gains but it takes a ‘bite’ out of his of all stocks and grains to warrant classifying
capital and after a few trades of this kind he has them altogether for this average of recurrence
a losing average. or ‘repeats’ on the rallies and declines, however
The Book Trader takes losses, of course, but true, this may be of their actions as a whole,
he knows why and realizes that by so doing he some stocks and grain futures while preserving
is playing for position and a more profitable the same movements will swing wider on the
opportunity that he knows will come along and rallies and declines and will make their highs
without much delay and when to expect it and and lows at different times but the trader who
how to capitalize on it. keeps a book on the movements of a half dozen
The Book Trader knows that, even though, or so stocks and grains will be able to ‘spot’
he may have an advantage with his method of the active wide swinging ones and confine his
trading that he does not have a sure-fire means trading to them.
of operating in the market and—it is well that We separate and designate each trading day
no such method has been devised—that he must for [its] own expected action and we eliminate
treat his trading as a full time job, yet, he knows from our minds all other actions and influences
that he can win on balance and this is about all about us, we concentrate on the stock or future
that can be expected from trading or any other we are trading in at the time, we try to remember,
hard thought out business proposition. The only, that action which can take place or happen
trader by studying his book sees that the entire around the particular Objective Point that we
business of trading is an average—and this is intend to trade on, as a Buy, Sale or Short Sale
true even for the insider—but on the winning Day.
side. We don’t listen to the ‘gossip’ nor what the
All his plays are an even break that he will news on the ticker happens to be at the moment
make a profit, much greater when he wins, than nor do we pay any attention to the telegrams of
the loss when he loses. Any method or system what ‘they’ in Chicago are doing, the results
that gives you a 50-50 chance is a pretty good will appear on the ‘tape’ and before their
one with all [its] faults. publication.
A check and study reveals the fact that the On a Buying Day, for example:—We observe
market repeats the same action (50%) of the the number of points the stock is down from the
time, in other words, that the penetration of a high—Short Sale Day—we notice whether the
Sale Day High will occur 50% or better out of stock or grain opened up and continued a little
the total Selling Day High Objectives. The same higher and is making the high FIRST or whether
with a Short Sale or a Buying Day Objective. the stock opened down and is declining further,
The failures to penetrate these Objectives, also, making the low FIRST. Making the high FIRST
preserve this same movement. we look for selling at this point and a reaction
That these trading Objectives will occur, to follow. Making the low FIRST we look for
just as he expects them to do, is a reasonable support buying and a rally to follow. We notice
12
if the price sold under the previous day and how Objectives in a more or less automatic way for
much. We know the average the decline can sell us which further lessens the strain,—at above
down, under at this point and we compare this or below these Objectives we expect buying or
decline to see if it is average, above or below selling and knowing about where to look for it.
and we note the activity and kind of trading at We eliminate all the smaller trends in between
this point. any two of these Objective Points.
Making the high FIRST we look for selling
here above the—Short Sale Day High—a On a Short Sale Day, for example:
reaction usually starts from here and we observe
whether the stock ‘sold off easy’ or whether the From a low on a Buying Day, there will
decline is stubborn and whether each transaction be thousands of transactions on the tape, in
decline is meeting with support, that is, being between and before the price reaches the Short
taken easily or the buying is backing away and Sale Day Objective—three sessions in the future
if the price is holding above the previous low— —assuming the rally from a Buying Day low to
Short Sale Day Low. the Short Sale Day High, is one of the many
We notice if the stock seems to be sort of times a stock or future makes a move of this
‘bouncy’ above this low, a decline being made kind—A strong close on a Buying Day, a high
on this kind of action usually bounces back a made FIRST with a penetration of the selling
little after the low point is made and considerable Day Objective, then a reaction and a strong
trading takes place above it. From here the rally close, with an Up opening and a high made
can and often does start with each transaction FIRST with a penetration of the Short Sale Day
decline falling short of the low, in other words, Objective—the Sale Day high. See (RZ) Chart
the stock begins to hold these small gains. From for October 13,14,15.
this action we look for and expect a strong This action is about 50% of the time, usually
closing and it shows the real trend as up and this in an Uptrend Trading Area, in the Seasonal
is the trend we trade on. How and when to buy is upswing. This is the longest unbroken rally the
covered under the Buying Day chapter. minor trend can make, for if it closes on the high
The above is pointed out as parts of ‘tape’ of Short Sale Day and opens up on the following
reading and you can believe the tape at all times, day—the Buy Day—it would be starting another
learn to read it and believe in nothing else for cycle and at another point at which we can, also,
short term trading. make a trade. We would not put out a short sale
Tape reading is difficult and requires long expe when the high was being made LAST on a Short
rience and an understanding of the fundamentals Sale Day. We would wait for the high made
of speculation and the market but the real heart FIRST on the Buying Day—it would be starting
of ‘reading the tape’ is to be able to detect concen another cycle and at another point at which we
trated buying and selling and to determine can, also, make a trade.
the trend of prices. Observation and memory, We are assuming here that the stock rallied
coupled with mental arithmetic of percentages. on one of these unbroken swings, as in the
You have got to remember what you see and above case and we are, Now, at the Short Sale
your calculations are made instantly, not with a Objective.
pad and pencil but with your head. Our Short Sale is made at or through the
Fortunately the minor movement with [its] previous high and this would be the high of
habit of repeating so regularly has given us Selling Day—We have our average of Short
these Objective Points, so called, which point Sale Exceeded Points in the column in our book
out places around which we may expect this —now just as the high is about to be penetrated
concentrated buying and selling, eliminating we observe the kind of trading that takes place,
a lot of hard work, that of watching each the stock may trade through this point in an
transaction on the tape and the book keeps these ‘easy’ manner and apparently seem in ‘no hurry’
13
this kind of action takes the price through for Short Sale Day.
a little deeper penetration before it reacts, but The trader using the Book Method of trading
also, the penetration may be made by one or a has a choice, in that he has an Objective for
few ‘jerky’ transactions and in fractions of a each trading day or he can use the Three Day
point, the stock seems to be in a hurry reaching Method, that of buying and then selling every
up for ‘something’ before it reacts. The decline third day.
here is usually rapid on the down side. The price This Three Day Method is explained in a
generally breaks fast from a top of this kind. This later Chapter.
action is further explained under the chapter—A
14
Chapter 2
How to Make up the Book
To make up a book we first head-line it with do is to draw in the lines forming the columns,
the yearly date above the first column, then put then head-it up. Two grain options or stocks can
in the name of the stock or commodity, then in be kept in each book. The cut shows how the
the first column put in the month, starting day ‘BOOK’ will appear when made up. Observe the
and date. markings.
The next four columns are for the entries of This page shows the trading carried back (18)
the daily prices, the Opening, High, Low and days and the two pages together give a broader
Close. picture of the movement.
These entries are made daily for a period of These reproduced pages show nearly the
about Ten (10) Days or Three (3) Swings, then ‘whole of the movement’ the highs and lows
go back and ring them with a circle, taking the made FIRST and Last, in series and mixed,
lowest price reached in this period, the first cycle the penetrations made FIRST and Last and the
will be in the third column and this low point failures to penetrate the Objectives, Buying Day
we designate as a Buying Day. The high of the Lows Under, Higher Buying Day Bottoms, and
day before in the second column, ring and make Buying Day Low Violations. The possibilities of
it a Short Sale Day, the high going back one the Three Day Trading Method, the long side,
more day, ring and make it a Selling Day. Then only, or the long and short side combined.
continue this circling in the same order back to This movement is part of an Uptrend Trading
the starting day of the book. Now coming back Area—notice the closing price on June 9th and
to the Buying Day Low—195 7/8—we carry on July 21st—a gain of (95/8) Cents—observe
forward in the same order. We have a book that the units in the ‘D’ and ‘R’ Columns in order to
reads; A Buying Day, A Selling Day, A Short accomplish this gain.
Sell Day, then, A Buying Day, A Selling Day, It is not claimed that a trader would get all
and a Short Sell Day, etc. these points but those he did get would be in cash
We are not concerned with how the book and not on paper during all this trading time and
started on the first day, whether it was a Buy, his only commitments would be his purchases—
Sell or Short Sale. a short sale covered and a buy ‘long’, on July
The book is always kept in this order, never 21st. The ‘long pull’ trader assuming he held on
change the continuity and there are no lines through all these ups and downs would still be
left open for Sundays or Holidays, the market confronted with the question of when to sell
is considered as a series of continuous sessions in order to get some part of these (9 5/8) profit
without a break. points.
The Single page Plate on the next page shows The column marked ‘D’ is for a decline or the
how a trader would make up a book starting from spread from a Short Sale Day high to the Low on
any date, in the market and continuing forward. a Buying Day and shows the number of points
This cut is the actual size of the ‘Book’ the the price sold down, if there are no loss in points,
trader carries with him and all information and we put in a Zero.
records he will need in his work will be contained The small diagonal ‘\’ mark placed above the
within it. (Next Page, page 17) These books unit in the ‘R’ rally column is used only where
can be bought at all stationary stores and come the Selling Day High exceeded the High of the
horizontally ruled, so that all the trader need day before—this is the High of the Buying Day.
15
Figure 1
In this same column on the Short Sale Day we put in a Zero.

line, we put in the number of points the Short The ‘BU’ column is, also, used for the ‘BV’
Sale Exceeded the Selling Day High, otherwise meaning Buying Day Low Violation, we put in
there is no entry. For ready reference and for the unit with a check under it when not using an
summation purposes, these entries can be ink of a different color. This column shows the
alternated with different color inks. number of points the price went lower than the
The column marked ‘BH’ means a Buying Buying Day Low. We make this entry only when
Day High or the highest point at which it sold on there is a violation.
a Buying Day and the number of points it sold The wide column is separated on the last day
through the Short Sale Day High Point, if it did of the week and the square to the left is the total
not sell above this point, we put in a Zero. of the daily declines of the ‘D’ column and the
The column marked ‘BU’ means Buy Under square to the right is the total of the daily rallies
and shows the number of points on a Buying of the ‘R’ column.
Day that the price sold under the low of previous The figures running vertically are the loss or
day—Short Sale Day—if it did not sell under, gain points from Saturday to Saturday closing
16
Chapter 2 How to Make up the Book
prices. The number of trading points of the We have two marks (X) and ( ) and these
rallies and declines can be compared with the marks point the trend of prices and are the most
gain or loss points at the close of each week. important signal marks.
We do not keep a column of gains or losses of The (X) means that the Objective for Buying,
the daily closing prices for all our interests are Selling or Short Selling was made FIRST.
centered in the spreads from highs to lows and The ( ) means that they were made LAST.
lows to highs during each trading day. We are These marks are placed inside the Circles on a
not concerned with a gain or loss at the close of Buying, Selling and Short Sale Day, at the close
the market. if the session and show whether the high or low
The last column is used for the Three Day of the day was made FIRST or LAST.
Method. We keep the highs and lows of the intermediate
The last column, shows the spread or number swings by drawing a line along side of the date
of points from a Buying Day Low Point to the column and mark it at each end with an arrow-
Short Sale Day High Point, in points gained and head, between these highs and lows are our
the ‘T’ means that it exceeded or sold through Trading Areas. Mark this line Up and Down
the Selling Day High. We put in the number of using Blue and Red Inks.
points and the ‘T’ beside it.
17
Figure 2
This page is from the actual transaction of the December Wheat Future,
during this period. The Book’ on (WZ) was started from the low price,
a Buying Day, January 14th, the lowest price reached (10) days after the
start of trading.
18
Chapter 3
Uses for the Columns and Marks
(The D Column - Decline Column)
The ‘D’ column shows the least and greatest the day, plus a wide up opening on the Buying
declines from the high—Short Sale Objective— Day. This Decline Zero does not happen so
to the low—Buying Day Objective—in points very often but it can be anticipated by watching
and we use this column to get an average in order the low of Buying Day and the high of Short
to judge this decline when it occurs. We have Sale Day, when the low holds at the same or a
the records of the past and can note the greatest higher price we can visualize the Zero in the
declines that have occurred and from this we can ‘D’ column and a Decline Zero generally means
see just what might be expected at any time in nearby higher prices for a day and many times
the future. longer. See the WK and CK Plates and note the
We get the number of Short Sale opportunities trend after a Zero appears.
and total of Short Sale points from this column. We always cover the Short Sale on the same
Comparatively low priced markets work in day when the spread is wide and or within the
a certain narrow range, the spread is narrow, limits of about what a decline, normally, should
comparatively high priced markets, of course, be or has been, from the Short Sale Day High to
work in a wider range, the spread is wider, also, the Buying Day Low. We see this range between
in the nearest future and near the expiration the high and low and reason that if it does not go
dates, the technical position at times causes wide any lower, we see this low as our point at which
spreads and with stocks after a long upward to buy, next day, on our Buying Day.
move with high prices. We don’t wait for the Buying Day on which
The declines in this column are not always to cover our Short Sale when the action is fast
from true highs but we are not concerned with and ‘panicky’ and the ‘sell off’ in one session is
true or false highs but with the spread from a within the range or more, the spread from Short
Short Sale Day High to the low on a Buying Sale High to Buy Day Low, for fast declines
Day. many times are followed by fast rallies.
This column points out the number of buying We cover our Short Sale and wait. We don’t
opportunities in any one week and during the life buy Long stock on this low, either, for the reason
of a grain option and with stocks they go on until that the stock may or may not rally from this
the spread is too narrow to trade in them. low and we only buy Long stock on a Buying
Generally the average of this column of Day or the Violation of a Buying Day Low made
declines points out the stopping places for FIRST.
buying ‘Long’ stock but the trading rule is a The stock from this low can do one or the
better check on the buying point and is summed other, close near the low without a rally or rally
up in the rule: “Cover Short Sales and Buy, at or from this low and recover all the loss of the
below the low of the previous day on a Buying day and more. We don’t care what it does for
Day.” the balance of the session, we sold it short and
covered with a profit but had we gone ‘long’ at
this low and there were normally, we would be
THE REASON FOR THE DECLINE in a bad way, for the trend would be indicating
ZERO further declines and we never make a trade
unless it favors our play.
The amount of Rally from a Short Sale Day What we do after covering our Short Sale,
low, with the closing price up or on the high for is to wait for the next day where we watch this
19
low and try to buy at or below it on our Buying

Day. THE DIAGONAL MARK (\)
Now suppose the stock did rally and closed
up near the top or even higher than the opening
of the day and—this is the reason on an action of We have the Diagonal Mark placed above
this kind why we covered our Short Sale on the the rally figures that show the number of Selling
break—this then would point the trend higher Day penetrations and we can tally them for the
and our Short Sale Day Circle would have a number of times or percentage of times we get
check ( ) in it, the high was made last. these penetrations or ‘sell thru’ or the number
From this action we could expect the of times they ‘fall short’ or fail to penetrate. By
opening to be up and the price to be higher than studying them we can get an average out of the
the Short Sale Day high and on a Buying Day. total Selling Objectives and know about what to
The high made LAST on a Short Sale Day, we expect at this point for penetrations. Study the
would not sell it again on this last high for it Plates and notice how they penetrate at about the
would indicate a high to sell on, made FIRST on same fractions or points with occasional very
a Buying Day. deep penetrations, which when this happens is
We covered our Short Sale on the same day in the traders favor.
and have protected our profits, anticipating a We find the average in grain futures of the
rally from this low, one that might hold and the recent past years was (56%) penetrations on the
possibilities that we might have to buy a Higher Selling Objective. These penetrations are almost
Bottom on a Buying Day. By making our play in sure profits, you can see the probable profit in the
this manner we are trading on the REAL trend spread from the low to the high on the Buying
and not on one of these daily cross-currents. Day, at the close of the market, plus the amount
Buying a higher Bottom on a Buying Day of penetration on the Selling Day of this Buying
usually results in a profit and the decline Zero is Day High.
always a higher bottom. Generally the trading rule covers our Selling
Objectives: “Sell your Long stock at or through
THE ‘R’ COLUMN - RALLY COLUMN the high of the previous day, this high of previous
day is the high reached on the BUYING DAY”.
The ‘R’ column shows the least and greatest
rally from a Buying Day Low to a selling Day
High in points and shows how much of the THE REASON FOR THE RALLY
decline has been recovered, all, part or none and ZERO
from this forecast of the trend as up or down for
the next day or so and sometimes longer. On the The lack of rally from a Buying Day Low
Yearly Plates, notice the ‘R’ column unit after a with a more or less ‘flat’ closing or on the low
large ‘D’ column unit and the action for a day for the day, plus a wide down opening on the
or so after. Selling Day. This Rally Zero does not happen so
The ‘R’ column shows the number of selling very often but it can be anticipated by watching
opportunities and the total of rally points on the the low on Buying Day and high on Selling
‘Long’ side of the market. Day, when the price holds at or under the Buy
Comparatively low markets work in a narrow Day low we can visualize the Zero in the Rally
range and high markets in a wider range, so that column and the Rally Zero, generally means
in narrow markets the rallies many times just nearby lower prices. Also, see the Plates on this.
about reach and penetrate the Selling Objectives, The Rally Zero is a Buy Day Violation and the
the same on the declines, while higher markets violation takes place on the opening, however,
run through for much deeper penetrations, either the low is usually made FIRST and generally a
way. rally starts from this low. If the opening is not
20
Chapter 3 Uses for the Columns and Marks
too severe, the rally many times comes up to the fast rally is caused by short covering.
and through the Buy Day Low and then starts to
decline again from around this point. Many times THE ‘R’ COLUMN FOR (SSE) SALE
it fails to reach it and at other times the rally DAY HIGH EXCEEDED
will carry back and penetrate the Buy Day High.
When buying on a Buying Day Low Violation, The ‘R’ column is, also, used for the Short
that is why we use the Buying Day Low as our Sale Exceeded, meaning the Short Sale Day
Selling Objective, instead of the Buying Day High exceeded or sold through the high of
High. Any fast come back through the Buying Selling Day. We enter this unit only when it
Day Low and then on up for a penetration of the ‘sells thru’ and from these entries we can get an
Buying Day High is just that much more in favor average of about what to expect in the way of
of the trader who goes Long on this Violation. penetrations at this point and an average of how
After having bought at or near the low on a often it repeats this movement during the life of
Buying Day Low and generally this occurs at the a grain future or during the longer term swing
opening on the Selling Day. We sell and ‘at the in a stock.
market’ on any rally from this decline, should Recent past expired futures in all grains show
this low be violated, at this point we either have that the Sale Day High was penetrated over
a small loss or a small profit. The profit when (50%) of the time before the future expired.
made is due to the rally that carries up through These penetrations run from fractions to
the Buy Day Low. The price sells lower than points but we can judge them by the price range
the Buy Day Low and then it generally rallies, of the stock, whether it is high, low, or at some
not always, for the market can keep going down point in between. News items at times cause
from here—this is why we get out as fast as we deeper penetrations and the beginning of a rally
can on any rally from this low—generally this from the low point reached in a Downward
rally carries up to and through the Buy Day Low Trading Area.
Point. We sell at or through this point always. This unit is put in on the same line as the
Never hold on and hope for more rally, sell out Short Sale Day Circle and since it is under the
here for what you can get. Big declines can start rally or Selling Day unit it might be well to use
from here for this could be the continuation different color ink to separate each of these units
of a decline that had started from the High of in order to avoid confusion in tabulation.
Buying Day made FIRST and particularly so, if By studying this penetration and knowing
the stock or future is well into the upswing and where to look for a hesitating action you will be
prices are high. able to see, at times, the selling that is taking
When the unit in the ‘D’ column is large, the place at this point.
Buying Day, we act immediately upon seeing This is a place at which you can do a little
the price go lower than the Buying Day Low and ‘tape reading’ for knowing what to expect and at
generally this occurs at the opening on the Selling which point to look for it, you can check it easier
Day. We sell and ‘at the market’ on any rally to see if your expectations are coming true.
from this decline, should this low be violated,
at this point we either have a small loss or a THE (BH) BUY DAY HIGH COLUMN
small profit. The profit when rally unit in the ‘R’
column is generally small, there are exceptions The BH column shows the number of times
but generally this is the case. In a panicky, severe and the extent of penetrations of the Short Sale
‘sell down’ at times the whole decline and more Day High, when there are no penetrations we put
is recovered. This happens more often when in a Zero. The (BH) and (BU) Zeros don’t have
some favorable news is announced during the the same forecasting significance as the Decline
trading session and the market technically is in a and Rally Zeros, however, the (BH) Zero when
position to act on it, the market is oversold and it appears does show the break and termination
21
of the three day swing and establishes the high to come into the market and we watch the tape
on the Short Sale Day. to confirm it. Support here would be inside short
We watch these penetrations and from them covering of stock sold on the last rally and the
we can get an average of about what to expect at buying back of Long stock sold a little above
this point in the way of a ‘sell thru’ and we can the market to the outside traders. Those traders
tabulate them for an average or percent times they who buy at the top of rallies are buying the Long
penetrate or fail to go through. This penetration stock sold on balance and the short sales put out
is the place for a quick Short Sale when the price by the inside operators.
goes thru FIRST. In order to make this point On the average trading day without inter-
FIRST, means that the rally must have started session news, in an Uptrend Trading Area (watch
on a Short Sale Day and closed strong on this your trend line) the stock makes this low on the
day, continuing to rally up to this point, making Short Sale Day and then trades around this point
a two or more days of rally and generally this is and closes fairly ‘flat’ and then opens down, the
enough to exhaust the minor swing and is in a next day and sells a little under this low on a
position for a decline, of some extent. Buying Day, the decline just seems to ‘level off’
At this point you can test your tape reading, here and on this ‘dip’ is where we buy our Long
the rally seems to be in an upward dead center stock. The low is made FIRST and usually a
and just about ready to roll over for a decline, rally starts from here.
generally this is the action at this point. This When the decline on a Short Sale Day is
BH (Buy Day High) is generally made when severe and the market is active, the stock makes
preceded by a Buying Day Low Violation. This a low and usually rallies fast and closes up
Buying Day Low Violation causes the decline nearer the high of the day, we can then expect a
to run one more day on the downside, therefore, higher opening on the Buying Day and whatever
the rally runs a day later on the upside. Generally reaction that takes place from this high falls
the Short Sale Day High ends the (3) days swing, short of the low made on the Short Sale Day and
a violation delays it and causes the high to be causes the (BU) Zero. The price then is being
made FIRST on the next Buying Day and with supported at a higher bottom and will generally
exceptions, this high still preserves the (3) day start up again from this higher low point. The
rally swing. stock is then making a higher bottom and Buying
a Higher Bottom is usually profitable.
THE (BU) BUY UNDER COLUMN
THE (B V) COLUMN BUYING DAY
The (BU) Column means, buy under, and LOW VIOLATION
shows the unit that the stock sold under the Short
Sale Day Low, on a Buying Day, if there were The column marked (BU) is, also, used for
no declines we put in a Zero. The (BU) Zero, the (BV) meaning Buying Day Low Violation
points out the Higher Buying Day Bottoms and and we enter this unit directly under the (BU)
are all higher support levels, on the declines, unit. This unit shows the spread of the decline,
from Short Sale Day rallies. The spread between the amount it sold under the Buying Day Low
these two points is the concession we try to buy point.
at. We watch this column for an average and we This decline we consider a ‘false move’ and
see that it runs from fractions to points. Usually when made FIRST it is usually recovered, even
in an Uptrend Trading Area, the heaviest selling though, the market may sell down again after
takes place on the Short Sale Day and the decline this rally. While it is part of a larger decline and
generally ‘levels off’ on the Buying Day—at, begins to show up at the starting of a Down Trend
a little above or below, the low reached on the Trading Area and continues through this area, it
Short Sale Day. is profitable to trade on this kind of action most
Around this point is where we expect support of the time. It takes place from a decline on a
22
Chapter 3 Uses for the Columns and Marks
Buying Day and where there was no rally and Buying Day to be penetrated as our Selling Day
the close was heavy and usually right on the low Objective we now change on account of the
of the day. This action indicates lower prices and Violation and make the low point of the Buying
we expect a down opening on the Selling Day Day, our Selling Objective, for this Long stock
and unless we are in a market of high prices from we bought.
which Downward Limit Days could take place The market usually rallies from a Violation
or Downward Secondary Reactions in stocks, it decline made FIRST and comes up to and
is, also, a ‘leveling off’ of a two or three days through the Buying Day Low point. We bought
decline. and we now see the rally carry up to this low, at
We watch for support at any place under the this point we can sell out with a sure profit. The
Buying Day Low—check back for two or three stock has recovered all of this ‘false move’ and
weeks for a recent range on these Violation the market at this point can turn down again and
declines, had they been fractions of a point— does many times and it, also, at times continues
more or less—and the present price of the stock. up. Now in this latter case any further rally
When this decline low is made FIRST and early begins the percent recovery of the decline unit
in the session, we buy as near this low point as as shown in the ‘D’ column. In this case it is
we can. Four (4) Cents, now, each point of recovery is
At this point we are considering the everyday, 25% of this decline and certainly after a rally
average market movement, so called, surprise that would recover the ‘false move’ or Violation
news and scares are treated in another chapter. points and ‘wipe out’ One Third to Two Thirds
We are watching the market and we see the of the Real decline should be high enough for
price under the Buying Day Low and we note us, even though, it may rally too far, we ‘cinch’
that his low is being made FIRST and shortly our profits and begin to anticipate our next play
after the opening and is under a couple of cents. for the chances are that on the next trade will be
For example:—We note this two cent decline more room and profit and our next trade would
plus the unit of decline in the ‘D’ column and the be a Short Sale on the Short Sale Day High and
total then is Six (6) Cents, this is a considerable would probably be made FIRST.
decline and normally would call for some, rally
at this point. Now, we are buying on a Selling
Day and where we usually watch the high of
23
Chapter 4
The Symbols (x) and ( ) as Trend Indicators
We have two marks (X) and ( ) these marks FIRST and usually a reaction would start from
point the trend of prices, they indicate the ending this point which would end again on our Buying
of or continuation of trends, depending upon the Day with an (X) or ( ) FIRST or LAST.
circle they are placed in and the kind of trading An example of the Objective being made
day. LAST:
The (X) mark means that the high or low was
made LAST. When the objective is made LAST the play
The ( ) mark means that the high or low was consumes more time for the trader must watch
made LAST. the entire session in order to make a trade.
These marks are placed in the circles on the Suppose the stock had sold down from a
Buying, Selling and Short Sales Days. Short Day High and made a low, then begun
An example of the Objective being made to rally and close Up from this low and at the
FIRST: opening was higher, making the high FIRST on
a Buying Day then begun to ‘sell off’ all through
As a supposition the stock reacted from Short the session and made a low, then began to rally
Sales Day High and on the Buying Day made a and closed UP from this low and at the opening
low early in the season, then began to rally and was higher, making the high FIRST on the
traded the rest of the session between the high Buying Day then began to ‘sell off’ all through
and low with the closing price nearer the high the session and made a low but there was little or
than the low. We would then put an (X) in the no spread from this low to the closing price. This
Buying Day Circle indicating the low as being then would be making the Buying Objective
made FIRST. LAST and we would put a ( ) check in the
In a case of this kind and this is what the trader Buying Day Circle, this indicates the trend as
likes to see, the opening on the Selling Day down, at the close, even though it may be the
would generally be up and with a penetration end of the decline and is many times, but it also
of the Buying Day High. The Selling Objective carries the implications of a Buying Day Low
would be made FIRST and an (X) placed in this Violation.
circle. The trader would sell—at or above this Suppose the low was made FIRST on a
penetration of Buying Day High—and would be Buying Day and the stock then began to rally
out of the market without much delay. from this low and closed up above this low but
The stock having sold through the Selling at the opening—Selling Day was off a little and
Day FIRST there would generally be a reaction traded down lower but did not break or violate
from this high, and even though the trader had the Buying Day low, then it began to rally and
sold out he continues to watch the low and close
continued on up for the balance of the session
of Selling Day, for an indication, for the stock
and closed on the high of the day, this then would
having reacted would again rally and close high
be making the high on Selling Day LAST.—We,
enough to indicate an Up opening and another
of course, would sell our stock here on the
penetration of the Selling Day High made FIRST,
penetration or failure to penetrate our Selling
this then would be on the Short Sale Day and the
Objective— the Buy Day High—but it would
Short Sale Day Circle would be marked with an
require us to wait and watch the entire session in
(X). On this penetration we would have a strong
‘spot’ for our Short Sale, since it was made order to complete our trade.
On a Short Sale Day when the high looks like
24
Chapter 4 The Symbols (X) and ( ) as Trend Indicators
it will be made LAST. We wait, never make a The import of the entire matter here, is that
trade unless it favors your play. At this point we the insiders, operator or the force that is making
check back in our book for a Violation of the the market go right along pushing towards the
previous Buy Day low, if so, we expect the stock objective to the other are ‘false moves’ and they
to continue up, even open up and make the high are the smaller trends that confuse the traders.
FIRST on the Buying Day and we watch for a That is why we must use the greatest of care in
Short Sale at this point, at or above the Short getting the signal marks correct—and this [is]
Sale Day High. difficult but the real trend follows these marks.
When the high is made FIRST on a Selling This example of a few years back shows part
Day and the stock reacts and the reaction of the movement at a time when all Objectives
continues up to the market it will probably were made FIRST—it shows one Buying
carry over to the next day, the low price would Day Low at the low of previous day—Short
generally be made on the opening or after, then Sale Day—on October 13th, and one Buy Day
a rally would probably start that would carry the low—under—on Saturday 16th. It shows how
price up making the high LAST on a Short Sale the bottoms were just equaled and exceeded and
Day but we do not put out short sales on a high how the tops were penetrated at the Selling and
made LAST. Short Sale Highs.
When a stock or future completes [its] cycle Prices during this period were in a narrow
from a Buy Day Low to a Short Sale High and range of four or five points for a period of about
all Objectives are made FIRST—and this is the nine weeks.
kind of movement we like to see—See Plate The ‘D’ and ‘R’ Columns total 8 1/8 points
on RZ 1943— you can see your profits as the while the six days gain at the closing prices were
movement unfolds. 2 1/4 points—the trading opportunities were
During other of these cycles we get a mixed almost four times greater.
movement of the Objectives made FIRST and When the markets are narrow, the moves are
LAST and this is caused by the real trend being small and the profits are small.
interrupted by the smaller rallies, and declines, The recurrence of the Buy and Sell and
currents and cross-currents that go on all through Short Sale signals in series are not exceptions
the trading session but in no way change the
for the market is filled with them at times and
ultimate completion of our trading Objectives
the trading at these times is most mechanical as
that is why we must at all times ferret out the
you can see.
Real trend and to be able to keep track of it,
The diagram shows two sets in series—a
regardless of these inter-day ‘Jiggles’. Our Book
Short Sale, a Buy and a Sale—a Short Sale, a
does this very thing for us, almost automatically
Buying and a Sale. All Made FIRST. At other
by pointing out the kind of trading day and the
times the series will be FIRST and LAST and
signal marks show which way it is most likely
to go. Mixed.
Watch the results of some of the plays made When the series runs all signals made
by the traders that go counter to the specific FIRST there is no delay, a trader buys and sells
trading days as shown in your book. just as his Objectives are reached or penetrated.
They buy and sell on rallies and declines At other times when the market action is mixed
during the day entirely ignorant of the kind of the trader must watch the entire session in order
trend, at the time, they buy or sell. Once in a to complete a trader and there will be sessions
while if they trade often enough they will ‘hit’ when it would be wiser to just stand aside and
the real trend and make a profit but the next trade do nothing at all when the movement gets too
will be nothing more than a guess and a wrong narrow.
one at that with an ultimate total loss.
25
Figure 3
26
Chapter 5
A Buying Day
We buy a stock or future when we think it Short Sale Objective.

is on a bottom dead center and the trend is just By selling out we have secured most of
about to turn up and our selling is done on a top the long profits from a move of this kind and
dead center when the trend is just about to turn in many cases all of them and we got them
down. without waiting for the Selling Objective—we
On a Buying Day when the stock rallies from are trading and take a ‘lump sum’ anytime the
the low and the gain in points is sufficiently large, market gives it to us fast, even though, it may be
we sell out on the same day. The rally may put a little less than we might get by waiting
the price up to and through the high of the day Having ‘sold out’ and we are out of the
before—the Short Sale Day—and the close may market—on the Buying Day—we prefer to
be strong and the stock may even close on the see this rally continue on the Selling Day for
high of the day, however, we sell out just before penetration of the Buying Day High, for we are
the close, for while strong or higher closing does now anticipating a future short sale and it would
indicate a higher opening and a continuance of generally be strong short sale indication should
the rally, this, should it happen, would only put the stock react from this penetration of Selling
the price through the Selling Day Objective, Day High for this short sale and it would be
next day, so we don’t take chances with this kind made after Three (3) Days of rallying.
of a move and don’t follow the rally too far, we On a Buying Day, we buy at, a little above
secure our profits before the close of the market. or below the low of previous day—this would
An action of this kind is fast and the ‘come back’ be the low reached on the Short Sale Day—we
rapid or the action may be quiet and slow with watch this range or spread on a Short Sale Day,
firm reaching up movement making new highs the ‘sell off’ from high to low and at this low
by fractions for several points and then end the we can see, so far, the price we will have to pay,
move with a slight relaxation, then a smaller next day—The Buying Day—for our long stock
‘spurt’ to reach the top or make a new high for provided the decline ends at or near this low but
we can with reasonable certainty figure whether
the day, however, no matter how the high is
this low will be our buying ‘spot’ or if we may
reached it gives us our profit a day in advance
not expect further concessions to buy on and we
of the Selling Objective by selling out before the
get this indication from the way the stock closes
close and we are not concerned with how high it
on the Short Sale Day.
may go on the next day.
We get this indication by watching the close
The reason we sell out on the same day, is
and whether prices are up or down, that is down
that the stock may open down and often does,
from the high of day or up from the low of day,
from a run up of this kind or it may open at the
weak or strong. Remember, we are watching the
previous close on the Selling Day and spend
prices on a Short Sale Day trying to anticipate
the whole Selling Day and not reach the Selling
the coming point at which we can buy or go
Day Objective—the Buying High—after which
‘long’—You will be short of the market on this
it can make one of two moves, close up with an
day, too, but this action is covered under the
indication that it will open up and sell through
chapter on a Short Selling Day. When the close
the top—Selling Day High—for a strong Short is strong on a Short Sale Day, that is, the closing
Sale Objective or close down near the low, an price is up from the low and nearer the high for
indication of failure to penetrate and a weak the day, we expect a higher opening on a Buying
27
Day. When this happens, we wait for generally Objective—the Buy Day High.
the price declines from a high made FIRST on a When the high is made FIRST on a Buying
Buying Day. Day, this causes the low, our buying point to be
The Short Sale Day Low is our point to watch made LAST and carries with it the possibilities
and we watch for it to be reached or for the price that the stock may trade down with no indication
to sell under this point, since this is where we to rally and the close may be near the low of the
buy our long stock. day, in which case we would not buy at all, even
In a strong uptrend the decline may ‘fall short’ though it was lower than the low of Short Sale
of reaching this low and the rally on a Buying Day, for here we would anticipate and expect a
Day may start from a little above this low—this Buying Day Low Violation and we would wait
is what we call Buying a Higher Buying Day for it.
Bottom and generally it is profitable. The price When the low of Buying Day is made LAST
may open up and rally farther, making the high but is holding a higher bottom, that is the low
FIRST, then starts to decline but the price on is higher than the Short Sale Day Low, we buy
the decline gives way ‘grudgingly’ from each as near this low as we can, for generally a rally
fractional ‘sell off’, the stock on the rallies starts from this higher bottom, however, should
seems resilient, it sort of springs back from each any gain at the close be lost on the opening of
low. By watching the tape closely at this point, Selling Day and this decline may or may not
you can see and ‘feel’ the buying for support. cause a Buy Day Low Violation, we sell on any
In this case the Decline Column Unit is usually rally after this decline.
small. We use the Buy Day Low as our Selling
We expect the price to fall short of this low, Objective, we sell at the best price we can get
to stop a little above it when the trend is turning above this low. The rally usually carries up to and
up from the low of a Trading Area, the bottoms through this low, even though it again declines.
have got to be progressively higher in an up- There are exceptions and times when it fails to
trend. reach this point and at such times it means a loss,
At a little above and below this point—the then again, strong rallies at times not only sell up
low of Short Sale Day—we watch for support to and through this low but continue up to and
and we note the range of prices around this through the High of Buying Day, completing the
level and the length of time the price trades in Primary Selling Objective with a penetration.
this range. By comparing the decline from the The low made on a Buying Day is the low
Short Sale Day High to the low as it is being and has nothing to do with whether it may be
made on the Buying Day, we can judge from the violated, the next day, you buy at what you
past declines of the ‘D’ column just what kind consider to be the low and many times you will
of a decline is taking place at the time and can actually get it, allowing for the executions but
follow it while it is happening, you can then after buying it may go a little lower but your line
note whether it is greater than average, less or
of thought changes after you have bought, even
about average—here again a small decline unit
though, you did not get the last eighth, you now
is followed by a larger rally unit in an Uptrend
begin to watch any rally from the low, made by
Trading Area.
the stock—not the price you paid for it—you are
Now, we go back to the close of the Short Sale
now expecting the stock to rally and show a gain
Day and we find that it was a ‘flat’ closing, then
above this low, at the close, indicating a higher
from this indication we expect a lower opening
opening and a further uptrend, this shows your
on the Buying Day and so far this would cause
play is correct so far.
the low to be made FIRST and is a stronger
indication when made early in the session that a Even though, your profit will be a little
rally would start from this low and hold the gains less by reason of the price having sold down
for a strong closing, which in turn indicates an a little lower after you bought, the point to be
up opening and a penetration of the Selling Day made here is that, after having bought at what
28
Chapter 5 A Buying Day
you considered the correct place, reverse your YOU ARE RIGHT.
thinking about further declines or ‘sell off’ and The temptation at this point after having
begin to look forward to the place where you can bought on the low or having the stock go
sell out with a profit, in case of a rally this will lower after you have bought and then holding
be somewhere above the high of Buying Day, on when the stock opens down and sells down
next day your Selling Day—unless the market lower causing a Violation of the Buy Low, even
hands it to you in the same session—the action though, the low is made FIRST is a strong ‘spot’
we mentioned in the beginning of this chapter. to make you want to average your loss and it
Suppose you bought at or near the low or looks like it would have been a ‘cinch’ after the
right on the low and the stock rallied but began rally sets in but Don’t do it.
to sell down again and near the close lost all the When prices are comparatively low and
gains, this then would be a ‘flat’ closing with the the Trading Area Trend is Up, a trader having
probabilities of the price going lower the next bought at or near the low and to then see the
day. stock close ‘flat’ need not worry, too much, for
A ‘flat’ or weak close on a Buying Day shows he can supplement his trade by using the (3) day
the short interest, inside or professional, in no method, he can hold on and generally sell his
great hurry to cover, therefore, an indication of a stock or grain at or through the high of—Selling
Buying Day Low Violation. Day—at a profit, however, in this case should
On an action of this kind, sell out before the the Buy Day Low be Violated the rally may
close, for you are in wrong and you must not be weak on account of this violation and fail
carry the stock into a greater loss, if you have a to penetrate the Selling Day High on the Short
loss at this point by holding on and hoping for an Sale Day. The trader using the daily method
up-opening on Selling Day. of trading should stick to this method and be
After a low is made on a Buying Day and the willing to take a small loss in order to better
stock begins to rally, it should hold a small part his position, rather than to switch to the (3) day
of the gains on each rally, each decline or set method and then back to his daily method, for
back should ‘fall short’ of the last low. while he can save—at times—this small loss,
A trader takes losses, he must but he takes it is bad medicine, especially if prices are very
them when they are small, as in a case of having high for in the above case of the Violation—or
bought, then a rally, and then to see this gain any Violation—there may not be a rally—prices
lost, and the close at or slightly above the low may continue on down. Trading this way might
of the day. He does not hold on and hope for become a habit and a trader should use one or
the other methods.
a rally, he sells out before the close, takes this
The trader who has been consistently using
small loss and begins to anticipate buying a Buy
the (3) day method can stand a loss, even, if it
Low Violation. Right here it is well to point out
is unusually large on account of his profits from
that up-openings do occur from ‘flat’ closings on
previous plays—the summary of the yearly WK
any of our Objective Days, but in these cases
and CK show the loss day swings run about
it is some overnight news that can’t be read on
(12%) of the total and the gain days about (88%)
the tape before the close and we don’t trade on
however, occasionally a loss day swing can be
what the market might do but try to trade on
very severe and the daily trader should not take
what it actually does and the probable future
chances where the loss could be greater than his
results. The trader by taking this small loss will
greatest daily gain. The daily trader can trade on
generally get it back and with a profit besides on
a ‘shoe string’ but the 3 day trader is prepared to
the next play or trade.
finance himself over a ‘bump’ of this kind.
NEVER AVERAGE A LOSS, SELL OUT IF
YOU THINK YOU ARE WRONG AND THEN The daily trader must at all times be in
BUY BACK AGAIN WHEN YOU BELIEVE complete command of his cash for use when
29
he needs it, therefore, he takes small losses by

selling out the instant he sees that he is wrong.
In the Uptrend Trading Areas, the low on a
Buying Day is generally made FIRST with the
closing price up from this low.
The ‘flat’ or weak closings are usually made
in the Downtrend Areas.
Regardless of the kind of Trading Area—up
or down—buying low points made FIRST on a
Buying Day, are for the most part profitable—
except in the precipitous decline after a steep
downtrend gets under way.
Buying on a low point and then to see the
price go a little lower does not prove you wrong,
unless the price closes ‘flat’—that is the low of
the day and closing price is the same.
We do get up-openings from ‘flat’ closing
but generally the little lower before the start of
a rally.
Buying, too soon, only means that you need a
little more in timing, in most cases.
Check the Yearly Plates on WK and CK on
the Buying Days—for the times the price sold
under the Short Sale Day Low—the times the
Buying Day Low was Violated—also, the gain
and loss day swings of the (3) day Column.
30
Chapter 6
Buying on a Buying Day Low Violation
The Buying Day Low Violation must be take place after a fractional rally that would
made FIRST and this would be the result of the establish a new low by a point or so but had
Buying Day Low made LAST with a more or the Violation been fairly deep, plus the points
less ‘flat’ closing. decline in the ‘D’ column—the spread from the
This action of a ‘flat’ closing favors the Short Sale High to Buy Day Low—the over-all
probabilities that the opening prices will be down decline could be considerable and the chances
and the opening is in itself often the start of the are the rally would start from either of these low
Violation and that the decline will continue until points and after all this probably would be the
it meets support. This support is for the most third session of a decline and ‘remember’ we are
part inside short covering both for profit and for not buying on the top of a three days rise, either,
stabilization of the market and is some of the as many traders do.
long stock sold to the traders at higher prices. In the case where these two lows are made
This decline can stop anywhere under the and had we bought at or near the first low,
Buying Day Low but from our column in the another small decline should not upset us, even
book we know the range of declines of past though, it was against us for a point or so, for
Violations and we know that they stop within after the rally started and the probabilities would
the fractional limits and are occasionally very favor a rally from this last low our loss on paper
severe but knowing the range and by watching would generally be only temporary and would
the activity at this point we generally get an be quickly made up.
indication of a coming rally. After the rally starts it will generally make up
We watch the market very closely for support all the Violation decline and this, then, would
buying and for the decline to slow down and bring the price up to the Buying Day Low Point,
stop for we, also, want to buy at this point and now right at or through this point is our sure
we do. At the turning point the stock makes a profit Selling Objective or at least a chance to
low, then rebounds in fractions or in points— get off the ‘hook’ in case you had made a ‘too
this depends on the severity of the decline—if soon’ purchase. From this Buy Day Low or a
severe accompanied with activity, the churning little above it, the decline may start in again.
up and down will be in a wider range of prices From this point—the Buy Day Low—if the
than if the decline was quieter and more normal, rally continues, it begins to ‘wipe out’ what we
however, you will notice a considerable amount call the Real Decline and this is the units points
of trading at this point for a brief period, then shown in the ‘D’ column.
the activity slows down and the market becomes Each eighth above the Violation recovery,
comparatively quiet, the market goes dead but recovers a certain percent of the Real Decline,
with the prices up a little from the extreme low the more the rally is extended the more of this
reached on the decline. The quiet market may Real Decline is recovered and the rally may
just penetrate the Buy Day Low fractionally and ‘wipe out’ all of this decline and continue higher.
then trade a fraction above this low until a rally Many times when the ‘D’ column unit is small
starts or the market starts to recover. the R’ column unit is large. Should the rally be so
We buy on the above described action and at strong after it goes through the Buying Day Low
the market and expect the rally to start from this and many times the activity picks up at this point
point, however, a support point here may only and the trading is fast with the price reaching
be temporary and another small decline may up to the top of the day and sometimes for a
31
new high and then a slight ‘dip’—then a rally The ‘take off’ from a period of accumulation,
just before the close. Should this kind of action also, starts with a ‘run in’ of the shorts but usually
take place after the penetration of the Buying ‘they’ try to conserve some part of it—for a
Day Low, we would then begin to anticipate the good size short interest is potential strength at
possibilities of the penetration of the Primary any stage of the move—generally, in the above
Selling Objective—The Buy Day High—and case, it appears at times that the intent is to make
we would not hesitate a minute before selling all the shorts cover in the same session.
out on this penetration before the close. Buying on a Buying Day Low Violation made
Remember we are buying on a Selling Day FIRST is for the most part buying against this
and we must sell out before the close of the short interest—inside and outside—but you are
market and a reasonable level at which to sell generally in good company when buying at this
our Long stock, assuming the Violation decline point in an Uptrend Trading Area. A rally caused
has been recovered, would be to sell when one by short covering is weak and that is why we
third to two thirds of the amount of the decline don’t follow it too far.
in the ‘D’ column had been recovered. When the demand caused by this short
We don’t follow this rally, too far, and are covering is filled the stock then generally ‘sells
not trading for the last eighth but for a profit off’ until it again meets with inside support.
and position for our next play and the next play Most of the Violations are found in the
would favor a decline and the next day is a Short Downtrend Trading Areas, they must of a
Sale Day. necessity make lower bottoms and the Downtrend
We watch this full rally, even though, we have is usually a session or two longer.
sold out lower down—or just after the price went We watch the spread from the Buying Day
through the Buy Day Low on the rally—for the Low to the Low of Violation and note if this
amount of reaction before the close or it may spread is wide enough to make profit—that is, if
close right on the top price for the day, however, we bought on the extreme low of Violation and
in any event a strong close would indicate sold out at or through the Low of Buying Day,
a further rally, with an Up opening for a high should the stock rally back this high. When the
made FIRST on Short Sale Day, yet, after a rally decline is severe at this point the rally may not
that would recover a two or three days decline, carry back as high as the Low of Buying Day, the
in one session may open off. This should not rally would be ‘dull’ and the market quiet and
surprise you, you must expect it. would show the lack of buying by going ‘dead’
The rally from a Buying Day Low Violation on the top, then the decline would perhaps start in
made FIRST is caused by short covering and again from this point. This kind of action would
the start of the movement is usually engineered be an indication of a downtrend of more than the
from the inside, the large short interest seems day to day kind, so in buying on this wide spread
to be that part of the covering movement that reaction, we would have to take whatever profits
carries the price up to and through the LOW we could get, on whatever rally took place and
of Buying Day and exhausts itself around this the place to take them would be just as the rally
point. The extended and over-extended short began to hesitate and stopped. Should the spread
interest and those traders that sold short, too near be narrowed, more normal that is fractionally or
the bottom noting the strength of the rally after it a point or so, it would show the price holding,
gets started, are forced to cover and their buying with covering and support buying, so we could
is usually done in haste, therefore, the rally is expect more from any rally from this point.
fast, active and the spread between transaction is A big decline takes times to consolidate around
wide and this action many times causes the price the low point, usually one or two session, before
to reach up to and through the HIGH of Buying a good recovery rally sets in, therefore, the ‘R’
Day. The extent and activity depends upon the Rally Column Units are usually small after a
size and urgency of the outside short interest. large ‘D’ Column decline, unless the technical
32
Chapter 6 Buying on a Buying Day Low Violation
position of the market is strong enough to make • Sell ‘long stock’ at or through the Buy Day
the shorts cover in a hurry. Low of 226 1/2.
As a rule we don’t expect too much of the
immediate rally following a severe decline In the March Soybeans Future—SH—
but when the market starts to recover and assuming a purchase at 227—on Buying Day—
with activity it at times regains a large part— this is one half cent above the low, the decline
sometimes all the ‘D’ column loss and at times is large and above the average for a ‘D’ column
it sells through for a penetration of the Buying decline, with the Buying Day Objective (2)
Day High. points under the previous low—the Short Sale
The main import we are concerned with here, Day Low—this point is, also, within our average
is to get off the ‘hook’ without a loss or as little for buying.
as possible, for having bought near the low on a The stock closed up—on Buying Day—and
Buying Day and then to be caught in a Violation we expected a higher opening on Selling Day,
by reason of a down opening on a Selling Day, we did not get it. The stock opened down and
we have a loss, at least temporary but usually declined quickly to 225 1/4 or (1 1/4) points
after a two or three days decline the Violation Violation and at this point we would have had
will be recovered and with a certain percent of a loss of (1 3/4) points on paper. The Buy Day
the ‘D’ Column Unit. Low Violation was made first and the Violation
We always sell on a recovery that makes up was the third day of a decline, we expected the
the Violation—of the Buying Day Low—and try stock to rally and it did.
to get some part of the rally above this point but The rally quickly recovered the Violation
we do not hold on too long, and hope for more decline and we are immediately alert for a place
rally and we don’t let it bother us should the price at which to sell out our long stock and this is
go higher after we sell out. With reference to the somewhere at or through or above the Buy Day
below Plate—the rally after going through the Low of 226 1/2.
226 1/2—the Buy Day Low—may show signs After the Violation loss has been recovered,
of exhausting itself and right at or through this we keep a record of each transaction above
point the stock may start to decline again. We this price—The Buy Day Low—we enter on
don’t follow the rally, too far, for this reason… our Work Sheet, on a pad with pencil or in our
minds, these recovery prices as they appear on
The trading for the three days would have the ‘tape’ as the stock rallies.
been as follows: We note the first price on the ‘tape’ at 227
or (1/ 2) pt., the first recovery ‘tick’ thru the
• Sell short on the penetration of 234 1/2 226 1/2—the Buy Day Low—and any recovery
• Decline is severe for one session—above above this price is figured as a certain percent
the average in points. recovery of the decline in the ‘D’ column.
• Cover short—same session—on dullness Many times a stock in a movement of this
around any low. kind, at this point, will j-u-s-t come up to it or
• (see Short Sale Day Chapter) slightly exceed it, so we must sell out at or after
• (wide decline in same session) it has been penetrated.
• Wait for Buying Day to go ‘long’. Should the action at this point be slow, it may
• Buy on penetration of 228 1/2 when decline just about reach or penetrate it but should the
slows down or stops. activity increase through and above this point
• Buy Low made FIRST—closing price up the rally may carry through for a much deeper
from low of the day—expect up-opening. penetration, it can and does, at times, even rally
• Down opening—most of gain lost—sell on far enough to penetrate the Buying Day High.
next rally. See (SH) Plate—January Friday 21st.
• Violation low made FIRST—expect rally. At times, the recovery makes up all the ‘D’
33
column unit loss and more.

We watch the transaction on the tape and we
sell at the market at any point—at through and
above the 226 1/2—the market at a point like
at this will generally prepare you or give you
a ‘tip’ on the coming action by slowing down,
hesitating or stopping before a reversal or the
activity will increase and the rally will continue
on up but in many cases, just through this point
will be the top for the rally from a Buying Day
Low Violation. In the case of (SH) the rally
stopped above this point—at 229—and then
declined to 227 3/4, at the close of the market.
The column of figures at the Left Side of Work
Sheet are the ‘ticks’ as they appeared in order on
the tape until the top was reached at 229 and at
this price the recovery of the (9) point decline
of the ‘D’ column was approximately 27.7%
or slightly below a one third recover—usually
considered a minimum—not counting the (1
1/4) Points Violation recovery.
The above paragraphs point out more of an
‘exit’ from a bad situation and shows that a
trader need not take big losses, if indeed a loss
would have been taken in this case but so long
as these situations exist in speculation a trader
must know how to protect his capital.
This situation—only in reverse—happens
about (50%) of the time where a trader can make
his initial purchase on a Buying Day Low where
no Violation occurs. The Violations occur about
(35%) of the time, on an average, taking the total
trading swings during the life of a grain future or
a stock, during [its] ordinary up and down move
with the general market.
34
Chapter 6 Buying on a Buying Day Low Violation
Figure 4
Figure 4
35
Chapter 7
A Selling Day
When the low is made FIRST on a Buying Day—should the rally carry back this far—this
Day and the closing price is up from the low and is now your Primary Selling Objective, instead
nearer the high of the day, we look for and expect of the Buying Day High.
an up-opening and a penetration of the Buying On a stalled opening or where the opening
Day High to sell on—on the Selling Day—and and previous close are the same, the trader sells
these penetrations occur more often in an Up- ‘at the market’ immediately upon seeing the
trend Trading Area. opening price—should the following prices after
On a Selling Day, should you sell out, too the opening be up, his order is in and will be
soon, after a penetration you lose some of your executed on a rising trend and he gets just that
probable profits, so that in an Up-trend Area, much more of the rally—should the following
you must expect not only slight penetrations but prices be down, his loss will be much smaller—
‘deeper ones’ for the tops must be broken on the his order is in—in time to ‘duck’ the real ‘sell off’
upside and be progressively higher. and he is out of the market quick and probably
The activity of the market after penetrations at the very inception of a declining trend. The
is a good sign to watch, also, after small ‘D’ price he gets for his stock will probably be
column decline units. slightly above or below what he paid for it on
From a strong closing on a Buying Day when the previous day—the Buying Day.
the opening—of Selling Day—is up and wide— Many traders at this point do nothing—if the
and this will generally be a penetration of the stock starts up after the opening they wait to see
Buying Day High—We sell out ‘at the market’, what will happen—if the stock starts down after
without waiting for the next transaction to appear the opening price they wait for a rally to ‘get
on the tape after the opening price. The price out’—most likely the expected doesn’t happen,
may go higher after we sell out and many times either way and the net result is a greater loss.
it does—so what—the opening price may be the For a reaction to take place from so short a
high and is many times and a reaction may start rally—the low of Buying Day—indicates a
from the next transaction after the opening price weak up-trend and will generally ‘fall short’
that could take the stock down much lower. We of a penetration of the Buying Day High—the
sell and ‘at the market’ and are not concerned Selling Objective—even though the decline
with how high the price may go after we sell does not violate the Buying Day Low—Sellout,
out. just the same, should the opening be down from
When a purchase is made on a Buying Day the Buying Day Close. The stock does rally at
Low and shows a good gain above this low—at times but we should not get this ‘dip’ so soon—
the close—then should this gain be partly lost the stock or future should have opened up and
on the opening of—Selling Day—or opens at continued the rally further—if the immediate
the Buying Day closing price—Sell out, ‘at the trend is higher.
market’ without waiting for the next transaction It is the better ‘play’ to take a small loss at
to appear on the tape. Should the opening on— this point—should it be a loss, than to hold on a
Selling Day—be down and decline further from chance a much greater reaction.
the opening price—Sell out on any rally from Had you bought your ‘long’ stock somewhere
the low of this decline and this point would near the Buying Day Low, you will probably get
be—at, through and above the low of Buying out with a small profit or an even break.
36
Chapter 7 A Selling Day
A Buying Day purchase must show a profit— The stock opened at 214 and rallied (1/2)
that is, the spread from the low to the closing point above the opening and our ‘play’ is to sell
price and not lose it on the opening of—Selling on any rally from a decline or down opening on
Day—The above action does not favor your play a Selling Day—and ‘at the market’.
so get out as cheap as you can. After this (1/2) point rally the stock began
Your Selling Objective, would be, at or to sell down and made the Buying Day Low
through the High of Buying Day on a Selling Violation LAST and closed almost ‘flat’.
Day but when this decline occurs with or without Had your purchase been made near the
a Buying Day Low Violation, instead of a Buying Day Low, your loss would not have been
continuation of the rally—we change the Selling very much, even had you paid (214) for it but in
Objective and now make it—at or through the holding on and hoping for more rally it could
Low of Buying Day. have been much more.
Should the decline stop within a fraction or The recovery of the ‘D’ column unit decline
a point or so and should the rally start with the of (6) points was (1 1/2) points—shown in ‘R’
activity picking up as the price sells through the column or 25%—the recovery rally.
Low of Buying Day and shows no hesitancy just In the case of—SH—it opened at 227 but
above this Low, the rally may carry further— declined FIRST and rallied LAST but with—
even penetrate the High of Buying Day—and it WK—it rallied FIRST and declined LAST. See
does, at times. We would then switch back to our (SH) Plate Saturday 19th.
Primary Selling Objective, that of selling—at or This is the reason why the signals have got
through the Buying Day High. We would sell to be watched carefully and these signal[s]
out on this penetration before the close. mark[ed] ‘X’ FIRST and ‘Y’ LAST make the
The Yearly Tables, show approximately difference between being right or wrong on the
(66) penetrations on—CK May Com—and (55) trend.
penetrations on WK May Wheat—out of a total
of (100) Selling Objectives. See (SH) Plate for
failures to penetrate and selling through Buying
Day Low points, also, selling stock bought on
Buying Day Low Violations.
Knowing how to trade on these kinds of plays
are our only concern, for they are the trouble
‘spots’ and we have no way to anticipate their
happening—except news that is announced after
the market closing.
The more regular action of strong closings
on Buying Days—with up-openings and
penetrations of Selling Day Objectives are clear
sailing and take care of themselves.
In this case—WK—made the high FIRST at
214 1/ 2 but part of the gain at close of Buying Day
was lost on the opening of Selling Day. We sell
our long stock on any rally following a decline
at a point like this—at, through and above the
Low of Buying Day. The stock if going higher
should have opened up and continued the rally
but we are not concerned with what it should
do, we try to act on what it actually does—we
follow the market and never try to make it.
37
Figure 5
38
Chapter 8
A Short Sale Day
Let us assume the close on a Selling Day after a rally from the last Buying Day Low Point
was strong, which in turn would indicate an up- a reaction would probably be in order, since it
opening and a continuation of the up-trend, the would be the (3rd) day up.
stock or future opens up and penetrates the Short We try to make all short sales on the high
Sale Objective—the Selling Day High—after made FIRST on penetrations of—Selling Day
the penetration we watch for a slowing down of Highs—‘This is the most favorable action for
the move, we are watching to detect if the price your play’—we would not ‘put out’ a short sale
is meeting with resistance, if the selling at this where the stock or future opened down and
point is overcoming the buying. declined future, without a rally, for this action
The selling we are looking for at this point is would carry the implications that rally, should it
inside short selling and it gradually overcomes start later in the session, may cause the closing
the unwise long buying by the traders at the top price to be up near the high of the day and this
of this rally—or it stops the rally abruptly and would be making the high LAST on a Short
the decline starts right in many times from the Sale Day, indicating a 46 future rally, and an
opening prices. up-opening but where the stock opened at the
Many times at the top of a Short Sale Day, same price as the previous close and declined
one or two futures or stocks will be made to early in the session and then rallied higher than
appear strong by ‘putting’ them up a little higher the opening price or for a penetration of the
while the others seem to resist further buying. Selling Day High—we would ‘put out’ a short
You will notice when ‘they’ are rallying one sale just as this rally began to exhaust itself after
future or stock that all the others will just ‘hold the penetration. This action is not as favorable to
or sell off’ a little—this is done to create an air our trade as the above.
of strength and to test the buying power of the When a reaction takes place after a
public and to put out short sales in all the others penetration of the Selling Day High and the
under the cover of strength in the ones they are movement is in ‘no hurry’ and the stock just
‘putting’ higher. trades down, we stay short anticipating our
When it is clear that there is no further buying covering point, next day, on the Buying Day. We
power the reaction starts—under the weight of can cover the short sale when we buy our ‘long’
these sales and short sales. The intent of ‘those’ stock or perhaps a little before—to trade in this
making the market not to put the price higher way gives you a little more time to concentrate
makes the stock—the best kind of a short sale. on your Buying Day Objective—this point for
This same action takes place on a Buying Day, both covering your short and your purchase
only in reverse, all futures and with stocks—will will be—at a little above or below the low of
make low prices—then one or two are ‘put down’ previous day—the Low of Short Sale Day.
for a new low while all the others hold—when Should the ‘sell off’ be severe and with
there is no more selling coming into the market, activity—during the Short Sale Day session we
the rally starts, including those that were used to cover our short sale on dullness, near the low
influence the market. of this reaction or if and when we have a profit.
We make our Short Sale—at through and We are then out of the market and we stay but,
above the High of Selling Day—on a Short Sale we don’t buy any long stock on the reaction. We
Day. wait for our next play which is that Buying Day
Had the high of Short Day been reached Objective, no matter what the market does after
39
we ‘cover’ and get out. supported and is not going lower, it will go
The stock or future can in this case rally higher—and generally where the stocks hold
fast—from the severe decline—and close strong a Higher Bottom on a Buying Day, the price
and this would indicate that a high would be rallies high enough to make a profit.
made FIRST on the next day—the Buying Day When a Short Sale is made on a Short Sale
and would be another chance for a short sale, for Day—even on a penetration—of the Selling
a high made FIRST on a Buying Day, generally Day High—then declines from this high but at
has some kind of a ‘sell off’. the low point of this decline the market becomes
By taking our profits on this fast decline it quiet and dull (with perhaps a few transactions
strengthens our position, in case, the decline at the same low price) then begins to rally—
from this rally does not go as low on the next Cover your short sale, and just as the rally starts,
day, our Buying Day and we may have to buy at the indication then, is for a strong close and the
a Higher Bottom. stock may even make a new high for the day.
By this is meant that any profits made on Had the short sale been ‘put out’ through and
the short sale can be used to reduce the cost of above the penetration, it can be ‘covered’ with
Buying a Higher Bottom—this is averaging but little loss and perhaps with a small profit. The
it is carried out in two separate trades. trade does not favor your play, so buy back your
Should you sell short, too soon, after stock and stay out of the market. To continue to
penetration and it happens to be one of those hold on could eventually cause a big loss. The
occasional times when the price goes through for rally starting from this low that would make up
a more than average penetration, the trade will all the decline and a new high would be a quick
be against you, temporarily, however, a rally so ‘run in’ of the shorts and while holding the top
active and strong that would cause a penetration price at the close, could be the end of the rally,
of this kind would no doubt meet with profit with a down opening the next day, however, the
taking and higher up short selling, both inside rally is an indication of a further up-trend and a
and professional which would cause the stock higher opening, but with no way to anticipate
or future to react or decline low enough for you this move, better trade is to cover and stay out.
to ‘cover’ with a small loss, profit, or even break A higher opening and a further advance would
before the close. be a high made FIRST on a Buying Day, with
These more than average penetrations are the probabilities of a joint at which the short sale
usually the fast rallies back following a severe could be ‘put out’ again—or just wait and watch
decline and widen the trading swings both up for a ‘sell off’ of a buying ‘spot’ to go ‘long’.
and down for a few sessions, then the movement A trader begins to anticipate a short sale
slows down and continues [its] trend, up or after the close of a Selling Day session—First
down, depending on which way is to be the note the closing price and [its] relation to the
future movement. high and low of the day—and if the close is up
After a sharp decline followed by a rally the from the low and nearer the high or if the close
stock usually declines again to the low point is down from the high and nearer the low. The
reached on the first decline and it may hold high closing indicates an up-opening and these
above this point or go lower. This is the reason up-opening generally occur in the Up-trend
after covering our Short Sale—on the Short Sale Areas, except, where the trend is being reversed
Day—why we let the ‘long side’ of the market from up to down. The low closing indicates a
alone and wait for the second decline which down-opening on the Short Sale Day, in the
generally occurs on the Buying Day. down-trend Areas, and where the trend is begin
This second decline may ‘fall short’ of ning to change from down to up. Next note if
reaching the low point made on the first decline, there was a Violation of buying Day Low—that
we then buy at this Higher Bottom and it is is, if the low is under the previous low, if so,
generally profitable—for if the stock is being the rally starting from the low of Selling Day
40
Chapter 8 A Short Sale Day
may not carry high enough on the—Short Sale column units show the trend continuing up or
Day—to penetrate the Selling Day High, it may down, reversing itself or forming a trade range.
come up near it by—first opening down and Check back over the ‘D’ column units and
declining further, then rally later in the session note the spreads of the recent past several weeks
for a strong closing—then many times the high and note if the spreads have been running wide
of the rally—from Selling Day Low—is made enough to make a profit had you sold ‘short’—if
FIRST on the next Buying Day, when preceded not, wait until the movement begins to widen.
by the Violation and this is generally the (3rd) The square at Left side of the Weekly Column
day of the rally and in a position for some sort of gives the total of the fluctuating declines.
a decline. There will always be reversals at the When a stock or future opens down on a Short
openings—at times—from what we expect, due Sale Day and declines further—let it alone—for
to news given out between sessions, however, it not knowing what it might do, it does not favor
is seldom important enough to cause a reversal your play. In your daily trading you will find
of the trend, after it has been established—after plenty of Selling ‘spots’ made on penetrations
a trend has been running for some time with the and FIRST that are more favorable.
price up or down, then a down-opening from a In ‘putting out’ a short sale on a penetration
strong close or an up-opening from a weak close made FIRST it will generally be after a rally of
may be the beginning of the change of trend two or three days and in most cases we are not
either way. selling at bottom prices or at lows of reactions
An up-closing on the Selling Day—in the because the stock or future looks so weak at
Up Trend Area—indicates an up-opening on these times.
the—Short Sale Day—and this action is the Check the Yearly Plates and study the action
rally that may cause the penetration of the— that precedes and follows the penetrations and
Selling Day High and FIRST and is the rally we failures to penetrate Selling Day Highs, on Short
use for our short sale—we ‘put out’ the ‘short’ Sale Days. See (SH) Plate for Short Sale Days
at and through this penetration—generally the when preceded by Buying Day Low Violations.
stock or future will react from this high made
FIRST—but in the case where this Violation of
Buying Day occurs, the stock many times rallies,
from this decline and closes up, making the high
LAST indicating a further up-trend, and a high
made FIRST on the Buying Day.
This action explains the reason—when we
‘put out’ a short sale, even when there is no
penetration—we ‘cover’ the short sale near the
low of this decline, should the stock or future
show any rallying tendencies—and the first signs
would be a decrease in the activity near the low,
with a hesitating action, quiet and dullness for
a short period—then the activity picks up and
each several transactions begins to hold a little
of each gain.
This is a different movement from the rally
that starts from the Low on a Buying Day—
without this Violation—and proceeds in the
more normal way, to a high on a Short Sale Day.
See (RZ) Plate—October 13, 14, 15th.
The ‘D’ column units compared with the ‘R’
41
Chapter 9
A Short Sale at High of Buying Day Made First
A Short Sale ‘put out’ at the high of Buying ‘easy sell off’ and we look ahead for a point on
Day made FIRST on the penetration of the this day to go ‘long’ of the stock.
Short Sale Day High, should be covered on the Never sell a stock or future short on a Buying
reaction, whenever it sells down enough for Day, when it makes the low FIRST—by opening
a profit or on the first indications of dullness down—even though it is the third or fourth day
around the reaction low, for short selling on of the rally. There is not enough spread and
the Buying Day High made FIRST generally is you can not make a profit with a reasonable
a weak short sale—when prices are relatively certainty.
low—especially in an Uptrend Trading Area— Don’t let it bother you because you covered
for the decline is of short duration when the your short sale and after that the price went lower
trend is just starting up from the low point of the and is closing on the low for the day you have a
last Downtrend Area. profit and that is what you are trading for—quick
A Short Sale made on the high of Buying small profits—Now, begin to look forward for a
Day when it is made FIRST should always be chance to buy a Buying Day Low Violation, next
covered during the Buying Day session, no day, and this would generally be a strong buying
matter how much lower the stock might look point for the Violation would usually be made
and because you should not short of a stock, at a FIRST and early in the session and generally the
point, where, in most cases, it is wiser to be long rally from this low is profitable.
and generally it is the better trade to be long on Usually in a strong Uptrend the stock will
a Buying Day, in an Uptrend Area. make the High FIRST on a Buying Day—about
In this case the stock or commodity future 35% of the time on an average—it then declines,
opens up and goes a little higher, it may or may then rallies and holds the gains for a strong
not penetrate the High of Short Sale Day, then closing. A trader sees the up-opening and a
generally it reacts and around this reaction low penetration or failure to penetrate the Short Sale
we ‘cover’ should the market become quiet and Day High and notes the activity at or through
dull. We then watch the market but need not be this point, just as it slackens and stops, he sends
in too great a hurry to buy or go ‘long’ since, so in his order to sell—he then watches whatever
far, the low is being made LAST on a Buying reaction that takes place from this high and the
Day, with the possibilities that the stock may activity around the low—if the stock shows no
trade down lower with the indications of a ‘flat’ indication to rally but he waits before going
closing, in which case WE DO NOT BUY AT ‘long’. From this decline low the stock often
ALL, even though this low is under the previous rallies—in an Uptrend—and should it make a
low—the Low of Short Sale Day—which would new top after this decline, by going higher than
ordinarily be our Buying Objective. the opening price or the high of the first rally,
In this latter case of the low being made LAST he buys on any set back from this high, before
we are anticipating a buying point on a Buying the close of the market. He covers the short sale
Day Low Violation—made FIRST—next day, earlier as insurance, because he must anticipate
when prices get within the range for Violations just such a rally as might occur here.
as shown in Violation Column in our book. In buying at this higher price on the set back
We cover a short sale quick on a Buying before the close, he is not ‘chasing’ the price
Day, when the stock acts ‘tight’ and resists an up, for he has a short sale profit to average
42
Chapter 9 A Short Sale at High of Buying Day made First
the cost down, although each is considered an short covering move could start that would carry
independent trade. This action indicates a strong the price up for a new high and end the session
close on the Buying Day and a strong Selling with a strong close, this rally would then cause
Objective, for this ‘long’ stock, next day. the high to be made LAST—in this case the
We watch the spread between the Buying ‘insiders’ might think the news was worth a little
Day High and the price we paid for our ‘long’ further discounting than at the opening or higher
stock and since we bought above the low of prices—having covered—we watch the prices
the day—we don’t expect too much, since we around this extreme low for a few transactions
are only trading for some part of this move and at about the same price and if, at this low,
we must be ready to sell out in case of a higher prices were under the Low of Short Sate Day or
opening on Selling Day or on the penetration of holding a Higher Bottom—if the latter, so much
the Buy Day High. the better, it shows higher support—we buy on
The beginning of Downtrends, many times, this ‘quiet spot’—any fast active rally that might
start from a Buy Day High made FIRST and take place from this low would be short covering
particularly so when prices are comparatively started from the ‘inside’ and a strong rally from
high. The high is made FIRST (a high made here up to the close would generally be a weak
FIRST on any day is usually an up-opening from rally, so, sellout before the close to protect your
the previous close and this may establish it or profits, for there is always the possibility that
the price may rally further, after the opening) prices may be down at the opening, next day, the
then the decline starts but so long as the rallies Selling Day. Had you bought and this rally did
from any low point ‘fall short’ the high has been not take place—sell out before the close, for the
registered for the session—this may sound silly indications would be for lower prices—the low
but carefully watch the days when this action was made LAST on a Buying Day.
takes place—you will observe many attempts A high made FIRST may be established by
to rally the stock and some of them will appear opening down on a Buying Day but would be
pretty strong but with the few exceptions, the of no interest to us for short selling—this would
high prices made early usually stand. be causing the low to be made LAST—the
With the above after the decline starts, the probabilities would favor a rally from this low
activity is on the down side—the stock makes before the close, for in this case the stock would
faint attempts to rally but doesn’t seem to get be selling off from a previous high price—our
very far—the activity dries up at the top of these Buying Day Objective is based on a decline
rallies and the market becomes dull and quiet, of one or two days, from higher prices. Any
then the decline starts in again from these lower rally from this low that would make a new top,
tops. On an action of this kind we don’t even after this decline, would reverse the high made
think about the ‘long side’ of the market, even FIRST—it would then be made LAST—and
though it is a Buying Day. Had we gone short this then would cause the Buying Day Low to
higher up, we watch the market but we ‘cover’ be made FIRST a strong confirming action for
our short sale before the close. the ‘long side’ and generally the close would
A weak closing on a Short Sale Day, may be strong, an indication for a strong Selling
indicate a lower opening on the Buying Day— Objective, next day, for the ‘long’ stock.
and we get set to buy on the low made FIRST— Generally where you get a wide spread from
yet, the opening may be up, on account of low to close, after the stock has sold down from
some news announcement between the sessions higher prices, you are getting your profit in the
causing the high to be made FIRST—on Buying same session, so take it in the same session and
Day—perhaps a little short covering—then a don’t enter the market again (in the same stock
decline may start from this high—a short sale or future) until the Short Sale Day, no matter
made at this top is covered on this first decline what the stock does in the interval.
with a smaller profit, for from this low or lower a The reason for short selling on the Buying
43
Day high made FIRST, is that had the rally been

in progress from the last Buying Day Low, it
would be the (4th) day up and the rally would
be in the process of exhausting the upswing and
in many cases the stock makes the high on the
Buying Day—when preceded by a Buying Day
Low Violation, it is being made after (3) days of
rally.
44
Chapter 10
Failures to Penetrate
We will start with a stock or commodity only in reverse, the extreme low is usually
future at or near the top of an Uptrend Trading made on relatively heavy volume and activity,
Area, assume the uptrend had been under way then the stock rallies from this low, with light
for a week or two or more and the price gains or heavy volume but the decline takes place
were Five Cents or Points or more from the low on greatly decreased volume and activity—the
reached on the previous Downward Trading heavy buying at this low for support and other
Area. Now, should the top be in process of being purposes is held, therefore, the pressure on this
reached the extreme high would generally be decline is not so great and the stock fails to go as
made on a relatively fast, active, wide move low, or it may penetrate the first established low
with volume—in the case of stocks—on the point fractionally.
commodity ‘tape’ we have no volume, so we Failures to penetrate the immediate previous
watch the comparative activity of the market. highs and lows, do occur both up and down in
After the extreme high is established the price an Up or Down Trading Area. These are usually
would probably break back under the high point arrested moves due at times to the news of the
and the trading for the remainder of the session moment but in most cases we get a forecast of
and the closing price would generally be slightly them by watching the closing prices—compared
under this top. This action is caused by ‘inside’ to the highs and lows of the day—weak or ‘flat’
selling, by ‘those’ who think the price is high closings forecast lower prices with the results
enough, at least temporary. Enough selling takes that rallies from these declines many times fail
place to stop the rise but not enough to break to penetrate the Selling Objectives—on the
the price wide open, however, at times, this does Selling and Short Sale Days.
happen. In the case of the Higher Buying Day Low
On a run up of this kind it attracts a following point, the failure to penetrate on the down
of ‘outside long’ buying and this demand is side—the Short Sale Day Low—the stock shows
filled during the trading that takes place under support and the chances of recovery of a good
this low and at the opening, the next morning. part and perhaps all of the ‘D’ Column Units,
Many times the supply is more than the demand the stock is receiving only stabilizing support
at the higher price and the stock opens down and and can go lower, after a rally. Many times the
declines further, however, a rally follows from close will be up from the low on a Buying Day
this low but this rally is accomplished on a quieter but the opening price—on Selling Day—will
market with decreased activity and volume in be the same as the closing price, with a failure
the stock—activity in the commodity—the rally on any rally from here to penetrate the Selling
fails to reach the extreme high, then the decline Day Objective—the High of Buying Day—then
starts again from this failure. the decline starts from this failure and the stock
When this is the top, the Uptrend Trading makes a Violation of the Buying Day Low
Area is now changing to a Downtrend Area and LAST.
low points as they are made will be penetrated It is this kind of an opening on Selling Day—at
after rallies and the rallies will progressively fail the Buying Day closing price—that causes us to
to reach former highs. sell on any rally or even on the next transaction
At the bottom Trading Areas, when the trend on the tape, after the opening and we use the
is changing from Down to up, the stock or future Buying Day Low, as our Selling Objective.
makes a low on the same kind of market action, The Violation of a Buying Day Low, in most
45
cases, forecasts the failure of the rally to penetrate found in the Downtrend Areas and when the
the High of Buying Day—on the Selling Day— trend is changing at the top and in most cases are
at times, rallies do come up to and through the forecast by weak or ‘flat’ closings on the Buying,
Buy Day High, but in many cases the rally fails Selling and Short Sale Days. At the bottoms,
after reaching up to and through the Buy Day rallies before the close that hold, forecast up-
Low. It takes rally to recover all the ‘D’ Column openings and failures to go lower.
Units and to then rally high enough to penetrate When a stock makes a high FIRST on a
the High of Buying Day. The Violation is, in Selling Day with a penetration of the Buying
itself, generally a three days or more decline Day High, then reacts and is selling nearer the
and it seems to require a session or two to build low of the day at the close, the indications are for
up a rally that will penetrate the tops of selling a lower opening on the Short Sale Day. Should
days—the Selling and Short Sale Day—then the the lower opening occur, after the decline the
high in most cases is made FIRST or LAST on stock or future will make an attempt to rally, in
the next Buying Day. most cases, and this rally will penetrate the—
Perhaps the best forecast of a failure to High of Selling Day—if the immediate trend is
penetrate on the Selling Day would be revealed higher, however, should the rally fail to reach
by the ‘D’ Column, in the severity of the decline, this Objective and at the top of this rally the
as shown by the size of this unit. activity dies out and the trading narrows down to
On a Short Sale Day, we can see the range a few transactions at about the same price, then
of the ‘sell off’ as it is taking place by watching begins to ‘sell off’, we would ‘put out’ a short
the spread from the high to the low. This spread sale on this declining trend and J-U-S-T as it
gives you part and sometimes all of the range in starts. This would be the better play when prices
advance of the Buying Day. A rally from this low are comparatively high for near the bottom of an
with a higher closing price, indicates a failure Uptrend Area, there may not be enough room in
to go lower—on the Buying Day—and this is the spread to make a profit.
Should you sell on this rally and the stock
what causes Higher Buy Day Bottoms and the
react and near this decline low, the stock show
Zero in the (BU) Column points them out. You
signs of ‘tightness’ by going quiet and the trading
can visualize and anticipate this Zero, so long as
sort of ‘bumps around at the same price’ without
the price holds above—the Low of Short Sale
making new lows—cover your sale and take
Day—and where this Zero appears, it generally
your loss or profit on the first indications of this
forecasts nearby higher prices.
kind of action. At times the open will be down—
In the beginning it might be well to study
on a Short Sale Day—and will continue down
these failures to penetrate and the results of
without any rally and not give you a chance for
them before buying or short selling but you have a trade. Should this kind of action take place,
got to recognize this action and trade on it, for there isn’t a thing you can do that would favor
while it is a most difficult ‘play’, at the same your play, except let it alone. You can look
time many of the most profitable moves take through your books for a more favorable trading
place from failures to penetrate at both tops and Objective. You would probably have a book
bottoms. on a stock or future that would be a Buying
The failures to penetrate Buying or Selling Objective on this same day, if so, this would
Objectives are not exceptions to our method of be the Objective to trade on, for it, too, would
trading, for a little study of the past movements generally be down and would be making the low
of stocks and commodity futures will reveal that FIRST on a Buying Day. Any rally from this low
this action takes place approximately 40% of would generally be profitable.
the time on an average, at either of these points, When the price falls to make a Short Sale
therefore, this movement is a very definite part Objective—the penetration of a Selling Day
of the method as a whole. High— by a relatively severe decline at the
The failures to penetrate the tops are usually
46
Chapter 10 Failures to Penetrate
opening, it is better to pass up the session and not in advance.

try to ‘put out’ a short sale on the rally, should Weak closings forecast failures to penetrate
a rally take place, from this decline—the trade ‘top side’ on the rallies after declines, while
does not favor your play and there is always strong closings forecast failures to penetrate
the possibility that any rally from this decline ‘down side’ on the declines after rallies.
may hold, thereby, causing the high to be made
LAST, with the indications of the continuance
of the uptrend.
The amount of rally from a Short Sale Day
Low, plus a higher opening causes a Higher
Bottom and a failure to sell lower on the Buying
Day.
The failure to sell as low on the Buying Day,
reduces the decline unit in the ‘D’ Column—this
shows the rally starting from the low of Short
Sale Day—while the Buying Day Low Under—
Short Sale Day Low—increases this decline
unit.
The reduction of the unit in the ‘D’ Column is
caused by and means a rally and the failure to sell
as low, forecasting a probable penetration of the
Selling Day Objective—the Buying Day High—
while the increase in the unit in the ‘D’ Column
means a decline and penetration with a forecast
of a probable failure to penetrate the Selling
Day Objective. That is why in buying a Higher
Bottom it is profitable most of the time, for you
are buying just after the rally started—from the
low of Short Sale Day—while buying a Buying
Day Under—under Short Sale Day Low—you
are trying to catch a probable temporary low,
before the rally starts. On Violations of Buying
Day Lows made FIRST, the rally from this low
fails—not always but in most cases—to penetrate
the Selling Day Objective—the Buying Day
High—that is why we use the Buying Day Low
as our Selling Objective.
In the case of the Higher Buying Day Low,
the stock or future shows support causing a rally
and a strong close on the Short Sale Day—the
decline from this rally, next day, on the Buying
Day, fails to sell down through the previous
low—the Short Sale Day Low—this rally on
the Short Sale Day, is an indication of a Higher
Buy Day Bottom and the failure to penetrate
this low—low of Short Sale Day— reduces the
decline unit in the ‘D’ Column and the forecast
is for a larger unit in the ‘R’ Column, two days
47
Chapter 11
The Trend Line and Trading Areas
The line running along side of the Date supply at the tops and support at the bottoms
Column, we use for the trend line of the market or penetrations at either end with volume and
and while we don’t use [its] primary term activity.
possibilities for our method of trading, we do use We watch the kind of Trading Objective
[its] implications for Bull and Bear intermediate Day, when these penetrations are made for they
swings and we always keep the Seasonal Trends generally are wide moves and at these points
in mind. we can expect more and can hold on for deeper
This longer term line is broken up into the penetrations when prices are moving in our
shorter swings and these are our Trading Areas favor.
and are moves of Five Cents or Points or more We watch for rallies to start from Buying
and there can be any number of these areas in the Objectives and declines to start from Selling
longer term or Seasonal Trends of the market. Objectives or from failures to penetrate at tops
We watch the highs and lows of these areas or bottoms.
and the number of points move up or down and Trading Areas vary in length of time and in
the time consumed in each move and particularly number of points and there is no way of knowing
after a move of Two or Three Weeks in either in advance how long they will run, up or down,
direction. nor are we much concerned, however, the failure
In the Seasonal Trend Upward Swing to penetrate the last high or low of a selling or
we expect penetrations at—the tops of these buying Objective, especially after a move of two
Trading Areas and we watch for support and the or three weeks, up or down, may be the changing
progressive lifting of the bottoms after declines. of one trend to another.
We note the kind of Objective Day we are We buy, sell and sell short in the Up and Down
trading on, as the price nears or—is at the top Trading Areas, generally, and in the Up Trends
of a previous area, since we can expect wider we can expect the Selling Objectives to be
moves on the day of ‘break thru’ or penetrations. reached and penetrated and in the Down Trends
The same at the bottom of these areas in the we look for Buying Day Under moves—under
Seasonal Downward swing. Short Sale Day Low—and Buying Day Low
One of the several kinds of our trading Violations—this is the low under the Buying
Objectives must end a move at the tops and Day.
bottoms, a Sale, Short Sale or a high made FIRST In the Down Trend Area, we can expect not
on a Buying Day, at the tops and a Buying Day only two decline sessions—the low of Short
Objective or a Violation of it, at the bottoms. Sale Day and the Buying Day Low Under—to
By concentrating all our attention on these complete a move but we can expect Buying Day
smaller areas, we eliminate a lot of confusion, Low Violations before these rallies start.
since there is no need to watch other than the In the Up Trend Areas, we can expect the
highs and lows of the previous Trading Area. corrective decline to be completed in one and
When the High of the Area we are trading in, perhaps the same session—this is the low made
in the Up Seasonal Trend approaches the high on a Short Sale Day, from a fast decline, with
of the previous Area, we look for a penetration an active fast rally from this low up to the
of this top, when prices are comparatively close—with the results that we get Higher Buy
low or failure to ‘break thru’ when prices are Day Bottoms and penetrated Selling Objectives,
comparatively high. In other words we look for “This is the reason why we ‘cover’ a short sale
48
Chapter 11 The Trend Line and Trading Areas
when the decline is severe in the same session ment as grains and other commodities. They
and equals the average of an ordinary decline trade around highs and lows and spend more
that would require the time consumed in the time in reaching a daily high or low, so that
movement from a High on Short Sale Day to the most of the time it is possible to buy and sell
Low on a Buying Day”. within an eighth or quarter of a point. A trader
We always keep in mind the immediate must not become so accustomed to the wider
previous type of Trading Area—the Up Trend movements in commodities, as to expect the
Area, made on wide daily rallies and declines same movements in stocks.
are in most cases likely to maintain the same While using U.S. Steel as an example—
characteristics on the reaction or Downtrend. all other stocks exhibit the same pattern of
The fast and almost vertical Upward movements movement and many others are better trading
will generally show the same kind of action, only vehicles, their movement is wider and they have
in reverse, the decline is severe and the drop a broad daily trading range. It is not the intent
precipitous with little or no spread on the daily to suggest any stock for trading purposes—the
rallies from the lows, until it nears the bottom of trader must select his own stocks and will be in
the decline. a better position if he will make up a book on
On the fast Upward Movement compare the them and study it. Many stocks have ‘set’ habits
‘D’ and ‘R’ Column Units—note the penetration and ‘quirks’ that a trader will learn to recognize
mark over the ‘R’ Column Unit, also, the absence after he gets acquainted with [its] movements.
of the loss unit in the (3) day column—we do get It is surprising, too, just how often a stock will
toss swings in the Uptrend but generally the loss move as expected.
unit is fractional. Note: When the ‘D’ Column By studying the Seasonal Trends on the
Unit is small the ‘R’ Column Unit is generally charts, next pages, we can get a fairly reliable
large. picture of the months of the year when grains,
On the fast Downward Movement the ‘D’ normally, sell at their highest and lowest prices.
and ‘R’ Columns reverse themselves and the Stocks have no season.
loss swing begins to show up in the (3) Day The Trend Line should be alternated with
Column. different color inks, marking the Uptrend Line
The very narrow ‘line’ Trading Area—see with Blue and the Downtrend Line with Red.
Chart on ‘X’ for 1944—is without movement This will separate them and you can get a
enough to trade for a profit and nothing can complete picture of the whole area at a glance.
be done about it, the market just doesn’t have
anything to give. THE TREND LINE FOR THE
This period shows, perhaps the narrowest DILETTANTE SPECULATOR
range a Leader Stock can reach and still show
up daily, on the ‘tape’. Those traders who can not attend the
The Industrial Average fluctuated in about a market sessions daily, can also trade at their
(16) point range during the entire year of 1944. convenience.
These ‘patches’ are but parts of these several Suppose some other business came up as it
kinds of trends—and are taken from both Bull does occasionally and it was not possible to come
and Bear Primary Markets, but are highly to the market place, well, this need not affect the
representative of the whole trend of which they trader, so far as keeping a line on the market and
are part. a trend for him to trade on, at the time he decides
We do find, regardless of the kind of trend— to reenter the market, even though, he has been
Up or Down—or the year in which they take absent for a week or a month.
place—the movements maintain the same daily Just so long as he kept his book in order he
trading characteristics. would always have a check on the market, so far
Stocks do not have the same velocity of move as trading with this method is concerned.
49
It may be that he would find himself in some • MARKET UNSETTLED indicates a

remote place and there were no papers or condition of market uncertainty, with a
quotations available, he would not have to fill in lack of agreement on the part of the trade
the daily price entries, just so long as he kept the as to whether there is a stronger or weaker
circles in his book in continuity. tendency to the market. It may also represent
Upon his return he would then only have to a waiting attitude pending the development
refer to the newspaper of the day before for or outcome of factors which might affect
prices and on the, day he decided to start trading the, market such as storm damage, labor
he would know at once whether it would be troubles, weather conditions, legislation,
wiser to buy or sell short, he could not use a etc.
Selling Day in this case for he would not have • MARKET WEAKER represents a condition
any ‘long’ stock to sell. of actual and general price declines.
• MARKET WEAK indicates a downward
MARKET TRENDS trend with a market sentiment that
anticipates lower prices.
“Market” represents the correlation of • MARKET DEMORALIZED is used only
opinions of buyers and sellers which results in unusual cases. It describes a condition
in sales. “Market” phases are used in market wherein the market is oversupplied and
reports to indicate comparisons with conditions sales cannot be made except at very low
which prevailed on the previous day, or prices.
conditions expected on the day following, or
both. Comparison of the present price level The above market phrases may be qualified as
with past and future levels creates the “Market to degree by terms such as “slightly stronger”,
Tone”. “slightly weaker”, “about steady”, “very dull”,
Terminology - On market reports “market” “quiet weak”, “quiet firm”, etc.
phases are used in the following sense: The trader who will commit these market
phrases to memory will have a better
• MARKET STRONGER represents a understanding of the changing market sentiment
condition of actual and general price and can use them to advantage in his buying and
advances. selling. Try to deduce from them what effect, if
• MARKET STRONG indicates an upward any, they could have on the next market session
trend with a bullish market sentiment that and on his present market position and for
anticipates further advances. May also be their forecast of the nearby market trends. The
used to describe a situation where prices newspapers usually head-up their columns with
are at high levels and no immediate decline these phases.
seems in prospect.
• MARKET FIRM indicates a condition of
increasing confidence on the part of most
sellers. Prices are either holding at the level
of the day before or are a shade higher.
• MARKET STEADY represents a condition
where there are no appreciable price
changes or trends in either direction and
no definite sentiment that any immediate
market changes are in prospect.
• MARKET DULL represents a period of
relative market inactivity but no definite
tendency toward market changes.
50
Figure 6
51
• (A) Buy Day—market opened off—249 1/2 any rally before the close—watch the 245
high made FIRST on sluggish rally—failed 1/2 price—this is the selling Objective—at
to penetrate Short Sale high—Sell Short— thru and above—this is the 3rd day down
cover on decline on penetration of 246 Sat. from 254 3/4—the strong closing and on
8th low—Buy Under is 1 1/4 points from S. high for the day is short covering and could
Sale High—Buy around 244 3/4—market be the end of the rally—on account of the
has time to rally—if no rally sell before Violation the price may fail to go as high
close—rallied and closed strong—expect tomorrow—Many times the High is made
up opening and further rally tomorrow. on the next Buying Day.
• (B) Opened at previous close to down 1/4- • (F) Market opened down—too much conces
—next immediate transactions are on the sion from previous close for a short sale—
upside—watch the 249 1/4 as the selling low is being made FIRST on a Short Sale
Objective for your long stock—sell on the Day—let it alone—market can rally before
penetration thru and above—254 1/2 high the close and make the high LAST—an
being made LAST—close at high for the uptrend indication—on account of Buy Day
day—expect up-opening tomorrow for a Violation at 242 1/2 yesterday we might
short sale on penetration of today’s high. get a high for a short sale made FIRST
tomorrow—this would be the 3rd day
• (C) Opened up with a penetration of 254 up-market closed strong—expect further
1/2—high being made FIRST—sell short—
uptrend on Monday 17th.
this is the 3rd day up from Monday—market
active and declining at 247 1/2 is off 4 1/2
• (G) Opened down 1/4 cent but market is
points—fairly severe reaction—market
rallying FIRST on Buy Day—Sell Short
trading around this low—cover short—
decline can continue or can rally—being on the penetration of 246—cover sale at
out, stay out—middle closing between high thru or above 242 1/2 or if and when you
and low—tomorrow is a Buy Day—watch get a profit—watch 242 1/2 as your buying
247 1/2 at or below for a chance to buy—on point—market is quiet and is trading at 243
an up-opening and further rally tomorrow 1/4—the low is being made LAST but is
try to get out a short sale. holding a 3/4 cent Higher Bottom—buy
around this price—market is closing up from
• (D) Market opened down and declining—no the low—support is higher than yesterday—
chance for a short—good action for a buy expect a further rally tomorrow.
low being made FIRST at 245 1/2 the Buy
Under is 2 cents—this is about the average • (H) Opened down at 243 3/4—Sell on any
unit in the Buy Under Column—Buy at the rally where Buy Day close gains are lost on
market—don’t expect a big rally following Selling Day opening—the Selling Point to
a big D Column unit decline—market not watch it at, thru and above the 243 1/4 the
Buy Day Low—thru and above this point
rallying looks like a flat closing—sell out
watch for the activity to dry up and the
before the close—expect down opening
rally to stop—from this point and slightly
tomorrow with a chance to buy a Buy Day
above the decline can start again—Sell
Low Violation made FIRST.
above this point if the market hesitates or
stops—Violation at 240 1/ 2 made LAST
• (E) Opening down and declining—242 of no use for trading—indicates weak Short
1/2 is now a 3 cents Violation being made Sale tomorrow—Expect high to be made on
FIRST—Buy at the market—sell out on next Buy Day.
52
• (I) Opened up then sold down—no short

sale the low is being made FIRST—stay
out—the chances favor a rally later in the
session with high made LAST—this day
is like Sat. 15th on account of Violation of
last Buy Day Low—the high is being made
LAST—the closing is up—an up-opening
tomorrow would be a penetration and a
short sale above—also the 3rd day up from
240 1/2—on down opening the low would
be in process of being made FIRST—watch
for a Buying spot at, above or below 242
3/4—strong closing at high—indications
for further uptrend.
• (J) Opened up with penetration of 245

1/2—sell short above the penetration—
cover the sale on any decline around the
242 3/4 point the Short Sale Day low—wait
for a chance to go ‘long’—the market is not
rallying and low is being made LAST but
is holding a Higher Bottom—buy before
the close—buying a Higher Bottom is
usually profitable—expect a further rally
tomorrow—today’s action is the same as
Mon. 17th.
• (K) Opened down made Violation FIRST at

243—market began to rally from here—this
decline at opening catches us with ‘long
Stock’ bought yesterday at close—on any
rally from 243 we must watch for a place to
sell out—the point is the Buy Day low 243
1/2—at or just above this point the activity
slows down and the rally stops or it gains in
momentum—the price having sold thru this
point and with the activity picking up you
now watch the 246 3/4 point, Buy Day High
to be reached—sell at, or thru this point—
Don’t follow the rally further.

53
Figure 7 Figure 8
54
Figure 9 Figure 10
55
Figure 11 Figure 12
56
Figure 13
57
Figure 14
The seasonal trend of wheat, as shown in the above chart shows the traditional pattern. Easy
prices prevail at harvest time, but once the pressure of the harvest is over, the price level starts to work
higher until it is again time for the new crop to be received.
The downturn usually occurs about one month prior to the harvest. While this pattern has not
necessarily held true during recent years of high loans and high prices, it could become more active
when the loan may become effective in diminishing free supplies.
58
Figure 15
Here is a pattern that can be relied upon by both the [trader] and the
speculator—the speculator who is familiar with seasonal movements can take
advantage
of these trading opportunities.
59
Figure 16 Figure 17
Historically, corn values follow a distinct seasonal pattern. From a low in November—
the peak of the harvest movement—farm prices move higher each month until they
reach their peak about the following August when remaining supplies of the old crop are
scarce.
After August, prices generally ease in anticipation of new crop supplies.
While the seasonal longer up-trend is from the low in November to a high in August,
this line is broken into numerous trading rallies and declines and these are the short term
Trading Areas.
60
Figure 18
Look at the accompanying Seasonal Trend Chart, depicting the normal

trend of soybean prices during a crop year, based on the years 1937/41. By
about May or June, when their price declines again, most crushers’ needs
have been satisfied and a fairly accurate idea of the remaining crop-year’s
needs have been formed. In anticipation of next year’s crop, the price index
begins to decline but before harvest time it levels off slightly. Then comes the
weight of the harvest that forces prices still lower. Crushers, in order to ensure
themselves of an adequate year round supply, purchase about 50% of the crop
before December 31. The price level accordingly moves steadily and sharply
upward from the October lows as the demand for beans is being filled. Both
the [trader] and the speculator should take advantage of these seasonal price
savings.Here is a pattern that can be relied upon by both the [trader] and the
speculator—the speculator who is familiar with seasonal movements can take
advantage of these trading opportunities.
61
Chapter 12
Limit Day Moves
The beginning of a series of Downward kind the closing prices are generally right on the
Limit Moves must start from a comparatively bottom eighth, we do not buy long stock, for
high range of prices. when the Low is made LAST the Buying Day
We have Three (3) Selling Days, the Selling Circle would have a check ( ) in it, indicating a
Day Objective, the Short Sale Objective and the lower trend.
high made FIRST on a Buying Day, but only two The starting of a series of Upward Limit
of these objectives could be used The Short Sale Moves must start from a comparatively low
Day, and the Buying Day High made FIRST, in range—perhaps restricted prices—or be the
a downward movement. culminating move after a long slow rising
The Beginning of this movement must start market.
from one of these three tops, therefore, should This movement would generally start from a
this decline take place from a Selling Day Buying Day Objective or from a Violation of a
Objective, we of course, would be out of the Buying Day Low made FIRST or from a low
market by virtue of having sold our long stock on a Short Sale Day, from an active, severe ‘sell
at this point. In this case we would be without off’ from the Short Sale Day High. When this
an indication to reenter the market, with the happens the decline is more or less panicky with
result that we would miss the move, however, each price change going lower until it reaches a
being out of the market at this time carries [its] bottom and then the turn about is abrupt and the
own compensation by reason of conserving our rally is very active and fast with the gains usually
resources and the anticipation of the increased held but sometimes followed by a decline from
buying power at much lower prices. this rally and while the first low may not be
This in itself is one of the fundamentals of reached—the next day, the Buying Day—the
speculation—to be able to protect your capital real start of the upward move would take place
and be in a position to act on a more favorable from the Higher Bottom on the Buying Day.
opportunity when it comes along. This rally would start when the market had the
A movement of this kind starting from a appearance of going lower and with a general
Short Sale Objective would put us in and being bearish atmosphere. Some specific news usually
a limit move, we would stay in, first because we causes the start of this move and the technical
are speculators and secondly, “because we may position of the market is ready to be influenced
not be able to get out”. by it. The manipulator would only start this
The movement starting from the high made move after a strong technical position had been
FIRST on a Buying Day, is also, generally built up through too many unwise short positions
a Short Sale Objective and were we in such and the way to get an extended short position in
a move it would become apparent, at once, the market is to make it look weak and have the
for it would reach and run through the Short traders sell it short at or near the bottom.
Sale Day Low—the low of the day before—a We have no way of knowing when a move of
Buying Day Objective but the apparent lack of this kind might start but we have two chances
rally here would prove the move as out of the to get aboard in the Upward move—the Buying
ordinary and one of our rules would come into Day Low and the Violation of the Buying Day
play “On a Buying Day when a stock or future Low made FIRST—should the turn come on
shows no tendency to rally and looks like it will either of these days. In the Downward move we
close ‘flat’, that is, the low and close at the same have the Short Sale Day and the Buying Day
price, it usually goes lower”. In a move of this High made FIRST.
62
Chapter 13
The Three Day Trading Method
his stock at this point—then wait for a reaction

PART 1 to see how it acts on this decline and to confirm
his judgment, whether he was right in buying the
With the selection of the stock, it is only first lot. He then buys more after the stock rallies
good judgment to get a report on the company, and just as it makes a new high. His buying is
its past and future probabilities—but unless the done in this manner, Because: At times, the
market action of the stock confirms the report stock may turn and go in the opposite direction,
a trader should let it alone—watch but don’t and may ‘dip’ low enough to break to line of
buy. The time for buying should be based solely lows at the bottom of this range. (An action of
on the technical indications and the present this kind ‘cleans up all the stops’ below the line
market position, in relation to the low and high of bottom prices and ‘shakes off’ a following
for the year. It could be selling so near to a top before the real move gets under way.) Having
(Temporarily, perhaps), that by waiting a short acquired his stock he holds on for the move; an
time it can be bought at a wide concession. indefinite period, perhaps three to six months
Most all Bull markets show at least one or more or longer, or until he recognizes the described
important declines during the year that are buying action around tops.
opportunities, but the most important part is; In some years and at other times, some
starting at exactly the right time. A decline in a stocks and commodities, begin their advance
stock, due to a general decline in the market as a from other than trading ranges. Bottoms of long
whole, is not of great concern but the way it acts declines may be reached by a particular violent
on the rally, and the preparations for a new move downward thrust—establish a low—generally
is important. A trader should look for buying in followed by an immediate sharp rally and a
a stock around the lows of important declines— subsequent slower decline on greatly reduced
after the market stabilizes. It takes considerable volume and activity—stopping short of the last
buying to start a stock up and continuous buying low. A trader does not try to buy long stock on
to keep it going up. (Many good stocks lack this fast decline—he waits for the ‘quiet spot’ on
trading appeal, sponsorship, or due to other the reaction after the rally—and when the market
conditions, move with such sluggish action that becomes ‘dull’. He will buy part of his line at
they are unattractive to the more active traders.) this point (with the intent to sell out should the
Stocks with a good future potential should be stock make a new low) then add to it where the
watched but a trader should not wait until ‘they stock begins to make new highs in series. In case
make the news’ before buying—at this time they he is forced to sell, he starts over again from a
might be a better sale. Buying in a stock shows, new low—using this same action. (The manner
in the way the stock acts. He should follow of buying at bottoms—shows why—he should
the progress of a stock at bottoms or where it not expect to get less than a 10% average above
begins to form a well defined horizontal trend— extreme lows.)
confined to a narrow trading range—and trades A stock that trades in a listless manner on
on a fair amount of volume and activity, with very small volume; with intermittent small
some fair size lots of stock. He then waits for transactions, with absent days of trading, shows
a day of unusual activity and volume and gets neglect; and no immediate interest, and should
ready to buy at the very inception of the ‘break- not be bought until it shows a more active
out’ of this range, top side. He will buy part of participation in the market. A trader recognizing
63
this action in a stock should look to the company days of advancing prices after a long move
report for the reason. A stock must be traded in up, culminating with a quick, sharp, upward
fair size lots and volume in order to accumulate it. thrust on abnormally large volume and activity,
(This action can, also be seen in the commodities compared to previous trading. The stock makes
markets, in the distant futures, for a short time a high then resists all further buying—the supply
after the ‘start of trading’ in them.) and demand comes into balance—with the
Experienced traders and tape readers can trading very active and sustained—but the stock
generally distinguish a rally from a change in makes little or no progress either way. The heavy
trend by figuring how far a stock should come selling at this point is, temporarily discontinued,
back, allowing that a normal rally is from one- but the ‘selling sources’ continue to force a little
half to two-thirds of the decline. In case the more stock on the market than can be absorbed,
decline is not over, the rally will fall short. without loss, causing this sagging decline, on
The large transactions will be on the downside greatly reduced daily volume. Near or at the low
and the smaller lots on the upside. The volume of this decline there is a noticeable increase in
is light and the activity ‘fades away’ with the the volume for a day or more—the stock must
rally ‘dying out’ at the top. Where the trend is be bought in large enough quantities to absorb
to continue the trading shows a steady rise on all selling and turn the stock up. The day of
increasing volume and demand for the stock, heaviest support is the Real Bottom, then, many
and where there is an urgent demand for stock times after a short sub-normal rally or series of
for ‘short covering’ the pace will be accelerated. rallies, the stock will sell just a little lower on
The large transactions are on the upside and a negligible amount of volume—making the
are taken at the higher prices, with the smaller Actual Bottom—before the rally or uptrend is
transactions on the downside. (This same action resumed. (A new high has a bullish effect and
can be seen in the smallest daily—in the broader causes buying. A new low has a bearish effect
and longer movements—and in the Market and causes traders to sell out at bottoms, or at
Averages.) least, refrain from buying.)
Many stocks make two tops—the Real and A trader will repurchase a small part of
Actual—the Real top is where the first heavy his stock ‘as a trading lot’ on this decline in
liquidation takes place after long advances; anticipation of a rally or on the assumption that
then, after a decline of a week or more, a rally an uptrend will extend far enough to make a new
or continuation of the advance, many times, will and Actual Top. (But, with the firm resolve to
exceed the first high making the Actual top on a re-sell at, thru, and above on this new high—or
volume as large—more or less. A trader should to ‘get out quick’—if after a rally, the reaction
be on the alert to begin his selling the instant he breaks the last or support low.)
detects this inside selling. (The point here is: he There are other stocks that make one top—
must sell when he has a market, if his holdings the Real and Actual—and on comparatively
are large.) Experienced traders take their profits light volume, with no signs indicating that a top
at this point and do not try to anticipate an Actual has been reached. The long decline starts with
Top. (Which may or may not happen.) The high a series of small reactions and rallies but with
made on this kind of action may be one and the a definite downward tendency. These tops are
same—the Real and Actual. When this does difficult to recognize. (If, in fact, they can be.)
happen the stock makes a new high and has a A trader should understand the characteristics of
tendency to make the ordinary traders intensely these stocks or at least have some idea of the
bullish—they continue to ‘hold on’ or ‘come in’ percentage appreciation or number of points in
as new buyers—to take the stock at, perhaps, the swings of the past years, as a guide to the
top prices. (And this is just what is expected of future—and he should be satisfied to sell, if
them.) and when, past results as good or better can be
The Real Top, is generally one or several
64
Chapter 13 The Three Day Trading Method
attained. In this case a stock that fails to make a own, in the way they move, some rally ahead of
new high in a reasonable period of time should be the market, some with the market, while others
sold, particularly so, if other stocks in the market fluctuate ‘Up and Down and Up and Down in a
are showing the heavy top action. (The trader series of rallies and declines’ they just seem to
who can recognize these diverse movements in ‘plug’ their way along. This last type is good for
the market can use them as confirmation of the our trading purpose, if they, also, trade with a
weakened technical condition of the market as spread wide enough for buying and selling with
a whole). profit.
A trader who will start right—buy and sell After you have found a good trading stock,
according to these ‘age old’ tenets—will find stay with it and forget about the others and what
little need for many of these ‘new discoveries’ they are doing.
and other ‘wearisome’ statistical market This method is purely mechanical, in [its]
indices. strictest sense, but you must develop a certain
confidence in [its] movements, for knowing how
PART 2 it has recorded the movement in the past, you
can feel reasonably certain that it will preserve
This method of trading is applicable of this same movement in the future and used in
both—Grains, Commodities and Stock on the this sense, you need not invoke the finer points
‘Big Board”, however, in applying this method of trading, as you would do in using the daily
to stocks, select only those stocks that appear on trading method.
the tape every day and with large volume, relative This method is based on the greater percentage
to the daily transactions of the whole market and of gains over losses, for you will have loss swings,
which are the public trading favorites, the bid but the records show that generally, but with few
and ask is not so wide and they are easier to buy exceptions, the loss swings in points are small
and sell. and the profit swings, with a few exceptions,
Low priced stocks will not do for they do not are large, but the profit swings in points must
have wide enough fluctuations. of a necessity outnumber the loss points in an
Many of the stocks that made up the Dow- up trend, therefore, when consistently following
Jones Averages are good fluctuating stocks and this simpler method of trading—that of Buying
they move over a two or three points or more and Selling as advantageously as possible, as
range, during this swing. Of course, there are the Buying and Selling Objectives appear, the
many others and they can be found in the Forty method is profitable in the long run—your
to Seventy Five Dollar price range that are profits are made on balance.
applicable to this method. The above is well for the long side of the
First select a few stocks and make up a book market but we want to take advantage of the short
on them—you can usually get the back number side, too, for this is half the profits, however,
newspapers at the public libraries. selling short, stocks on the ‘Big Board’ is a little
Start your book from the low point of any different matter than when selling short on the
Secondary Reaction in the market or at least go Commodity Markets, on account of a Stock
back a few months, so that you will have some Exchange ruling which restricts short sales to
of the past action of the stock to study, then some extent. Both with the Three Day Method
study the stocks you decide to trade in, observe and the Daily Trading, we many times hit the
the way they rally and decline and the number top price, when selling, even to the top eighth,
of points in the spreads from highs to lows to so in this case with stocks, we may not be able
highs, study them for regularity and continuity to ‘get off’ a short sale as we could do with a
of their movements. All this information you commodity, where there are no restrictions on
can get from your book after you make it up. short selling.
All stock have certain characteristics of their After a stock gets up to a high or where
65
distribution starts it enters another trading range, either way, with a profit or loss on the penetration
the same as near the low point, only that this or as near to it, on the failure to penetrate. DO
range will be wider with many fluctuations up NOT HOLD ON OR CARRY YOUR STOCK
and down, with activity and volume, in order to DOWN.
distribute it, therefore it might be well to wait for The next day being a Buying Day you will
this kind of action before trading it on the short probably get an opportunity to buy your stock
side. The past records show that the long side is at a lower price with the chances of making up
profitable without short sales and many traders any loss, in case this happened to be one of those
can not or will not sell stocks short. Trading with days swings and with a profit besides, on your
this method he can take his choice. next trade.
The above is not written to keep you from It might be well to point out here that a trader
selling short, for should the stock you select to must take losses but he takes them when they
trade in, develop enough spread on these swings are small and he tries to stop them as quickly
so that you can trade it both ways, do so, for you as possible when he sees that he is wrong and
are trading and are ‘there’ to accept any gains in taking them he is not losing anything at all
the market offers you, no matter in what stage of but is playing for position and a more favorable
the movement nor on what side, long or short. chance to trade that he knows will soon appear.
In using this method the Selling Day The Violation of the Buying Day Low does
Objective is eliminated, however, always watch not change your Selling Objective as it does
the trend of prices on this day, for you can usually when using the daily method—you do your
get a forecast of what to expect the next day— buying on a Buying Day and hold on, even
the Short Sale Day, your Selling Day—and you though, this low is violated—you ride through
will want to know if your Selling Objective will this reaction and wait for your Selling Objective
be on a penetration or whether the price will ‘fall which is the penetration or failure to penetrate
short’ of the Objective. the Selling Day High on a Short Sale Day.
On the Selling Day watch the high and low You are using this method as a purely
and which was made FIRST or LAST, the high mechanical way of trading—you buy and sell
on this day being made LAST is generally a and figure your profits on balance of greater
good sign that the opening will be up and your gains over losses, over the longer term swing
Selling Objective—the high of Selling Day will in stocks and during the life of a grain or
be penetrated. commodity future.
When the high of Selling Day is made FIRST A trader using this three day method for
and the close is up from the low after a reaction, grain futures will find that during the life of any
the probabilities favor a further rally and a of them he has approximately One Hundred
penetration for your Selling Objective—but Opportunities or trading swings on the long side,
having bought your stock on a Buying Day plus an equal amount on the short side from the
Low and to then get a Violation of the Buying starting to the expiration dates and that the past
Day Low—next day—the price generally ‘falls records show that over (50%) of the Buying
short’ of your Selling Objective—this action is and Selling Objectives were accomplished on
a good forecast of a failure to penetrate and it penetrations at these points.
shows a weak uptrend and it generally occurs The trends in the markets vary from year to
in a Downward Trading Area—so don’t expect year in that some Bull and Bear Markets will be
too much at your Selling Objective. On the achieved by a series of wide trading moves both
other hand when the Buying Day Low holds, the in the Primary swings and in the Secondaries,
forecast is for a larger gain and penetration of while in other years the swings will be a series
your Selling Day Objective and this Objective is of narrow persistent upward and downward
the high reached on the Short Sale Day. movements. Look at the charts on stocks of
At your Selling Objective you must sell out, the past years and then make up a book of their
66
Chapter 13 The Three Day Trading Method
movements during these different kinds of The consistent buying and selling through
trends. trends of all kinds does work out in favor of the
A trader has a fairly reliable guide on the trader over the longer term, yet a trader need not
kind of reaction trend to expect by noting the make his plays this way and it is not advised that
type of upward movement that preceded it. he do so, at least not if he expects the market to
Had this uptrend been accomplished by a fast run into one of these fast moves, either way.
and almost vertical climb, he would expect the These loss day swings can be very severe
reaction trend to be of the same nature, perhaps and they look more formidable while they are
a precipitous decline. Had the trader been using happening and it takes more courage than most
the Three Day Method he would forego buying traders have to ‘ride out’ these moves, even
on the Buying Objective and would wait for the though, the greater part of the loss may be on
Short Sale Day—then sell short—covering the paper and only temporary but it does require
sale on the Buying Day—and again selling on considerable more money to finance them.
the Short Sale Day, until after the urgency of the
decline was over and the stock began to receive
support of the kind from which trading rallies
began to take place, after the declines. He would
then begin to use his Buying Day Objective
again and buy and sell as he did before.
Since the intent of the reaction is to get the
price down, buying long stock at any stage is
going against the trend but few reactions have
ever been completed in one straight drop,
therefore, we have found that at certain stages
of the reaction it is profitable to buck the trend
and play both sides of the market and this stage
of the reaction is after the heat of the selling is
over and the stock begins to trade around the
low point.
The same can be said of the fast upward
movement for when prices are low—in a period
of congestion or accumulation—the movement
may start with a fast mark up of prices and this
action usually takes place from some kind of
restricted trading area—the intent then is to get
the price higher, without a following, so that any
reaction of the daily kind will be small in most
cases, too small, and fast to trade both ways. The
trader then would use the Buying Day Objective
and let the short side alone. He would buy on the
Buying Days and hold on until the Short Sale
Day, then sell and buy back again on the Buying
Day. After the stock or commodity began to show
trading declines from the higher prices he would
then begin to use his Short Sale Objective.
The Up or Down Movement made on wide
daily rallies and declines should be traded both
ways.
67
Chapter 14
The Investor and Swing Trader
The Investor and Swing Trader, has a means a rising market, it is not likely that he would be
of accumulation and distribution in the use of forced to carry a heavy load at a loss, in case of
the Three Day Method. a sudden decline in the whole market.
In buying for accumulation it is not wise to At the determined time for selling, he would
try to buy a full line all at one time. The same use the same procedure, he would sell only on a
for selling—even, though each would like to Selling Objective—the Short Sale Day and the
liquidate all at once—there are times when Buying Day High made FIRST. In this manner
it can’t be done, the market is not technically he would be liquidating his stock on a rising
strong enough to take the selling and by trying trend.
to do so, he may get a price far less than would In either case, the trader would have some
suit him. assurance that he was getting or trying to get, the
By applying the Buying Day Objective to his best prices at the time of his buying or selling.
accumulation and the Selling Day Objectives Trading technique, is simply the ability
to his distribution, he could save himself many through study, observation and experience, to
points—and dollars. detect the manipulation that takes place in the
The Investor or Swing Trader is in no markets at all times, and to recognize the signals
different position than the Daily trader—he too, in each, of the several phases, of the market
should make up a book on the stocks he intends movement. The most important consideration
to buy and sell. Both would first determine the for speculation, even ahead of earnings and
kind of market—Bull or Bear—and the price dividends, is the technical position of the stock
position of the stock, in relation to the market in relation to the market as a whole— leading
or trailing—its position within its own group—
as a whole and either buying or selling would
leading or trading—and the group attention in
have to be initiated on the minor trend—the
the news—at this writing it is television.
daily price fluctuations—regardless of the
Swing traders and semi-investors are more
longer term trend—and both would try to buy
concerned with price appreciation, therefore,
as advantageously as possible consistent with a
selection of a stock is of the utmost importance.
Bull Movement.
Most of the stocks that make up the back-bone
Suppose the line was to be 500 shares or
of the market are in the conservative class and
more—each would use the Buying Day—
trading profits should be figured on a percentage
observing the conditions around the Buying basis and not on points. The trader who will do
Day Objective—an order would be placed a little retrospective research will find that many
for part, say, 100 shares, after getting them he stocks he may have in mind are not suitable for
would then wait until the next Buying Day and his style of trading. Get the highs and lows of the
place an order for another lot, continuing in this one or more sustained swings that a stock makes
manner until he had bought his full line. This each year and then figure the percentage gains
procedure would be a higher average cost but and losses of the rally and decline swings, from
each lot would be more apt to show a profit and lows to highs and highs to lows. The Market
the trader would have some assurance that he Averages may show great gains and losses up
was following a rising trend. and down, in points, with the per cent gain or loss
Had he started his buying during a of an individual stock disappointingly small.
comparatively low range of prices and was in A trader buying stocks around any low point,
68
Chapter 14 The Investor and Swing Trader
Bear Bottoms or Secondary Reactions in a high enough to begin distribution of the stock.
Bull Market (here he should use the 3 day rule Regardless of the reason, this action definitely
for accumulation) should carefully check the warns the trader that the intent is not to put the
percentage rise of his stock as the price moves price higher, at least not for the present—and
up from the low point but most important: a is his signal to unload—the market is broad
stock that is going up will do so with but small enough at these times to take the selling and
and normal set-backs until it reaches the high is the opportune time to turn paper profits into
of the move, regardless of percentages, so the cash.
trader must be constantly on the alert for the day The low points of Bull Market Secondary
when his stock will make top—in many cases Reactions are just the reverse of the top action,
this top will be made quite unexpectedly but the low many times is made on relatively heavy
not without warning. Watch the build-up of the volume, then a rally for a day or two and a
volume for a few days prior to the top and the further decline on very light volume with the
greatly reduced volume the next and for a few price holding above the last low point, with
days after or the volume might remain large for trading dull (established points at either highs or
a few days before and after the high is made. lows may be penetrated slightly by the trading
The decrease in volume is caused by a let-up in that takes place but are not sufficient reason to
the selling pressure for technically the stock may withhold selling or buying at these points). The
not be able to withstand further heavy selling short seller on this trend must be on the alert for
without breaking the price, too much. Many this same big day, only on the downside: for then
times a trading range is formed between the the stock is in supply for covering short sales
high and the low of the break-back and the stock and is the long stock bought at higher prices,
will trade in this range indefinitely, weeks and now, being sold at the bottom.
months, depending on the strength or weakness The market action for a swing trading is identi
of the general market—further distribution cally the same as that used for the 3 day method,
takes place in this range and on the way down, only on an enlarged scale. The minor movement
if, the general market is headed that way. This receives the same support on the declines and is
phenomenon of the action of individual stocks subjected to the same pressure on the rallies.
is a feature of the market prior to bull market
endings—with one stock after another refusing
to participate in any further rise in the market,
while the general market continues to advance—
this same action takes place in a lesser degree
before severe intermediate declines. This may
not be the action of low priced late movers, that
move up fast, make a top and start to decline,
seldom going back to their highs a second time.
Being behind, they must hustle to catch up with
the general market which is plainly showing a
declining tendency. This sudden reaching of a
top on greatly increased volume compared with
the previous daily totals, then, a slight break of
several percent of price from the high while the
volume continues large, is the results of heavy
selling, mixed with public buying and inside
short selling, caused perhaps by advance informa
tion adversely affecting the stock—sufficient to
cause large profit taking or the price is deemed
69
Chapter 15
Pertinent Points
The rallies and declines of the past a book on them, observe the repetitious action
movements in stocks, commodities and of the daily price changes and you will get the
grains—meet support and supply at or near ‘swing and feeling’ of the regular rhythm of this
these Objectives, study them and watch the price action and note the similarity of movement in all
action on the ‘tape’. of them—past and present.
Do some paper trading—try buying and Watch the low and close of each day and how
selling for about Ten (10) Days, until you get the and where they closed, near the high for the day
‘feel’ of the market. You are not day dreaming or near or at the low for the day and for what
by doing this nor are you reading the prices action and forecast for the next day. Be prepared
after the close of the market, with exultations for wide openings up or down, particularly
or recriminations of what might have been, had if prices are up or down (10) points or more,
you done this or that. which could be the top or bottom of a Trading
Take a pad and pencil with you to market, Area. Many times the opening price will be your
then buy and sell by using these Objectives. Buying or Selling Objective on a penetration or
Check yourself with the record after a couple of failure to penetrate.
weeks of this kind of practice. The commodities markets being seasonal
This trading practice will teach self control, affairs have and will continue to have broad
curb impetuous buying and selling, control your swings with activity and deeper penetrations at
patience and cause you to keep in mind all the the Objectives, in the Trading Areas and these
actions that can take place at these Buying and are the profit making moves.
Selling Objective Points. Forget about a trade after you have made it, if
Never try to anticipate the market farther you didn’t get the last eighth or if the price went
ahead than your signals, ‘cinch’ your profits higher after you sold or lower after you covered
as the market gives them to you, don’t hold on your short sale.
past a signal because a trend looks strong or you Keep in mind the tactics used around the
think the price will go higher or lower, it may do important turning points—Objectives—and keep
exactly as you think and does many times but looking forward to your next trade. Remember,
your ‘play’ is to take what the market offers you you are trading for quick, small but sure profits
and at the exact time of this offering. and this is exactly how a floor trader looks at
Don’t think about any other Objective, only the business. Take what the market offers you
the immediate one, that is, if you are looking for at the time and don’t hold on for what you think
a Buying Objective, think only about the action the market should do, trade the market on what
that can happen around this point. it does. In daily trading you will have enough
Never make a trade unless it favors your opportunities to keep you busy and should you
‘play’, it is better to pass up the entire trading find it, too, trying [to] use the Three Day Method
session than to buy or sell on a guess that it will for a change.
turn out all right, wait, until you are reasonably A trader should make up a book on several of
sure and the market many times makes it very the grain options and on a few stocks, then study
plain, when to buy or sell. The best practice them for their movements. After deciding on the
you can get is to go to the public library and one he intends to trade in, take only that book to
get the past quotations of the daily transactions market with him, or at most two books, one for
on a commodity or stock and while making up Short Sale Objective and the other for Buying
70
Chapter 15 Pertinent Points
Objective. In the beginning this eliminates a buying ‘spots’ for a quick profit.
lot of confusion by watching or trying to watch A purchase on a Buying Day must show a
them all, for as one option moves, the others will profit in the spread, from low to closing price—
usually be in line. when the low and close is about the same price
After making up several books on the grains or where the gain at close is lost on the opening
and stocks, he will find that some of them will of Selling Day, sell out on any rally towards
differ, in that one may be at a Buying Objective your Buying Day Low point.
while another a Sale or Short Sale but this is the Watch the range from high to low on a Short
continuity so follow them that way. Sale Day, to determine the possible low point at
There is nothing inconsistent with this so which to buy, next day—the Buying Day.
far as the trader is concerned, as an example: A Having ‘put out’ a short sale on a Short Sale
trader may have a book on two Wheat Futures, Day, then if the stock reacts and the spread is
Corn or Soybeans—the same with stocks—one very wide—cover your sale the same day—this
a buy and one a short sale on the same day. Now, profit will help reduce the costs, in case, the
on this same day and before the opening, if the next day, being a Buying Day you may have
trader has not already done so, he will review to buy at a Higher Bottom. This is caused by a
the market of the previous day on both the Buy rally before the close of the Short Sale Day and
and Short Sale Options and will note the signal makes the Buying Day Low, higher. Buying a
mark for the possible trend in each. Higher Bottom is usually profitable.
He then expects an up or down opening he When the Buying Day Low is Violated, the
watches for either. On the up opening he watches high for the movement is usually made on the
for the Short Sale option to reach the Short Sale next Buying Day—3 day swing—it is usually
Objective—that of selling through the Sale Day safer to pass up the Short Sale Day, if it looks
High—if so, this would be the trade to make, a like the high might be made LAST and try to sell
short sale—for it would be happening first. On an short on the high of Buying Day made FIRST,
action of this kind his Buy Day Option or stock but ‘cover’ your sale the same day. This gives
will probably be in line with all the others and you both a short sale and a buy, but ‘cover’ the
it, too, would probably be up—we know that a short when you have a profit and wait for the best
reaction generally takes place from a high made chance to ‘go long’. This action usually happens
FIRST on a Buying Day, so he would watch it in an Uptrend Trading Area—Downtrend Areas,
but would not buy it for awhile. Now, should the give you lower tops and bottoms.
opening be down, it would be making the low The amount of rally from a Buying Day Low
FIRST for his Buying Option, so this would be to the close, determines the action for the Selling
the trade to receive first attention. Objective, as weak or strong, unless it [is] one
On a Buying Day, buy at or below the low of those days where you get all the range on the
of the previous day, unless the market looks like same day, then the opening on the Selling Day,
it might close on the low for the day. Failure to is liable to be down.
rally from a ‘sell off’. The decline from a Selling Day High, may
When the low and close are about the same on cause the price to go under the previous low—
a Short Sale Day, we usually get our (BU) Buy Buying Day Low—which will show the Short
Under, the price goes lower, next day. Sale Objective as being weak, if the High on
Watch how the Objectives are made—FIRST Selling Day was made FIRST and the close is
or LAST—Objectives made FIRST are the somewhere near the low of the day.
surest and quickest for profits. On a Buying Day, after a decline, should the
Watch the close to determine the extent of rally rally from the low be active and strong and the
when Buying Day Low is being made LAST—a price carry up to and through the previous high—
‘flat’ closing generally means a Violation—next Short Sale Day—sell out your stock before the
day—and when made FIRST are usually good close, for many times this will be the high and
71
the opening of Selling Day may be down—this may even show a loss for the swing. Having
is the reverse of the wide decline on the Short bought on the Buying Day, you must hold on
Sale Day, where you ‘cover’ in the same session through this violation but, also, you must sell out
on a wide decline. In either case the market is on the Short Sale Day, but expect your profits
giving you a good profit without much delay— to be small on account of a failure to penetrate
why take chances on losing part of it? your Selling Objective. Rallies don’t always fail
In the Downtrend Areas, both the Sale and to reach the Selling Objective but generally they
Short Sale Objectives, generally ‘fall short’ of do so. Don’t hold on too long, when you get a
penetrations—the Buying Day Low is usually profit take it and don’t expect too much, in this
Violated. case.
Use the Three Day Method for the
• When the Decline unit is small, the Rally accumulation of stocks and commodities but
unit is usually large. don’t buy your full line all at one time—buy
part of your line only on a Buying Day and then
• When the Decline unit is large, the Rally another part on the next Buying Day, etc. Where
unit is usually small. a Buying Day Low may be Violated—don’t buy
at all, but having bought (here you may have
• When the low on a Buying Day is higher bought on the low for the day and the stock
than the high of the previous day—Short rallied but began to sell off near the close) and the
Sale Day—you have a Decline Zero and a stock looks like it may close on the low for the
forecast of a rally. day—sell out your last purchase before the close
and let the market alone until your next Buying
• When the Decline Zero appears the rally is Day. The reasoning here is, that Violations begin
usually profitable. to show up in downtrends and downtrends are
not the kind for accumulation.
• The amount of rally from a Short Sale Day In selling out a line at higher prices use only
Low, plus a higher opening on a Buying the Selling Days—preferably the Short Sale
Day causes the Decline Zero. and the Buying Day High made FIRST—in the
case of the Violation of last Buying Day, it is
• The lack of rally from a Buying Day Low, reasonable to look for a high of the swing on the
plus a down opening on a Selling Day next Buying Day—many times this high will be
causes the Rally Zero and a forecast of made LAST, in this case it is a strong ‘spot’ for
nearby lower prices. selling long stock.
Since all trends in commodities are seasonal
• The Rally Zero always violates the Buying watch the position of your future and whether it
Day Low. is up or down and in what month. The months
when they normally sell at their highest and
There seems to be about two swings a week, lowest points.
one Upward and one Downward. In the Bull At times, during the last few days before
movement, the one downward will be longer and an option expires, the technical position of
is the swing that causes the failures to penetrate the market may cause several wide rallies
the Selling Objectives and the cause of Buying and declines, during the same session—take
Day Low Violations. your profit at the first opportunity—complete
When trading on the Three Day Method— your trade, depending on the kind of trading
buy on a Buying Day and sell out on a Short Objective you are using—then stay out of the
Sale Day—when the previous Buying Day Low market—don’t try to trade these rallies and
is not violated expect greater gains—when this declines—they are aimless whip-saw movement
violation occurs the gains are usually small and and they don’t favor your play.
72
Chapter 15 Pertinent Points
The price you pay at the time of buying and a trader can buy and sell with a profit. Use it
selling has nothing to do with it—the point is to in [its] most mechanical form and stay away
determine the correct place for buying or selling. from production and marketing statistics, if
In the Uptrend you continue to buy and sell on a possible, for in short term trading, the trader
rising range of prices. In the Downtrend you do is concerned, only, with the day to day price
the same on a declining range of prices. changes—the spreads between the Buying and
When accumulation is taking place in a stock, Selling Objectives.
considerable buying would be done around Soybeans have a very promising future as a
a low point for a considerable period of time, trading vehicle—they are a useful and minority
then when the floating supply is about bought crop—and it would be an astonishing revelation
up in and around this range of low prices, the to the trader who will go back and make up a
price will move up to a higher range for further book and a record of the fluctuations for the
buying—when accumulation is completed at years 1948-49-50.
the lower and higher ranges—then the stock is It is not within the scope of this book to
in position for [its] upward move, for a top and cover in detail all commodities—it is sufficient
distribution. to point out that the ‘tape’ action, the rise and
Professional traders usually cover around fall of prices in the market, is the same for all.
old lows and sell out around the highs. At the A book is made up and traded in exactly the
lows the stock is in supply and it gives them a same way by those traders who want to trade in
chance to cover short sales. At the tops the stock cotton, fats and oils or any other commodity that
is in demand and it gives them a market for long has a continuous daily price change on the ‘tape’
stock and short sales. or frequently posted price changes.
Until a trader gains in experience, he should
buy and sell just as his Objectives are reached—
put in your order to buy or sell just as soon as the
price appears on the tape and many times your
buying or selling ‘spot’ will be at or shortly after
the opening. Those traders who use charts in
their work may find them of use in conjunction
with this method of trading, If so, well and
good—those traders who go in for astrology
and statistics to a point where they can tell you
“the rate of growth on a corn stalk in one night’s
pull of the moon”, might, also, ask themselves,
If the ‘boy’ on the floor who makes the market
understands these theories. Perhaps not, and
cares less, however, he does understand how
the markets of the past were made and how well
they worked and is not losing much sleep trying
to alter or devise a new way—not so much that
it can be noticed over the past 100 years.
A trader with any method or system of trading
must develop and have a certain amount of confi
dence in it—with this means of trading he must
believe in the occurrence and recurrence of the
past pattern of movements. The intent has been
to keep the method as simple as possible and to
rely on the fact that at these trading Objectives,
73
Additional Material
Figures
Figure 19
77
Figure 20
78
Additional Material: Figures
Figure 21
79
Figure 22
80
Figure 23
81
Figure 24
82
Figure 25
83
Figure 26
84
Figure 27
85
Figure 28
86
Portfolio
Revised Reprint from
Taylor Trading Techniique For Trading in Stocks
This illustration is from a trading-book started after an 8 point decline in the RR: Averages—DI,
and worked forward from the low of the stock (51 3/8); the lowest point reached during the first 10
days of trading.
Abbreviations used in trading
CD - closed down on day or previous close

CU - closed up on day or previous close
NH - new high, since last trend high
NL - new low, since last trend low
HB - higher (support) bottom, or last trend low
MU - mark-up, big support buying (comparative)
MD - mark-down, big selling (comparative)
RH - real high, on greater or less volume
AH - actual high, on greater or less volume
RL - real low, on greater or less volume
AL - actual low, on greater or less volume
TR - trend reversal (supplementary rule)
X - up-trading area
XX - down-trading area
V - volume; represents all factors combined;
movement; price changes; news, etc.,
modified as large VL, or small
VS (used compartively to previous
daily volume)
VLX - increasing on rally
VSX - decreasing on rally
VLXX - increasing on decline
VSXX - decreasing on decline
Figure 29
Used daily the symbols form an important concise record of the movement. At places of abnormal
increased volume, important—trend change may be near. MU/MD shows big buying, immediately
reversed at high into big selling, as shown by closing price of day. MU first big selling, then big
buying, as shown as close.
PLACE THIS SHEET ALONGSIDE PAGES FOR READY REFERENCE.
87
The records of the past, for many years, show Selling Day, then a Buying Day, 1st Selling Day,
the market to have a definite 1-2-3 rhythm, 2nd Selling Day; then a buying Day, etc.
varied at times with an extra beat of 1-2-3-4 The book is always kept in this same order;
and at times 5. These figures represent days. never change the continuity from the way it
The market goes up 1-2-3 days, then reacts; the was started. No lines are left open for ‘Sundays
4th and 5th figure is the variation when it runs or Holidays; the market is considered a series of
that extra day or two on the way up or down, continuous trading sessions, without a break.
in both bull and bear trends. This 1-2-3 beat
of the market [is] subject to these occasional THE (D) COLUMN—DECLINE COLUMN
variations (usually caused by internal market
conditions and news announcements—also, This column shows the unit of decline from
at the climax of extended trends up or down) the high of previous day (2nd Selling Day) to low
occur with surprising regularity. So it would of Buying Day. (See Oct. 27-3 1, etc.).
seem that the same methods of manipulation When no decline occurs; put in a Zero.
used in the past—in start-big and continuing a The zero does not occur often, but when it
trend—are still used today. That is buying and does it shows higher support above the low of
then selling, every third or fourth day in an up- previous day, and it generally means nearby
trend and reversed in a downtrend. Three days higher prices, for a day, and at times longer. (See
are considered as a trading cycle for active Dec. 5, Feb. 8).
traders; who will be guided by the action around When the decline unit is large; the rally unit
their buying and selling objectives. Those who is generally small. (See Oct. 27-29, Dec. 8-10,
are using the longer term trends will take their Feb. 5-6).
cue from the signs present at the trend change
points—explained in the latter pages. Can be THE (R) COLUMN—RALLY COLUMN
recorded in an ordinary 5 3/4” x 3 3/4”,” ruled
note book by drawing the perpendicular lines to This column shows the extent of the rally
form the columns. The example, opposite page, from low of Buying to the high of 1st Selling
is a record of the actual trading in this stock. Day, and the amount of decline in “D” column,
Observe the markings! recovered. (See Oct. 29, Nov. 1, etc.).
When no rally occurs; put in a Zero.
TO MAKE-UP TRADING BOOK: The zero does not occur often, but when it
does it shows lower support, under the low of
First head-line it with the year, above first previous day, and it generally means nearby
column, then in the first column put in the lower prices, for a day, and at times longer.
month, starting day and date. When the decline unit is small; the rally unit
The next four columns are for Volume, High, is generally large. (See Nov. 16-17, Dec. 16-17,
Low, and Closing Prices. Dec. 5-6, Mar. 27-28).
These entries are recorded daily for a period (The “D” and “H” columns are used by the
of Ten (10) Days; then the lowest price reached tape-reading traders. Using the low of Buying
during this period is ringed, and termed a Buying Day and high of 1st Selling Day, as their buying
Day. and selling objectives.)
Working backward or forward from this low;
the two ringed prices under the “F” are termed THE (3 D R) COLUMN—THREE DAY
1st and 2nd Selling days. The 1st follows a Buying RALLY COLUMN
Day, and the 2nd precedes it.
A trading book started from any date should This column shows the extent of the rally
always be made-up in the above manner, so from low of Buying Day to high of 2nd Selling
‘that it reads: A Buying Day, 1st Selling Day, 2nd day.
88
Additional Material: Portfolio
When the swing shows a loss; put in the loss and volume—are lacking.
unit with the “L” beside it. (See Jan. 31, April 2). These factors are noticeably absent after
When the rally shows a gain; put in the gain unit the minor trend changes and as the decline
only. When the rally shows a gain, exceeding the continues, and at the low, the volume may or
high of 1st Selling Day, put in the gain unit and may not increase before the trend again changes,
the “T” alongside—meaning “sold through” the but generally it does. After the trend changes the
high or previous day. These are strong rallies, in volume shows a progressive increase as the rise
most cases, but when the unit is comparatively is resumed—when the major movement is to be
large, it shows a comparative big interest and continued. During these corrective periods the
volume in the stock; and many times it occurs, trend is contained between the last important
at, or prior to the start or reversal or an uptrend. high and low, and can go either way, up or down,
(Nov. 27, Feb. 7, March 29). but in the early stages of the major movement it
The Trend Line of the stock is drawn alongside can be assumed as, up. The price of necessity
the Date column. Use a Blue line for an uptrend fails to make new highs with the lows going
and Red for downtrend. This line points out the lower during this period, and the low may again
actual highs and lows of Trading Areas. Between approach or equal the low made at the last trend
the arrow-heads “U” means up, “D” down. decline, but so long as this low holds, and is not
The action around tops and bottoms of broken, the major trend is, up. Although, this
trading areas, intermediate and primary swings intervening minor trend is down. (See the period
are explained in the latter pages; the following between Nov. 2-8, Nov. 9-21). A trader should
is a supplementary rule to this action, and can use as his guide; the points, percentage move
generally be seen near the trend change points, from last low, and the length of time the trend
usually the day after high or low: has been made: has been running, since the last important high
So long as the price on the rally continues to or low—then be on the alert for the trend change
make a new high, with the price on the reaction signals.
holding above the last low, with the price on the When a major trend has been extended; with
next rally going higher than the last high—the an active market, high prices, big price changes,
trend is UP. Failure of the price on the rally to with greatly increased volume; with a probable
make a new high, with the price on the reaction run of 1-2-3 days or more, with successive new
going lower than the last low—would reverse highs; then those who sell at the sign of the “TR”
the trend to Down (See Nov. 2-14-17-23, Dec. rule will not get the top eighth, neither, will they
3-7, Feb. 4-11, Mar. 27-31). have cause for regrets. (See Mar. 27-28-29,
All extended trends are interrupted by trading Dec. 4-5-6-7), The first heavy selling sinks the
declines and rallies, and they, also, show this price; explained in latter pages. (A graphic or
“rule” action at the reversals—a trader expects picture chart can be made from the trading-book
them, but does not try to capitalize all of them, not and may help show this action better, however,
if he is trading the longer swings. He knows they the tabular font is more attention compelling
are of a temporary nature, if in the early stages for comparing volume, price changes, and the
of the main movement. These minor movements interpretation of the daily movement.)
[show] the same general characteristics and When the zero or loss unit occurs, the result
pattern, but they, also, have a distinguishing is a loss on the trade; to be consistent a trader is
action. They show in a less pronounced degree; compelled to sell, in anticipation of an imminent
increased volume, at the tops and bottoms, decline from high of 2nd Selling Day, to low of
compared to the previous daily trading. Buying Day. (See Mar. 31 low to Apr. 2 high).
The salient features of important tops and bot The Zero and “L” swings generally appear
toms; big market participation; interest in the in downtrends; but when they occur in uptrends
stock; fast mark-ups, or down; big intersession the loss is generally less than one-point. Out of
price changes (see units in the 2 day column), each 100 successive (decline rally) 3 day swings
89
examined; the loss swings occurred 12 times on Example of Objectives made

an average. Of the total swing points, the loss FIRST:
points were about 3% of the gains.
This column will show the fluctuations in a Suppose the price reacted from the high or
stock, and whether the stock selected or trading 2nd Selling Day, then on the Buying Day made
the 3 day swings, has wide enough movement. a low early in the session; then began to rally
Try other stocks. and traded the remainder of the session between
the high and low, with the closing price nearer
THE (X) ( ) ARE TREND INDICATORS the high, than the low. The “X” would be placed
in the Buying Day circle indicating the low was
The “X” means the trading objective high or made FIRST. The trend at the close would be
low was made FIRST. considered as, up. (See Oct. 30-31).
The “ ” means the trading objective high or The opening of 1st Selling Day would
low was made LAST. generally be up and continue higher, with a
These marks point the probable trend, prices, probable penetration of the high or previous
will take between the trading sessions—and are day. Then a decline, with a rally failing to reach
placed in the circles of a Buying Day and both the last high, with the close nearer the low. The
Selling Days, at the close of the market. selling objective would be made FIRST and an
The most important part of active trading; “X” placed in the 1st Selling Day circle. A trader
buying or selling, or buying stocks for trend would sell—at, and above the high of previous
trading (when buying you “fee;” your way into day—Buying Day—and would be out of the
the market; at tops you sell in bulk—if you can) market, if he was using the 1st Selling Day as his
is to determine the trend of prices. objective. (See Nov. 1.).
The Real Trend is the trend between the lows
of buying days and the highs of selling days, Example of Objectives made
and the trend to be determined, as distinguished LAST:
from the many currents, smaller rallies and
declines—for instance the low of day may be Suppose the price declined from high of 2nd
50 and the established high 53, with the price Selling Day, made a low, then began to rally and
trading between the two points as, 51 3/4. After closed up from this low, and at the opening, next
these deviations the price will swing back to the day, was higher; making the high first on Buying
real trend, through either 50 or 53, depending on Day; then declined during the remainder of the
the way the trend is headed. These fractional or session with the close nearer the low of the day.
point trends interfere and confuse a trader but do The buying objective would be made LAST and
not change the ultimate direction of price toward a “ ” placed in the Buying Day circle. The trend
the highs or lows the trading objectives. at the close would be considered as, down. (See
(The uninformed trader buys into the market April 2-3-4).
on a reaction or low point and by luck he hits Suppose the low was made first on Buying
the real trend just as the price starts to rally; then Day, then rallied, with the close nearer the high
he sells with a few points profit, but on his next of the day. The trend at the close would be
trade he buys or sells one of these cross-currents considered as, up; at times the opening, next
and the trade promptly shows a loss; not only, of day, is down or opens at the previous closing
the recently won gains, but it takes a “bite” out price—this is due in part to a preponderance
of his capital, and after a few trades of this kind of “bunched” selling, over buying orders put in
he has a losing average.) before the opening. After the opening the price
90
holds or sells-off a little then rallies and makes stop; at, a little above or below the low of
the high of day. The “ ” would be placed in the previous day—the low of 2nd Selling Day. The
1st Selling Day circle indicating that the high was “buying spot” is around this low point when the
made LAST. A trader would sell at this ‘high activity quiets down and the trading becomes
on the penetration’—in this case—or failure to listless and dull. At times, the trading may be
penetrate the high of previous day. (See Mar. 27- sort of “bouncy” above this low. Then again the
28) decline may be precipitous, make a low, with a
When the buying and selling objectives are fast rally, then a slower decline falling short of
made FIRST, a trader is in-and-out without the last low. From this low the rally often starts
much delay, but when they are made LAST the with each transaction decline failing to reach the
move consumes more time and he must watch last low, in other words, the price holds these
the entire trading session in order to complete small rally gains. From either of these kinds of
the trade. lows, expect the rally to continue, which would
Trading would be easy if all FIRSTS and show the real trend as, up.
LASTS of the 3 day cycle were made, each The severe decline from high of previous
in sequence, with penetrations. Unfortunately day may continue throughout the Buying Day
we get cycles of mixed symbols “X” and “ ” session, with little or no rally, with the closing
with failures to penetrate at highs and lows of price very near or on the low of day. This is a
objective points, and these are caused by the “flat” closing and the indications are for nearby
cross-currents—detour trends—carrying over further decline, in most cases, only occasionally
from one trading session into the next. Since a is it profitable for the one day trader to buy a
trader cannot make the market in a stock; (this
low made Last. Wait for the next Buying Day.
is the job of the “Specialist” in a stock) he tries
Never start a trade in any case unless it favors
to follow it, and to anticipate the buying and
your “play”. (This is not so with the 3 day trader,
selling—when and where—by the Specialist, on
who buys, then holds on through the intervening
the trading floor of the Exchange.
action, rallies and declines until his objective is
reached—the high of 2nd Selling Day—where he
BUYING DAY EXAMPLE:
sells with a profit, or loss.)
At the opening of the market, notice whether
A SELLING DAY EXAMPLE:
the price was up and continued higher making
the high FIRST, or whether it opened down and
When the low is made FIRST on a Buying
is declining further, making low FIRST. Making
Day, with the closing price nearer the high of the
the high FIRST expect selling from this point
day; expect an up-opening, or higher prices, with
and a reaction to follow on an up-opening, wait.
a penetration of the high of previous day. Sell
Do not buy. Tape-traders don’t buy on “bulges”,
at-the-market—at, through and above this high.
they know a rally is limited and perhaps in the
When using the 1st Selling Days the objective.
3rd or 4th day up, from the last Buying Day low
(See Oct. 31 to Nov. 1).
or under it. On a down-opening observe the
(On either Selling Day, 1st or 2nd), should you
spread from high of previous day, to low of
sell too soon after a penetration you lose some
present decline, and at this low, if the price is
of your probable profits. Expect not only slight
under the low of previous day. By checking back
but deeper penetrations of the highs, because
over the units in the “D” column a comparison
the “tops” must be broken and be progressively
can be made to determine the extent of this
higher in uptrend trading areas.
present decline, and gauged as a normal trading
The activity of the market in the stock is a
decline, or a severe reaction—perhaps following
good sign to watch—whether increasing or
a change of trend.
decreasing on the rise, after penetration, also,
The normal trading decline will generally
after small “D” column decline units.)
91
From a high closing on Buying Day, when the lows of Buying Days and the highs of 2nd
the opening next day is up, and with a wide Selling Days. (This is a more or less mechanical
gain; sell at-the-market, without waiting for the method of trading, but, the records show it to
next transaction to appear on the tape, after the be profitable and a trader can win on balance,
opening price. The price may go higher after but the lot of the active trader is hard… the big
you sell. So what? The opening price may be the money is in the big swings.) Northern Pacific
high and is many times, and a decline may start Ry—(NP)—is used as an example, throughout,
from this high that could be the beginning of a because it is representative of all the features
down trend. (By so doing you get a profit and required in a stock for active, intermediate, and
perhaps the major part of the rally.) (See Nov. 20 primary trend trading—price appreciation. The
to 21). illustrations show only the approach to highs
From a high close of Buying Day; then should and lows of the swings, that is, a few days prior
this gain at the close, be partly lost by a down- to and after they have been made. The places of
opening next day, or opens at the closing price of major and minor trend changes. Records can be
previous day; sell at-the-market without waiting obtained from back-number newspapers at any
for the next transactions on the tape. (See Dec. of the public libraries and a fill-in can be made
5-6. Here 67 was made first; 70 1/2 LAST. Also of the entire movement in this stock.
March 27-28, here the low 88 7/8 was made first, The longer record will show the swings of
at the opening, at the same price as previous a week or more, and where the pressure was
close; 94 1/4 was made LAST). December 5 applied, in a more or less degree, at tops, and
and March 27, were big intrasession rallies and support at bottoms, of these smaller movements.
experienced traders sell on an action of this kind, The trading characteristics remain the same, it’s
before the close; others put their orders in before only a matter of extent of the movement—big or
the opening, next day, hoping to catch the top little.
of the rally on a higher opening. Generally the
price opens down or at the previous close, then
rallies, when headed higher.
On wide up, or stalled openings, a trader acts
immediately upon seeing the opening price.
Should the following prices be up, his order is
“in” and will be executed on the rising trend,
and he gets a little more of the rally. Should the
following prices be down he loses only part of
his gain—his order is “in”—in time to “duck the
real sell-off”, and he will be out of the stock,
and probably at the very inception of a declining
trend. (Many traders at this point do nothing—if
the price starts up after the opening, they wait to
see what will happen; if it starts down they wait
for a rally to “get-out—most likely the expected
doesn’t happen, either way, and the result is a
greater loss.)
From the low of Buying Day there will be
thousands of transactions on the tape between
and before the price reaches the high of 2nd Selling
Day—three sessions in the future—a trader using
the 3 day swing, while interested in this action,
will be more concerned with the action around
92
The sole purpose is to point out a trading method—no “tip” is intended; a trader must make his
own selections and he will find many stocks that are acceptable, if he will make-up a book on them
and study it.
This drawing was started from Nov. 16, to concentrate the attention, to the action prior to
and immediately after the high of an intermediary movement.
place this sheet alongside pages for ready reference
93
at this writing it is electronics.

TREND TRADERS Swing traders and semi-investors are more
concerned with price appreciation, therefore,
selection of a stock is of the utmost importance.
The Investor-Speculator, Intermediary and Most of the stocks that make up the back-bone
Primary trend traders have a means of buying of the market are in the conservative class and
or buying for accumulation; through the use trading profits should be figured on a percentage
of the Buying Day (observing the conditions basis and not on points. The trader who will do
around this point). In this way their buying is a little retrospective research will find that many
done around the low points of declines and not stocks he may have in mind are not suitable for
at tops of rallies, thus, saving many points— his style of trading. Get the highs and lows of the
dollars. They would first determine the kind of one or more sustained swings that a stock makes
market—bull or bear—and the price position of each year and then figure the percentage gains
the stock in relation to the market as a whole. and losses of the rally and decline swings, from
It is not wise to try to buy a full line of lows to highs and highs to lows. The Market
stocks, all at once. Suppose the line was to be Averages may show great gains and losses up
100 or 500 shares or more—an order would be and down, in points, with a percentage gain
placed for part, say, 25 or 50 shares, at a time, in or loss of an individual stock disappointingly
odd lots, to fill the former order and in round lots small.
in proportion to the quantity wanted in the latter. A trader buying stocks around any low
After getting them he would wait until the next point, Bear Bottoms or Secondary Reactions in
Buying Day; then place an order for another lot; a Bull Market (here he should use the 3 day rule
continuing in this manner until completion of for accumulation) should carefully check the
the full line. percentage rise of his stock as the price moves
This procedure would be a higher average up from the low point but most important: a
cost, but each lot would be more apt to show a stock that is going up will do so with but small
profit and he would have some assurance that he and normal set-backs until it reaches the high
was following a rising trend. of the move, regardless of percentages, so the
Had he started his buying at a comparatively trader must be constantly on the alert for the day
low range of prices and was in a rising market, when his stock will make top—in many cases
it is not likely that he would be forced to carry a this top will be made quite unexpectedly but
heavy load at a loss; in case of a sudden decline not without warning. Watch the build-up of the
in the whole market. volume for a few days prior to the top and the
At the determined time for selling he would greatly reduced volume the next and for a few
be on the alert for the danger signals (explained days after or the volume might remain large for
next page), and in addition would have the use a few days before and after the high is made.
of the Selling Days (1st and 2nd). The decrease in volume is caused by a let-up in
Trading technique; is simply the ability through the selling pressure for technically the stock may
study, observation and experience, to detect the not be able to withstand further heavy selling
manipulation that takes place in the markets at without breaking the prices, too much. Many
all times, and to recognize the signals in each, of times a trading range is formed between the
the several phases, of the market movement. The high and the low of the break-back and the stock
most important consideration for speculation, will trade in this range indefinitely, weeks and
even ahead of earnings and dividends, is the months, depending on the strength or weakness
technical position of the stock in relation to of the general market—further distribution
the market as a whole—leading or trailing— takes place in this range and on the way down,
its position within its own group—leading or if, the general market is headed that way. This
trailing—and the group attention in the news— phenomenon of the action of individual stocks
94
is a feature of the market prior to bull market on the rallies.

endings—with one stock after another refusing With the selection of the stock, it is only
to participate in any further rise in the market, good judgment to get a report on the company,
while the general market continues to advance— its past and future probabilities—but, unless the
this same action takes place in a lesser degree market action of the stock confirms the report
before severe intermediate declines. This may a trader should let it alone—watch but don’t
not be the action of low priced late movers, that buy. The time for buying should be based solely
move up fast, make a top and start to decline, on the technical indications and the present
seldom going back to their highs a second time. market position, in relation to the low and high
Being behind, they must hustle to catch up with for the year. It could be selling so near to a top
the general market which is plainly showing a (temporarily, perhaps), that by waiting a short
declining tendency. time it can be bought at a wide concession.
This sudden reaching of the top on greatly Most all Bull markets show at least one or more
increased volume compared with the previous important declines during the year that buying
daily totals, then, a slight break of several percent opportunities, but the most important part is;
of price from the high while the volume continues starting at exactly the right time. A decline in a
large, is the results of heavy selling, mixed with stock, due to a general decline in the market as a
public buying and inside short selling, caused whole, is not of great concern but the way it acts
perhaps by advance in information adversely on the rally, and the preparations for a new move
affecting the stock;—sufficient to cause large is important. A trader should look for buying in
profit taking or the price is deemed high enough a stock around the lows of important declines—
to begin distribution or the stock. Regardless of after the market stabilizes. It takes considerable
the reason, this action definitely warns the trader buying to start a stock up and continuous buying
that the intent is not to put the price higher, at to keep it going up. Many good stocks lack
least not for the present—and is his signal to— trading appeal, sponsorship, or due to other con
the market is broad enough at these, times to ditions, move with such sluggish action that they
take the selling and is the opportune time to turn are unattractive to the more active traders.
paper profits into cash. Stocks with a good future potential should be
The lows points of Bull Market Secondary watched but a trader should not wait until “they
Reactions are just the reverse of the top action; make the news” before buying—at this time
the low many times is made on relatively heavy they might be a better sale. Buying in a stock
volume, then a rally for a day or two, and a shows, in the way the stock acts. He should
further decline on very tight volume with the follow the progress of a stock; at bottoms or
price holding above the last low point, with where it begins to form a well defined horizontal
trading dull, (established points at either highs trend—confined to a narrow trading range—and
or lows may be penetrated slightly by the trading trades on a fair amount of volume and activity,
that takes place but are not sufficient reason to with some fair size lots or stock. He then waits
withhold selling or buying at these points.) The for a day of unusual activity and volume and
short seller on this trend must be on the alert or gets ready to buy at the very inception of the
this same big day, only on the downside; for then “break out” of this range, top side. He will buy
the stock is in supply or covering short sales, and part of his stock at this point—then wait for a
is the long stock bought at higher prices, now, reaction to see how it acts on this decline and
being sold at the bottom. to confirm his judgment, whether, he was right
The market action for swing trading is in buying the first lot. He then buys more after
identically the same as that used for the 3 day the stock rallies and just as it makes a new high.
method, only on an enlarged scale. The minor His buying is done in this manner, because, at
movement receives the same support on the times, the stock may turn and go in the opposite
declines and is subjected to the same pressure direction, and may “dip” low enough to break
95
the line of lows at the bottom of this range. to continue the trading shows a steady rise on
(An action of this kind “cleans up all the stops” increasing volume and demand for the stock,
below the line of bottom prices and “shakes off” and where there is an urgent demand for stock
a following before the real move gets under for ‘short covering” the pace will be accelerated.
way.) Having acquired his stock he holds on for The large transactions are on the upside and
the move; an indefinite period perhaps three to are taken at the higher prices, with the smaller
six months or longer, or until he recognizes the transactions on the downside. (This same action
described action around tops. can be seen in the smallest daily—in the broader
In some years there are no well defined lines and longer movements—and in the Market
at bottoms. Stocks begin their advance from Averages.)
other trading ranges. Bottoms of long declines Many stocks make two tops—the Real and
may be reached by a particular violent downward Actual—the Real Top is where the first heavy
thrust—establish a low—generally followed liquidation takes place after long advances;
by an immediate sharp rally and a subsequent then, after a decline of a week or more, a rally
slower decline on a greatly reduced volume or continuation of the advance, many times, will
and activity—stopping short of the last low. A exceed the first high making the Actual Top on a
trader does not try to buy long stock on this fast volume as large—more or less. A trader should
decline—he waits for the “quiet-spot” on the be on the alert to begin his selling the instant he
reaction after the rally—and when the market detects this inside selling. (The point here is; he
becomes “dull”. He will buy part of his line at must sell when he has a market, if his holdings
this point (with the intent to sell-out should the are large). Experienced traders take their profits
stock make a new low); then add to it where at this point and do not try to anticipate an Actual
the stock begins to make new highs, in series. Top (which may or may not happen). The high
In case he is forced to sell, he starts over again made on this kind of action may be one and the
from a new low—using this same action. (The same—the Real and Actual. When this does
manner of buying at bottoms—shows why—he happen the stock makes a new high and has a
should not expect to get less than a 10% average tendency to make the ordinary traders intensely
above extreme lows.) bullish—they continue to “hold on” or ‘come
A stock that trades in listless manner on a in” as new buyers—to take the stock at, perhaps,
very small volume; with intermittent small top prices. (And this is just what is expected of
transactions, with absent days of trading, shows them.)
neglect; and no immediate interest, and should The Real Top, is generally one or several
not be bought until it shows a more active days of advancing prices after a long move up,
participation in the market. A trader recognizing culminating (Or with a quick, sharp, upward
this action in a stock should look to the company thrust on abnormally large volume and activity,
report for the reason. A stock must be traded in compared to previous trading). The stock;
fair size lots and volume in order to accumulate makes a high then resists all further buying—the
it. supply and demand comes into balance—with
Experienced traders and tape readers, can the trading very active [or] sustained—but the
generally distinguish a rally from a change in stock makes little or no progress either way.
trend by figuring how far a stock should come The heavy selling at this point is, temporarily
back, allowing that a normal rally is from one- discontinued, but the “selling sources” continue
half to two-thirds of the decline. In the case to force a little more stock on the market than
the decline is not over, the rally will fall short. can be absorbed, causing this sagging decline,
The large transactions will be on the downside on greatly reduced daily volume. Near or at the
and the smaller lots on the upside. The volume low of this decline there is a noticeable increase
is light and the activity “fades-away” with the in the volume for a day or more—the stock must
rally “dying out” at the top. Where the trend is be bought in large enough quantities to absorb
96
all selling and turn the stock up. The day of

heaviest support is the Real Bottom, then, many
times after a short sub-normal rally or series of
rallies, the stock may sell just a little lower on
a negligible amount of volume—making the
Actual Bottom—before the rally or uptrend is
resumed. (A new high has a bullish effect and
causes buying. A new low has a bearish effect
and causes traders to sell out at bottoms, or at
least, refrain from buying.)
A trader will repurchase a small part of his
stock “as a trading lot” near this first decline low
in anticipation of a rally or on the assumption that
an uptrend will extend far enough to make a new
and Actual Top. (But, with the firm resolve to
re-sell at, through, and above this new high—or
to “get-out-quick”—if after a rally, the reaction
breaks the last or support low).
There are other stocks that make one top—
the Real and actual—and on comparatively
light volume, with no signs indicating that a top
has been reached. The long decline starts with
a series of small reactions and rallies but with
a definite downward tendency. These tops are
difficult to recognize. (If, in fact, they can be.)
A trader should understand the characteristics of
these stocks or at least have some idea of the
percentage appreciation or number of points in
the swings of the past years, as a guide to the
future—and he should be satisfied to sell, if
and when, past results as good or better can be
attained. In this case a stock that fails to make a
new high in a reasonable period of time should be
sold, particularly so, if other stocks in the market
are showing the heavy top action. (The trader
who can recognize these diverse movements in
the market can use them as confirmation of this
weakened technical condition of the market as a
whole.)
A trader who will start right—buy and sell
accordingly to these “age old” tenets—will find
little need for many of these “new discoveries”
and other “wearisome” statistical market
indices.
97
Supplementary Articles
Linda Bradford Raschke’s
Taylor’s Swing Trading Method
Reprinted with permission from Club 3000 News, a publication of Club 3000 (from
issue #93.19, December 30, 1993)
We heartily recommend Club 3000 to any readers who are interested in joining a
“Futures Traders Network,” whose members share information with each other on
such topics as books, software, system design, testing, development and
implementation, and many other areas of interest through a periodic newsletter:
B.A. “Bo” Thunman

Club 3000
4550 N 38th St.
Augusta, Mi 49012
Phone and Fax (616) 713-5600
I have organized much of my trading the previous day’s high/low; the length of the
methodology and philosophy around short-term upswing relative to the downswing; ignoring all
techniques, as defined by George Douglass news and fundamentals—concentrating strictly
Taylor and thus have recommended his book on what tape or price action is telling you. That
The Taylor Trading Technique, as one well worth is the only “truth” in short-term trading.
studying. However, Taylor was definitely a better Keep in mind that Taylor’s particular labels
trader than author! Here are some pointers from for each day were just his way of staying
which to approach the book: systematic, simple and consistent. If you read
First, read the chapter Pertinent Points between the lines, you’ll see his specific rules
two or three times; this makes a much better for shorting on “buy” days and buying on “sell
introduction to the subject matter. Skip chapters short” days—it really has to do with how many
2,3, and 4 completely. I do not make up a “book’ days up/down the market is from the previous
as Taylor does, nor do I recommend doing so. I swing low/high.
do write down the open, high, low and close and Though trading on a 1- to 2-day basis, be
underline the 3 to 4 day swing lows and swing conscious of the bigger picture—even Taylor said
highs. It helps to keep some type of log by hand, to skip the first “buy” trade when breaking down
it keeps trading “systematic”. out of a congestion area. In other words, wait
Where Taylor discusses various Buy Day five to six days before looking to buy, instead of
or Sell Day concepts, I find it useful to diagram two or three. He also emphasized the importance
examples in the margin, using candlesticks. I of overall long-term and seasonal trends. Under
also find it helpful to read his book with a yellow standing markets includes recognizing when
highlighter handy. In fact, I have gone through price is discounted and when marked up and
several copies because they keep getting so watching for signs of support by interests larger
marked up. than ourselves.
Think in terms of concepts instead of I have found that some of the most
specifics. These concepts, include: Trading successful mechanical systems/price patterns/
within a 2 to 3 day time frame; price action around methodologies work because they use the
101
concept of “in one day, out the next”. Examples

include Larry Williams’ patterns, Bob Buran’s
methodology and Toby Crabel’s studies. Enter
on a trigger or pivot, exit on the next day’s
opening or close.
I test patterns on a close-to-close basis—enter
on a close, exit on a close one or two days later.
My systems have no more than two parameters.
They are crude models that highlight a market’s
tendency. For instance, “selling a higher opening
after two higher closes” illustrates a market’s
tendency to pull back at that point,
My market models indicate whether the odds
favor being a buyer or a seller for the day. I then
use Taylors “rules” to trade as if it is a “buy day”
or a “sell short” day. I hold the trade overnight
and exit according to his guidelines. Don’t carry
losing positions overnight, it is better to exit
with the intention of re-entering at a better trade
location the next trading day.
I first came across Taylor’s name In George
Angell’s book, Winning in the Futures Market,
specifically the chapter referring to the “LSS
Method”.
After studying Taylor’s book for a more
comprehensive understanding of his guidelines,
I first adapted his techniques for S&P trading.
Taylor emphatically teaches students of his
techniques that they must never average down.
I have yet to come across a consistent, winning
trader who practices this most destructive of
habits. One may get away with averaging a
loser, but doing so will add much more volatility
to your bottom line and, sooner or later, be your
undoing. It is very difficult to be in the proper
frame of mind for trading when carrying losing
positions on a daily statement. Many of Taylor’s
rules are, in fact, defensive in nature—for
example, exiting on the first reaction when a
market does not act “correctly”.
Following Taylor’s guidelines diligently
should develop within you the best possible
trading “habits”. Ultimately, it is one’s trading
habits which govern one’s success.
102
George Angell’s
Winning in the Futures Market: A Money Making
Guide to Trading, Hedging, and Speculating
(revised edition)
Chapter 13 “The LSS 3-day Cycle Method: A Day-Trading Approach to the Markets”
Reprinted with permission.
Copyright © 1979, 1987 and 1990 by George Angell
This book is published by:

Probus Publishing Company
1925 N. Clybourne Avenue
Chicago, IL 60614
Given the volatility, pace, and high leverage of interest statistics for the popular S&P 500
today’s futures markets, it is surprising that more contract. On an average day, the volume will be
traders don’t take this approach. Day trading, as twice the open interest—about sixty thousand
the name suggests, is simply the completion of contracts traded against about half that number
the round-turn, in-and-out buy and sell cycle held in open positions overnight. This represents
within a single trading session. a significant amount of in-and-out trading.
The method is popular among traders for For years, professional floor traders relied
several reasons. First and foremost is the issue on day trading—often, a specialized form of
of safety. If you are not in the market overnight, day trading known as scalping, in which small
nothing troublesome is going to happen to profits are taken over and over again throughout
you on tomorrow’s open. You’d be surprised the day—for a very understandable reason: the
how suddenly a seemingly profitable trade at professionals know the risks of holding onto a
yesterday’s close can go sour on today’s open. futures too long. Unlike the public trader, the
All you need is a little news overnight or an floor trader, who is a member of an exchange,
unexpected money-supply report. The damage doesn’t pay commissions. As a result, the floor
to the unwary can be awesome. Second, day traders do not have to worry about commission
trading has reduced margin requirements. If you costs. Nevertheless, the real reason that the
aren’t holding a position overnight, chances are professionals concentrate on small, yet profitable,
excellent you won’t have a margin call. That is moves is due to the risk involved. For the trader
not to say, of course, that you can totally avoid who holds a position for a week or more, one
losing trades. You can’t. But the combination mistake and he’s finished. In contrast, the day
of no overnight jitters, no margin calls, and trader can be wrong five or six times during the
an overall relaxed method of rapid in-and-out day and still emerge a winner.
trading can do wonders for the spirit. Since today’s discounted commissions are
In recent years, there has been a trend toward lower than ever before, the public speculator
day trading among public speculators. To see can now join in the fray with those specialized
how popular this form of trading has become, in-and-out traders down on the floor. It is still
you only have to look at the volume and open almost impossible to truly scalp from the outside,

103
but day trading, in which you might take two dollar, expect gold and silver to prove volatile.
or three trades during the day, is something But, at other times, you will have to look
else again. Down on the floor, a trader who just elsewhere. A glance at a recent newspaper shows
does two or three trades is considered a position that nearby Standard & Poor’s 500 futures had a
trader—like someone who holds a position for daily range of 1.70 points ($850 per contract)
three months on the outside. So it is truly a and nearby U.S. Treasury bonds had a daily
matter of perspective. range of 26/32 ($812 per contract). In contrast,
during the same trading session, corn moved
The Potential for Profits two and a quarter cents ($112 per contract) and
oats even less, just a penny and a quarter ($62
Another reason why day trading has become per contract). Obviously, the S&P and bonds are
popular is the genuine potential for profits. In better day-trading vehicles.
today’s volatile markets, where the value of a To find a good day-trading candidate, select
single contract may move up or down by a only markets that have depth (liquidity) and
couple of thousand dollars during a single trading volatility. Otherwise, you are going to be
session, the potential for profits is considerable. disappointed in your trading results. Recently,
When viewed in this fashion, the cost of a $20 the stock index, interest rate, and currency
commission suddenly becomes negligible. futures have all offered worthwhile day-trading
Large, aggressive floor traders in the volatile opportunities. One other word of advice: Try
S&P pit can occasionally make six figures in a to stay with the leading futures of each group.
single trading session. So don’t be put off when That would mean the S&P, Treasury bond, and
someone says “What do you want to take ‘small’ Deutschemark in the three respective groups
profits for?” The answer is very simple. Because listed above.
you want to be around to trade tomorrow. And, In recent years, the focus has shifted away
what’s more, because you would like to grow from the agricultural commodities toward the
rich in the process! newer financial futures. Given a resurgence in
You hear so often that the serious money in the agricultural sector, day traders may again
futures is made on the so-called “big moves.” find soybeans, among the grains, and pork
What you don’t hear about is the road to the big bellies, among the meats, worthwhile day-
move—the days and even weeks in adversity trading vehicles.
when the really big traders have to finance their
losing positions to the tune of millions of dollars. Taylor’s Book Method—The
Clearly, the answer for the novice or small trader Genesis of a Trading System
is to try day trading.
One rule if you are going to be successful During the nineteen fifties, a little-known
at day trading is to select the right market. On grain trader at the Chicago Board of Trade
this score, you want a market that both enjoys a published a manual known as the Book Method.
wide participation and has sufficient volatility, The trader, George Douglas Taylor, maintained
to enable you to extract profits. A few years that the grain markets moved in a three-day
ago, you might have selected the gold market, cycle that could be tracked by measuring the
which was second only to Treasury bonds in rallies and declines. Taylor kept a record of grain
both participation and volatility. In those days, prices and their respective rallies and declines in
$15 and even $20 moves were common in the a notebook he carried with him—hence the title
gold market. No more. Today, the gold market Book Method. What is remarkable today is how
struggles to move $3.00 or $4.00 a day. accurate this simple bookkeeping entry can be
The selection of the market will be determined when applied to the markets of the eighties.
by economic conditions at the time you decide Although the grain markets of the fifties were
to trade. During inflationary periods and a weak far from turbulent, Taylor observed what he came
104
George Angell: The LSS 3-Day Cycle Method
to call “market engineering.” He found a pattern could successfully trade from the winning side.
in the market. By painstakingly recording the Moreover, it posed several important questions.
magnitude of market rallies and declines, which When is a rally not a rally, but, rather, a skillful
he kept in his notebook, Taylor found a three- attempt to lure buyers into a trap? Conversely,
day cycle that, despite occasional aberrations, when is a price break simply a ruse to create
repeated itself over and over again. selling to provide the powerful interests an
What’s more, Taylor maintained that the opportunity to buy at low prices? Obviously, if
natural rhythm of the market created a false one could indeed learn the hidden signals of the
move that served to fool traders into buying market, one’s opportunity to profit would surely
when they should be selling, and vice versa. The increase.
powers in the grain markets, Taylor maintained,
frequently caused prices to decline in order to The Book Method
create a buying opportunity for themselves; Thirty Years Later
within three days, after the market had rallied
sufficiently to provide them with handsome Over the years, the Book Method, which was
profits, a short-term top was created in order self-published in notebook form, has become
to provide a selling opportunity. This was the an underground classic of sorts among futures
market “engineering” at work. Although the traders. Few copies are available, and those that
pattern had remained hidden, with sufficient can be found in trading libraries are dog-eared
research and careful examination of prices, one and well worn.
could uncover these precise buying and selling Unfortunately, Taylor’s advice was
opportunities. For anyone who has ever sought exceedingly general. You should sell on the
to utilize a trading system, this was powerful third day’s rally at, through, or slightly below
information. the previous day’s high. You should buy on the
Ironically, Taylor’s method wasn’t a day- following day, following a break in prices at,
trading technique at all—undoubtedly, given the through, or slightly above the previous day’s
ranges of those days, one would be hard put to low. These, essentially, were his rules. Often,
pull day-trading profits out of the market—but they were vague and hard to identify. Where
a short-term trading system in which positions do you buy? At a higher bottom (a very bullish
were held overnight. He gave a name to each sign, according to Taylor) or somewhere under
trading day: the Buy Day, the Sell Day, and the previous day’s low? Do you always sell on
the Short Sale Day. Each day had its particular the third day’s rally?
trading characteristic. For instance, the Buy Day Determining the cycle itself becomes
was identified as the day in which prices either problematic. While the three-day cycle is at the
open at or retreat to a low prior to rising. The Sell heart of the system, Taylor hedged and said that
Day, in turn, was characterized by prices trading occasionally you will find a four- or five-day
at, below, or slightly above the previous day’s cycle. Well, how do you know when the longer
high. And on the Short Sale Day the market took cycle is occurring? And if you are selling on
a final lunge upward, which was met by selling the third day’s rally, what should you do with
resistance, and prices broke. Then the cycle your short position while prices are rising? The
began all over again. answers to these and other questions remain
Although the notion of a three-day cycle, inconclusive. At times, the cycle will change.
with the precise pattern described above, is And when the market breaks, you will have a
highly simplistic, it has the elements of an sense of so-called Buy Days in which lower
idea that deserved attention. It meant that if lows are made daily. Which is the correct low to
indeed such a cycle did exist, and if one could establish the Buy Day?
successfully “read” the hidden intentions of Despite these and other persistent questions
the market at specific stages, then perhaps one about the Book Method, the basic pattern can
105
be observed in a number of futures contracts—

among them the metals, interest rates, and stock The Order in Which the High and
index futures, as well as the grains. What’s Low Occur
more, the pattern seems even more identifiable
among these newer financial futures than among When identifying the three-day pattern, Taylor
the more traditional grain contracts. What’s the was careful to make a note on whether the high
pattern? How do you identify it? And, most or the low occurred first during the trading day.
important, how can you make money trading the He marked the low on Buy Days and the highs
three-day cycle as a day trader? on Sell Days and Short Sale Days. If the low
occurred first on the Buy Day, he would indicate
The Ideal Three-day Pattern this with an X (we’ve used an asterisk on our
examples); if the low occurred last, he would
The ideal three-day pattern, which Taylor place a check (we’ve used a double asterisk).
first identified, consists of the Buy Day, in which On the Sell Days or Short Sale Days, he would
the low is established first and the market trades place an X if the high occurred first and place a
higher; the Sell Day, in which the Buy Day high check if the high occurred last.
is considered as a resistance point; and a third The order in which each occurred was vital
day, the Short Sale Day, in which the high of to the smooth functioning of his system, because
the Sell Day is challenged or taken out prior when the high or low occurred out of sequence—
to a retreat in prices—at which point the cycle that is, when the reverse was expected—he
begins over again. The three-day pattern is would often find that he could push the cycle
illustrated in Figure 49 in which the horizontal ahead a day and the three-day pattern would
ticks to the left and right respectively indicate again become evident.
the open and close. Note that the second day, or In the table below, you will find price data
Sell Day, is an immediate day during which the on a recent contract of Standard & Poor’s 500
market gains strength to challenge the high on futures. You should note which numbers are
the following day, the Short Sale Day—which, underlined and whether an asterisk or a double
according to Taylor, is the day on which the asterisk is indicated.
market “engineering” works to fool the unwary Note that there are three Buy Days over this
that the market is indeed headed higher and ten-day period. They are as follows: Wednesday,
create the ideal selling opportunity. August 21; Monday, August 26; and Thursday,
There is a paradox at work here that thoughtful August 29. On each Buy Day, the low is
traders should be mindful of when they place underlined; on each Sell Day and Short Sale
their orders: Day, the high is underlined. The asterisks in the
Buy Days mean the low was made first during
1. The market is often taken down, in order the trading session; the asterisks in the Sell
to create selling, to provide a safe buying Days and Short Sale Days mean the high was
opportunity for the powerful market forces (see made first during the trading session. The double
Figure 50). asterisk signifies that the underlined number was
achieved last during the trading session.
2. The market is often taken up, in order to create
buying, to provide a safe selling opportunity for
the powerful market forces (see Figure 51).
106
107
How To Identify the Three-day Keeping the Book

Cycle
Once you can identify the pattern, you can
The rule for identifying the three-day pattern begin keeping the book. The book is at the heart
is as follows: Take ten days of data and circle of Taylor’s system—and, as we shall see in the
the lowest low of the ten days. This is the Buy section on the worksheet, at the heart of the LSS
Day. Then count forward and back, circling the 3-day Cycle Method as well. But before we can
two highs in both directions. Every third day get to the LSS system, we should concentrate on
becomes the Buy Day. what Taylor said.
As you can see in the table above, the lowest Essentially, Taylor was a believer in measuring
low occurred on Monday, August 26. This is the the rallies and declines. His was a percentage
Buy Day. Would the next day in the sequence method in which he attempted to see how far
be a Buy, Sell, or Short Sale Day? The next day a rally or decline tended to carry. Once it was
would be the Sell Day, or the second day in the measured, he could pinpoint changes in the
three-day cycle. The one-two-three-day cycle market—and, more important, he could estimate
pattern then repeats as it has in the table. how far a rally or decline was likely to carry.
You will note that on all three Buy Days, the
low was made first during the trading session.
You can see that Wednesday, August 21, was the
day to buy at the low made first. The third day,
Friday, August 23, was the Short Sale Day with
the high made first—the ideal three-day cycle.
Although Friday’s price was indeed lower then
Wednesday’s, the pattern persisted nevertheless.
That is, you could have sold soon after the open
on Friday, August 23, and made money, because
the open was very close to the high of the day.
There are many more inferences to be drawn
from the table of prices. For instance, while
you could have purchased the low made first on
Monday, August 26, three days later the reverse
proved true. The high was made after the low,
or last during the trading session. As a result, a
short sale near the open on Wednesday, August Taylor made four key measurements—all
28, would not have been a good point to sell. of which have been incorporated into the LSS
Before moving on to a more advanced concept, system as well. Illustrated in Figure 52, the
you should practice identifying the three-day measurements quantify the following:
pattern. First, you circle the lowest low of the
past ten days and then count forward and back. 1. The Decline column (D)—Difference between
Which is the Buy Day? The Sell Day? The Short previous day’s high and today’s low
Sale Day? Tomorrow’s day is always identified 2. The Rally column (R)—Difference between
by the previous day. Thus, if today is the Buy previous day’s low and today’s high
Day, expect the Sell Day to occur tomorrow. 3. The Buying High column (BH)—Difference
And so on. between today’s high and previous day’s high
4. The Buying Under column (BU)—Difference
between today’s low and previous day’s low
108
Actually, Taylor included a fifth measurement .50 points, the difference between the previous
which was identical to the Buying High column. day’s low and the next day’s high. Looking at
He gave it a different name because he used it the Buying High entry, you’ll see that a negative
on only one day during the cycle and not on number appears. When this occurs, you know the
the other two. In the interest of simplicity, this day’s high is below the previous day’s high, since
fifth column has been dropped. Moreover, since the formula is today’s high minus yesterday’s
every measurement is taken every day, it would high equals the RH column entry. Lastly, the
be redundant as well. Buying Under column shows a positive number,
The best way to learn to keep the book is because today’s low was lower than the previous
by example. In the following table we have day’s low. This column measures how far under
listed the open, high, low, and close of seven the previous day’s low the market traded. In this
trading days in the September 1985 S&P futures instance, the market traded precisely 1.70 points
contract. From these prices, we have calculated under the previous low.
the respective Decline, Rally, Buying High, Incidentally, on the day shown, you have
and Buying Under column numbers. Make sure the makings of an excellent buying opportunity
you understand how each number is calculated on the following day. First, you’ll notice you
before moving on. have the classic Short Sale Day pattern: high
Consider the entries for Wednesday, July made first and then a break in the market with
24. On that day, the Short Sale Day, the market the close near the low. Second, you have the
opened near its high and promptly sold off, Buy Day occurring on the following day. The
completing the ideal three-day pattern and anticipated pattern, therefore, is for the market
setting up an opportunity to go long on the to rally—low made first and then up. Moreover,
following day at the low made first. Looking to Taylor mentioned that the very strongest buying
the right, you’ll see that the entry in the Decline opportunity presented itself when you had the
column was 4.90. This is the total range between opportunity to buy a higher low. This means
the previous day’s high and the just completed the low on the previous Short Sale Day holds
day’s low. The rally entry on that day was just and is never penetrated. Indeed, this is precisely
109
what occurred. The low at 191.60 holds and the with Taylor’s method.
market rallies off the 191.95 point the following In order to develop a system that would
day and closes near the top end of the range. stand up to extensive computer analysis, it was
Over the next three days, the entire cycle repeats necessary to develop rules that could be tested
itself. against the past. The rules couldn’t be vague.
Before we move on, let’s look at some more They had to be specific. This has given rise to the
entries. Look at the entry in the BU column on LSS 3-day Cycle Method in its present form.
Tuesday, July 30. The .10 entry means the market While the three-day cycle notion appears
traded just .10 points under the previous day’s sound, the LSS system has refined the idea and
low. Had it held a higher bottom, the number incorporated a number of computer-proven ideas
would have been negative, since you are taking that Taylor never used.
today’s low and subtracting yesterday’s low. For one, the LSS system is strictly a day-
How about the Buying High entry on Monday, trading method. During Taylor’s day, the grain
July 29? Negative .90 points. This is the amount markets rarely moved sufficiently to have a
under the previous day’s high where today’s day-trading method that would work. Today, all
high occurred. A negative Buying High number that is changed. Soybeans can move 30 cents
means today’s high is under yesterday’s. within a given trading session, and the stock
index futures have no limits at all. Profits of
The LSS 3-day Cycle Method three or four thousand dollars in a day’s time are
not uncommon on even a modest position for
So far, we’ve looked at the basics of Taylor’s today’s trader.
Book Method: finding the cycle, keeping the For another, the LSS system relies on a
book, and so on. But, at this point, Taylor becomes tier approach to putting on positions. Whereas
somewhat vague. Where do you buy and sell? Taylor tried to quantify trading days as better
Taylor says, at the Buy Day low made first. This than others, the LSS system relies on letting
position is then liquidated on the following day, the market decide the number of positions to
the Sell Day. Where? At, through, or slightly take. There are three levels of trading. On any
below the previous day’s high. On the third day, given day, you may take none or all three levels.
the Short Sale Day, the Book Method calls for The number of contracts taken at each level is
taking short sales on the high made first. Ideally, the same. Although margin considerations and
this will occur at, through, or slightly below the one’s bankroll should determine the size of
Sell Day high. one’s commitment in the market, the system was
There are several problems with Taylor’s tested on a 3-3-3 contract basis. That is, during
instructions. First, how do you quantify the the day, you might have a maximum of three,
buying and selling points? Do you, for instance, six, or nine contracts. At day’s end, of course,
take the entry in the previous day’s Rally column you will liquidate your entire position, win or
and use that number to extrapolate a price at lose. In this fashion, you will either profit or lose
which to sell? Perhaps. Second, what exactly during the day. No positions are ever held over
does at, through, or slightly below the previous night.
day’s high mean? Fifty points, a hundred points?
Again, it is hard to say. While Taylor’s theory Developing a Consensus
appears sound, a more quantifiable approach is
required. Lastly, the market doesn’t announce Taylor had the right idea. There is a three-
whether a price is the high or low made first. day cycle. It occurs on a regular basis. And it
During the trading day, when you are faced with is identifiable. But the secret of market success
a decision, you cannot tell whether what appears, isn’t as easy as buying every third day—far from
say, as a low made first might not be, indeed, a it. In reality, the market often gets out of “phase”
high made first. So, there are clearly problems and the cycle often becomes lost to the would-be
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three-day cycle trader. As a result, the low often phenomenon suggests that the “herd” of buyers
doesn’t hold on the Buy Day. Instead, the market all panic and stampede for the exits at once. This
breaks. And the buyer often has losses. is precisely what happens when the stops are
To cope with the unpredictability of the market, run. First, the very thinly bankrolled traders run
an element of flexibility had to be built into the (and the knowledgeable few who are simply on
system. To avoid confusion, the notion of Buy, the wrong side), then the stops are hit and, as
Sell, and Short Sale days had to be dispensed the market breaks, larger and larger long-term
with—at least, the names had to be changed, traders begin to bail out of their positions. By
because one often gets confused when selling, the time the public funds are selling, you know
for example, on the so-called Buy Day. This is the bottom has been reached. This familiar price
where the LSS designation becomes important. action has been likened to rolling a large boulder
The LSS really should read: L-S-SS, the letters up a mountain. It goes up very slowly. But once
standing for “long,” “sell,” “short sale.” But the you push it off the cliff it breaks fast! The same
point is simple: You can either buy or sell on any thing is true in the market. And it explains why
given day. Don’t let the name or letters confuse the short side of the market is so profitable.
you.
The LSS system, which is based on computer- The Trend Reaction Numbers
proven probabilities and percentages, is
designed to react to market conditions as they As part of the consensus, the system relies
unfold during the day. For instance, if computer on the trend-reaction buy number and the trend-
studies indicate that the probabilities of a buying reaction sell number. These numbers are but one
position on any given day are 75 percent in favor of four numbers that will be used to calculate
of its working as opposed to just 25 percent the buy and sell envelopes that are so important
of its losing, you are better off buying. To to the LSS system. While the trend-reaction
establish the probabilities, the system relies on buy and sell numbers are often surprisingly
calculating averages, and averages of averages, close to the bottom and top of the day’s range,
and mixing them all together to come up with respectively, they are not to be used as buying
a trading recommendation—again, in response and selling points.
to actual market conditions. The market decides The formula for calculating the buy and sell
whether and when you buy and sell. As a result, numbers is as follows:
the system is much more reliable than any High + Low + Close = x
forecasting method. 3
Computer studies have shown that 70 percent 2x - high = trend-reaction buy number
of all LSS winners are made by short selling. 2x - low = trend-reaction sell number
That’s better than two to one in favor of a short- Assume the following:
selling position working over a buying position. S&P futures high = 189.55
Actually, to an experienced futures trader, this “” low = 187.75
shouldn’t come as a surprise. As a rule, most “ ” close = 188.25
public speculators are buyers—not sellers. Using the numbers listed above, the trend-
Moreover, the vast majority of all futures traders reaction buy and sell would be calculated as
end up with losses. This suggests that although follows:
there is indeed a buyer for every seller, there 189.55 + 187.75 + 188.25 = 188.50
are many, many more buyers, in number, than 3
sellers. That is, a relatively small pool of sellers 2(188.50) - 189.55 = 187.45 = trend-reaction
routinely fades the buying public. buy number
If you monitor price action over a period of
time, you’ll notice that price breaks tend to be 2(188.50) - 187.75 = 189.25 = trend-reaction
considerably faster than price rallies. Again, this sell number
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Rephasing the Cycle indicator numbers = UP trend

2. Trend momentum indicator number more
Taylor’s rule for generating the cycle days is positive than one of the previous two numbers
to take ten days of price data, take the lowest low, but more negative than the other number =
and call it the Buy Day, and then count forward SIDEWAYS trend
and backward, circling the third low and the two 3. Trend momentum indicator number more
intermediate highs. In this manner, the three- negative than two previous trend momentum
day cycle is determined. Unfortunately, this indicator numbers = DOWN trend
approach is too inflexible to take into account
the many crosscurrents in the market. Even Listed below, you will find several
Taylor maintained that the three-day cycle was consecutive days of closing prices. In the
occasionally interrupted by a four- or five-day columns to the right, you will find the trend
cycle. Moreover, where one begins the cycle momentum indicator number and the UP,
count will determine what days are labeled Buy SIDEWAYS, DOWN designation for each. Note
and what days are labeled Sell or Short Sale. that you cannot have a designation until you
In designing the LSS system, therefore, there have at least three trend momentum indicator
was a need to rephase the cycle when it got out numbers.
of synch with the traditional 1-2-3 cycle pattern.
What was required was a simple indicator that
would tell when the market was changing trend.
This indicator is known as the trend momentum
indicator. It measures the rate at which the market
is rising or falling. That is, when a market rallies,
it moves up slowly at first, picks up speed, and
then, although still rising, the momentum begins
to slow, suggesting that a change indirection is
imminent. The trend momentum indicator is a
helpful tool in this respect.
The rule for rephasing the cycle when you use
the trend momentum indicator is simple: each
time the trend momentum indicator changes
direction, the cycle is rephased. Rephasing As long as the TMI number is more positive
involves going back ten days and taking the than the two previous numbers, you’ll have an
lowest low as the new L-day (Buy Day) and UP designation. Note that on day 6, the +.95 is
then counting ahead, L-day, S-day, SS-day, and more positive than both +.15 and -2.35—hence
so on. the UP designation. But on day 7, the +.40
How is the trend momentum indicator difference is more negative than day 6 but more
calculated? This is the rule: take today’s close positive than day 5—hence the SIDEWAYS
and subtract the close two days previous. Thus: designation. Day 8 is considered unchanged,
close on day 3 - close on day 1 = momentum because the +.40 number is not more negative
indicator number. The number generated is then than the previous day’s. Lastly, at -.55 on day 9,
compared to the two previous trend momentum the designation turns DOWN, because it is more
numbers. The last number will then have one of negative than the two previous numbers.
three patterns in terms of the previous two as It is important to note that the designation does
follows: not determine the direction of the market, only
the rate at which it is moving up or down. Look
1. Trend momentum indicator number more at the close on day 7. The close is higher, but the
positive than two previous trend momentum indicator has turned from UP to SIDEWAYS.
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Again, on day 8, the close was higher while the will be established and the change will indeed
designation was still SIDEWAYS. By day 9, the change. When this occurs, you base tomorrow’s
designation had turned to DOWN and the market anticipated cycle day on the new rephased day.
had finally turned lower. The indicator tends to For instance, let’s say that before rephasing,
lead the market, but it is not used to pinpoint today was designated as a Short Sale Day (SS-
buying or selling opportunities. Rather, the day); after rephasing, following today’s close,
change in the designation signals the rephasing however, today’s SS-day becomes an L-day, or
of the cycle. Buy Day. Hence, tomorrow’s anticipated cycle
Often, the cycle will remain the same day is the following day in the cycle, the S-day,
despite rephasing. For instance, you might or Sell Day.
have a low that occurred seven or eight days To see how rephasing might change the three-
ago, and that designation may have changed day cycle, we need to look at an example which
several times since then. Each time, you go is first not rephased, and then, after calculating
back and rephase the cycle. In each instance, the trend momentum indicator, in the second
the lowest low remains the same and the cycle example, the cycle is rephased. See how one
stays intact. In time, however, a new, lower low compares with the other.
In the unrephased three-day cycle shown above, the L-day, or Buy day, repeats every third day.
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The cycle is rephased each time the momentum why you shouldn’t give up when selling into a
trend indicator changes in the second rephased rally in hopes of capturing a down move. Let’s
version. (Note: for the days shown, the lowest say the market rallies on you and prices move
low occurred on Monday, March 18, at 180.00, higher. You must take the loss. But chances are,
the L-day). As a result, the cycle remained intact you were simply a day too early. Sell the next
on the close on March 26. Again, on March 29, day in anticipation of capturing the SS-day high-
the rephased cycle remained intact. The cycle to-low pattern. You’ll find that this works even
was rephased again on Tuesday, March 26, when in bull markets.
the momentum indicator changed from DOWN Once you find the correct pattern, you can
to UP. New rephasing then occurred on Friday, expect two or three cycles of winning trades.
March 29, and Monday, April 1, and Tuesday, Look at the SS-day that occurred on Monday,
April 2. On each day, the dropping of the day March 25. You go in expecting a nice break
ten days back resulted in a new L-day, or Buy and sell right at the open. Prices are up a mere
Day, and a new three-day cycle. On Wednesday, .10 points over the open, and down they go. It
April 3, the cycle was not rephased, because the would be hard to lose by selling short on such
Trend remained DOWN. a day. Since the pattern seemed reliable at that
The rephasing attempts to relocate the three- point, it makes sense to stay with the three-day
day cycle when the highs and lows don’t occur cycle. The next day, the L-day, you expect the
as expected. Very often, a simple technique to reverse: low made first and rallying prices. You
find the “correct” cycle is to push it ahead one buy at the open or—ideally—a reaction down
day. For example, let’s say today is the SS-day, from the open. Sure enough, March 26 proved
and the pattern to expect is high made first and an excellent day to buy, since the market rallied
then lower prices. But let’s say you have the L- off the low early in the day.
day pattern occurring, low made first followed Once the market goes into one of its rephasing
by higher prices. By pushing the cycle ahead stages, it often pays to stand aside for three or
one day, you can often find the pattern you are four days until it finds the cycle once again.
looking for. This, by the way, is one reason Consider, for a moment, what happens when a
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market breaks. You will have day after day of successive lows. As a result, each time the cycle is
rephased, today’s new low becomes the Buy day, or L-day. This leaves the least reliable day, in terms
of its market direction, the S-day, as the following day. Sooner or later, the actual low—the Buy
day low—will occur, and then, typically, the three-day cycle will again become evident. Consider
the following table of prices and you’ll see why standing aside when the market is rephasing often
makes sense.
Right after the Memorial Day holiday, the market became rather choppy and the cycle was thrown
out of synch. First, the L-day low made first on Tuesday, May 28, failed. Instead, the SS-day pat
tern—high to low—occurred. Here you could have pushed the cycle ahead a day. There was the
L-day pattern the following day, Wednesday, May 29. But the momentum trend indicator, which had
been quite choppy, going from DOWN to UP to SIDEWAYS to DOWN in four consecutive days,
pinpointed Thursday, May 30, as the S-day, or Sell Day. It was wrong. After rephasing on May 30,
the real Buy Day, when the low was made first, occurred and the market rose 3.65 points in four
days.
You can see the benefit of rephasing. Looking back on the numbers after the cycle has occurred
makes the selection of the Buy Day low an easy one. The problem, however, is spotting the Buy
Day low at the same time it is occurring. This particular cycle was a difficult one to find. At the real
ten-day low, on Thursday, May 30, most traders were probably selling. Why? Because
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the market sold off. 85 points from the open with, the range of these two zones—namely,
and took out the two previous lows by two and the buying and selling envelopes—can often be
four ticks, respectively. This is not an accident. highly accurate, often within one or two ticks.
What happened was that a great many traders Let’s begin with the buy envelope. What consti
who, in retrospect, had indeed seen the bottom tutes the buy envelope? As we’ve defined it, the
coming, had the misfortune to place their stops buy envelope is an area where support should be
right under the market. So they were right—but found in tomorrow’s market. Remember, the buy
wrong! The market was driven down to get the envelope is calculated daily after the close for
stops—and only then did it soar upward! Note tomorrow’s market. Hence, we only have past
how, after the close, the market received an UP data to work with in calculating the numbers.
designation. The upward move carried all the What are the numbers we want to examine? To
way to 191.95 on Friday, June 7. calculate the buy envelope, we want to look at
In summary, the LSS 3-day Cycle Method the following:
rephases each time the momentum trend indicator 1. The previous day’s low. By previous day,
changes designations. Rephasing serves to help we mean today, the day just finished. If this is
you find the correct three-day cycle. In addition, Tuesday and the low of the day was 186.00, we
when the anticipated day’s pattern doesn’t occur want to make note of this number in calculating
as expected, it often pays to push the cycle ahead the buy envelope for Wednesday. Lows are
one day. Remember, there’s no rule you have to significant because they identify points in the
buy on a so-called L-day or sell short on an SS- market where the sellers couldn’t push prices
day. The names or the days are simply to help lower without buyers willingly taking everything
you identify the pattern. the sellers wanted to sell.
2. The trend reaction buy number. We have
Calculating the Envelopes covered the calculation of this number in a
previous section. This number represents
Now that we’ve covered the discovery of support.
the three-day cycle pattern and discussed the 3. The average of recent Decline numbers.
rephasing of the three-day cycle, it is time to Here’s where tracking the numbers comes into
identify support and resistance. Where do you play. Remember, the Decline column measures
think the market will stabilize or encounter price the distance between a high and the next day’s
resistance? low. It measures how far a sell-off carried
One method that has proved to be quite before support was found. As a result, if you
effective is to design two separate envelopes for could average recent Decline column numbers,
each trading day. There is a buying envelope, and subtract from the previous day’s high, you
where support can be anticipated, and a selling might very well have a ballpark figure on where
envelope, where you should expect resistance. support could be found. This is where the LSS
As a rule, it is exceedingly difficult to forecast system has improved Taylor” s original concept.
tomorrow’s high or low before the market opens. It is important to average recent Decline column
Computer studies have shown that this, and other entries, because the market can change over
systems, can occasionally approximate these time.
areas, but, in general, this kind of forecasting 4. The average of recent Buying Under numbers.
method doesn’t lend itself to picking two or The Buying Under number reflects how far under
three key numbers. yesterday’s low a market carried. If it didn’t pen
What can be accomplished, however, with etrate the low, the BU number is expressed as
a high degree of accuracy is the identification a negative number. Again, by averaging the BU
of trading zones within which support and entries and subtracting from the previous day’s
resistance should occur. Moreover, once the low, you can arrive at a good support level.
market is open and you have new data to work
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The selling envelope is the mirror image of the DAY DECLINE COLUMN
buying envelope. To calculate the sell envelope,
consider the following: 1 .40
1. The previous day’s high. In calculating 2 1.90
tomorrow’s sell envelope, you take today’s high 3 .50
as the point where resistance will be encountered.
This concept is borrowed from Taylor, who The average of these three entries is about
maintained that resistance will always exist at .95 points after rounding. You then take the
the previous day’s high. previous day’s high and subtract the average of
2. The trend reaction sell number. This number the previous three Decline columns to arrive at
is valuable as a point where resistance will be a number you can use in the buying envelope.
encountered. The calculation was discussed in The previous day’s high was 169.15. By
an earlier section. subtracting .95 points, you arrive at a support
3. The average of recent Rally numbers. When level of precisely 168.20. Now remember, this
added to the previous day’s low, the average of calculation was made following the close on
the Rally numbers signifies a resistance area Wednesday, January 9. The previous day’s
where selling should overcome buying. low? Precisely 168.20. Right on the money!
4. The average of recent Buying High numbers. Obviously, this was only a coincidence. The
This average is added to the previous day’s high. likelihood of selecting the exact low using this
Remember, the BH number is the amount by method is not that great. What’s more, once you
which the day’s high exceeded the previous high. factor in the other numbers in the envelope, the
If the last high did not exceed the previous high, overall buy number would have been somewhat
the BH number will be negative. By averaging a lower. But this does illustrate how recent price
series of BH numbers, you achieve a consensus behavior tends to suggest how the market might
that pinpoints a resistance area. trade in the near future.
The Buying Under column. Buying Under
Now, taking both the buy and the sell measures the penetration of the previous day’s
envelopes, you should have four numbers in low. How far under the previous low did the
each. Since the previous high and low are self- market trade? Obviously, if no penetration
explanatory and the trend reaction numbers occurred, the number would have to be negative,
have already been discussed, let’s look at since you will be subtracting a larger number
several examples utilizing the D, R, BH, and from a smaller one. On Wednesday, January 9,
BU columns for generating buying and selling the low of the March S&P contract was 167.10.
numbers for the buy and sell envelopes. The previous day’s low was 166.35, hence the
The Decline column. The Decline column BU entry will be -.75. The two previous entries
measures the range in prices from high to low were +.60 and -. 95. Here are the three BU
over a two-day period. Let’s consider an actual entries in column form:
example in which three consecutive D-column
entries were averaged and subtracted from the DAY BUYING UNDER COLUMN
previous day’s high. 1 -.95
First, the target day, which, in our illustration 2 .60
here, we’ll assume has yet to take place, Is Thurs 3 -.75
day, January 10. The most recent data, therefore,
are for the previous Monday through Wednesday. The average of the last three entries, therefore,
The Decline column entries for those three days is minus .35 points when averaged. When you
were as follows: subtract a negative number from a number, you
add. Therefore, the previous low at 167.10 plus
.35 points equals 167.45. This is the entry in the
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buy envelope as the Buying Under number. As trading—namely, January 9—the Rally column
we indicated above, the low on the following sell number is 169.00. Indeed, the market on the
target day was 168.20—so this number was a bit subsequent day carried far above that number—
low. the top occurred at 172.15. But this number,
The reaction trend number. The reaction trend like the others, only suggests where resistance
buy and sell number is derived from the formula should occur—not where one should necessarily
provided earlier in the book. The high, low, sell. This is an important point to keep in mind.
and close for the day just finished were 169.15, The Buying High column. The Buying High
167.10, and 168.60 respectively. Add them up column measures the penetration of the last high
and divide by three to derive the average; then over the previous high. In the example we are
multiply by two. Subtract the high of 169.15 and considering, the penetration occurred during the
obtain the reaction trend buy number, 167.45. last two out of three sessions. Hence, a negative
The buy number. The buy number is the number was entered on one session. Here’s what
average of the four numbers in the buy envelope. the columns looked like.
The four numbers in, the example we’ve just
covered are as follows: DAY BUYING HIGH COLUMN
1 .90
BUY ENVELOPE 2 -.65
3 1.55
D-column number = 168.20
Reaction number = 167.45 The average of the three is, therefore, .60
BU-column number = 167.45 points. When added to the previous day’s high
Previous low = 167.10 of 169.15, the BH-column entry is 169.75.
Average of four = 167.55 buy numbers The reaction trend number. This is the same
formula you used to derive the reaction trend
Now that you know how to derive the buy buy number. The only difference is that you
number, you must know one other rule: you subtract the previous low to achieve the sell
don’t buy at the buy number. Rather, the buy number. If you do the calculations, you’ll see
and sell numbers are best used to calculate the that the reaction trend number is 169.50.
anticipated range, which we will describe in a The sell number. The sell number is the
moment, as soon as we cover the sell envelope. average of the four numbers in the sell envelope.
The Rally column. The Rally column The four numbers in the example we’ve just
measures the difference between yesterday’s covered are as follows:
low and today’s high, or the range from low to
high over the past two-day period. By averaging BH-column number = 169.75
the magnitude of the rallies, you attempt to Reaction number = 169.50
anticipate resistance in the market. Previous high = 169.15
Using the data for the March S&P contract R-column number = 169.00
for the three days of January 7, 8, and 9, we find Average of four = 169.35 sell number
that the numbers were as follows:
Here again, you do not use the sell number to
DAY RALLY COLUMN sell. Rather, you use both buy and sell numbers
1 2.25 to establish the anticipated range.
2 .65 The anticipated range. The anticipated range
3 2.80 is the difference between the buy number and
the sell number. In the example above, the buy
The average of these three entries was 1.90 number was 167.55 and the sell number was
points. When added to the low of the last day of 169.35. The anticipated range, therefore, is
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the difference between the two, or 1.80 points. on the table. After many tests, the results proved
The anticipated range is used to pinpoint profit- that doubling the anticipated range maximized
taking points once an intraday high or low is the profitability. The reason: on those occasional
established. days when the market really runs, the system
There are two ways the anticipated range can will capture the entire move. More often than
be used. In the first, you await the establishment not, the doubling of the anticipated range means
of an intraday high or low and then you add or the target buy or sell number is not hit. Since
subtract the anticipated range in order to project a the LSS system is designed for day trading only,
high or low for the day. This high or low is known you must then exit your position on the close.
as the target sell or target buy respectively. Quite Typically, this is best achieved by using a market
often, this method is very accurate in predicting on close (MOC) order.
the high or low of the day. The advisability of doubling the range is
For example, let’s consider an actual trading shown by an example. On February 13, 1985, the
situation. For Thursday, January 17, 1985, an L- March S&P contract had an anticipated range of
day with a DOWN designation, the anticipated 2.05 points. On the opening, which turned out to
range of the March 1985 S&P 500 contract was be the low of the day, the market mounted a rally.
1.60 points. The buy number was 172.55 and By doubling the anticipated range and adding
the sell number was 174.15. On Thursday’s it to the low of 181.35, a target sell number of
open, at 173.80, the market rallied two ticks, to 185.45 was established. The actual high of the
173.90. This was the intraday high. By taking day proved to be 185.55, just two ticks above the
the intraday high and subtracting the anticipated anticipated sell number. The range on the day
range, you reach a target buy (cover) number of was over four points—almost double the typical
172.35 (173.90— 1.55 = 172.35). The actual low range for the time period. How did the system
of the day proved to be 172.15. On the close, the correctly anticipate the move? It didn’t. Rather,
market rallied to 172.60. it simply allowed the trader to capitalize on the
Another way to use the anticipated range is occasional move of four or five points when the
to double the number and then add to the low market really runs. On the following day, the
or subtract from the high, depending upon your market reverted to its more normal range, about
initial position. In designing the LSS system, two points.
many variables were tested as profit-taking
points. At first, the testing concentrated on The Overbought/Oversold
generating many, many winners. To achieve this Indicator
high probability of winning, small profits were
taken—starting with just 50 percent of the range Should you buy or sell? One of the most
as the target buy or sell. But this soon proved reliable aspects of the LSS system is a simple
to have its drawbacks. For instance, if you take overbought/ oversold indicator that pinpoints
just 50 percent of the anticipated range and add when prices have advanced just a little too much
it to the low or subtract it from the high, you during any given trading session, suggesting
will surely increase the number of times the the reverse action on the following day. Like
anticipated range number is reached. After all, the “Bullish Consensus” percentages, the
if the anticipated range is one point, isn’t there overbought/oversold indicator pinpoints when
a higher likelihood that the market will mount either buyers or sellers gain command of the
at least a half-point move? Certainly. But the market. And, like contrary-opinion trading, the
enhanced number of profits will be offset by the LSS system tries to capitalize on the situation by
inevitable occasional losses, a half-point profit trading against the short-term trend.
offset by a half point loss. What’s more, by Thus, when you have a market that begins
taking just 50 percent of the anticipated range, near the low and rallies, you will have a high
you will find you often leave too many dollars reading on the overbought/oversold indicator;
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when the market opens near its high and trades JUNE S&P—FRIDAY, JUNE 14
lower, a low reading will occur. As a rule, you Open = 186.50
want to sell high readings in the indicator which High = 187.15
measures 70 percent or higher and you want to Low = 185.70
buy low readings at 30 percent or lower. The Close= 187.05
reading is taken each day following the close
of trading. The reading applies only to the next The overbought/oversold indicator can also
day’s price action. be used as a confirming signal for the three-
Here’s the formula for the overbought/ day cycle. Remember, we recently discussed
oversold indicator: the advisability of occasionally pushing the
cycle ahead a day when the ideal pattern can’t
(High - Open) + (Close - Low) = overbought/ be ascertained. This is the precise scenario that
2 x range oversold indicator occurred here. Thursday, June 13, was an S-day
percentage with declining prices throughout the trading
session after the initial morning bulge that
Let’s take an example to illustrate how the occurred on the open. Instead of challenging
overbought/oversold indicator works. We’ll the highs on the previous day—Taylor’s Buy
look at prices after the close on Thursday, June Day—the market had been in retreat for two con
13, 1985, in the June S&P contract. The prices at secutive days. The selling was overdone and the
the close that day were as follows: market was due to start rallying. Instead of the
three-day rally pattern that the classical Taylor
June S&P—Thursday, June 13 trader would expect, the market was trending
Open = 187.10 downward. The third day was indeed the next
High = 187.60 day, the SS-day. Instead of selling into a rally,
Low = 185.50 however, the S&P trader had to shift his thinking
Close = 185.60 180 degrees and buy the break. Where was a
good place to buy? Right where Taylor said there
To calculate the overbought/oversold would be support above the previous day’s low.
percentage reading, we rely on our formula as The previous day’s low was 185.50. The market
follows: found support at 185.70 the next day. By using
the overbought/oversold indicator together with
(187.60 - 187.10) + (185.60 - 185.50) the three-day cycle, you could have made a very
2 x (187.60 - 185.50) successful and virtually risk-free trade.
= .50 + .10 The overbought/oversold indicator works
2(2.10) equally well when you have a rising market and
=.60 you are looking to sell. In a recent three-day
4.20 cycle that occurred during August 1985, the L-
=14% day pattern occurred as forecast, moving from a
low made first to a high made last, followed by
With a low reading of 14 percent, a buying a second rising market on the following S-day.
opportunity presents itself on the following day. The pattern was ideal for a short sale on the third
Note that, on Thursday, the high was made first day.
and the market declined, setting up a buying Here are the prices for the September S&P
opportunity as the market closed near its low. contract for the S-day, Thursday, August 8:
On the following day, the June S&P contract
traded down from its open and then rallied
toward the close. The prices were as follows:
120
SEPT. S&P—THURSDAY, AUGUST 8 look elsewhere for a confirming tool that prices
Open = 188.50 are headed higher or lower.
High = 189.45 One good place to look is at the price action
Low = 188.25 during the first hour of trading on the following
Close= 189.10 day. The range which is established during this
first hour of trading, we call the intraday range.
The calculations for the overbought/oversold The high and low registered during the first hour
indicator are as follows: are known as the intraday high and the intraday
low respectively. All but the most thinly traded
(189.45 - 188.50) + (189.10 - 188.25) futures will have some range after an hour of
2 x 1.20 trading, even if the underlying cash index or
= 1.80 commodity is virtually unchanged. So you will
2.40 have this range to work with. During the first
= 75% hour on such a day (namely, when the percentage
falls between 30 and 70 percent), you should
With the overbought/oversold indicator at 75 make it a point to stay out of the market. What
percent, the market was ripe for a short sale on you are looking for after the first hour is over and
the following day. Not only was it the third day the intraday range is established, is a violation
up in the three-day cycle, but the overbought/ of either the intraday high or the intraday low.
oversold indicator percentage was pointing Once this violation occurs, you want to fade the
toward lower prices. Taylor’s rule to sell near the move and go the other way.
previous day’s high proved right on the money! That is, if the intraday high is violated, look to
Here are the results for the following day: sell; if the intraday low is violated, look to buy.
These are very simple rules, but over a year’s
Open = 189.40 time they will return you thousands of dollars in
High = 189.50 profits.
Low = 188.45 You can be sure that this is the exact opposite
Close= 188.70 of what most traders are doing—and this,
incidentally, is why it works so well. When
The 70-30 rule obviously doesn’t prove the market rallies, for instance, several things
accurate every day. But when used in conjunction happen. One, the stops of the short sellers (who
with other signals, it is a valuable contribution to have now become buyers) are hit; this, in turn,
selecting the right trend of the day. generates more buying as the latecomers, who’ve
There will be many days when the percentage been watching the market for some clue to
falls between 70 and 30 percent. How do you direction, decide to jump aboard. More buying.
use the indicator when the percentage is in the Unfortunately for them, they are too late.
middle? When this occurs, the LSS system These “engineered” rallies—which are called
turns toward another signal. When a balance “sucker rallies”—exist solely to fool the unwary.
exists between buyers and sellers, the balance This is the classic Taylor rally, the very paradox
is reflected by stationary or, at least, sideways that makes the Taylor Book Method and the LSS
price movements. The market may be up in system so profitable. Essentially, the market is
the morning and down in the afternoon and taken up in order to generate a fresh source
close just about unchanged. On such days, the of buyers for the sellers to sell to; the reverse,
overbought/oversold indicator will reflect this of course, is true on the downside. When you
indecision by registering a neutral reading—say, think about it, what better time to move the
a 50 percent, or even a 45 or 40 percent, reading. market around a little bit than when the balance
Because the lack of market direction provides between buyer and seller is almost equal? There
no clue to subsequent price action, you have to is no “reason” for the market to rally, so why not
121
create a modest “technical rally” to get the ball Buy or Sell—the Level I
rolling? Trade
There could be a million and one excuses that
will be credited for the false rally—the Fed was Statistical studies have shown that the opening
loosening credit, rumors of tight crop, or what- and closing prices are often near one end of the
ever—but you can be sure that, regardless of day’s range. Typically, the opening will fall near
the reason, the smart money will profit and the one end of the range and the close near the other.
uninformed will lose. This is not to suggest that the key to beating the
There is a reason, of course. But not the one market is to simply buy on the open and sell on
you’ll find broadcast on the TV or radio news. The the close, however.
reason is that the insiders wanted to create a good The LSS system relies on using three levels of
selling opportunity, and they could accomplish prices to initiate positions. One of these levels,
this feat only by panicking the hapless short which is known as Level 1, relies on buying
sellers into buying at an unadvantageous price. or selling at a fixed variable, away from the
You have to remind yourself that there’s always morning’s opening price. For obvious reasons,
a buyer for each seller, and vice versa. Typically, the variable will be different for different futures
those who engineer the early-morning false contracts. The volatility of the market, the size
breakout know exactly what they are doing. Join of the daily range, and the market’s tendency to
their ranks and see how profitable it can be. retrace its initial intraday range will all determine
what the variable should be.
Using the Opening Price to The move away from the opening price serves
122
two key functions. On the one hand, a move of x on any given day, it would not rise above $4
points away from the open suggests the market is over the opening price 88 percent of the time. I
experiencing normal volatility and it may again took this to mean that I could safely sell gold on
soon reverse its direction; on the other hand, a a rally from the open and place a relatively close
larger move, of y points, in the same direction stop to protect my position. As prices gathered
means that a reversal is highly unlikely. strength and rose about a $4.00 premium over
Let’s look at this idea in terms of an actual the opening price, I would then take losses on
market experience. any short position and look for an opportunity
Several years ago, when moves of $20 and to begin purchasing gold futures contracts. It
even limit moves of $25 an ounce were not wasn’t long before I realized precisely what
uncommon in gold, I learned an interesting valuable information this was. When buying,
statistic. A trader who had run tests on the gold I would wait for a decline in prices under the
market told me that if gold prices were headed open. If, for example, gold opened at $570 an
lower, the rise from the opening price would ounce, I would often buy it at $567 and watch
exceed $3 only 30 percent of the time and that the market. If it went more than a dollar or two
it would exceed $4 only 12 percent of the time. against me, I promptly got out. More often than
That meant that if gold was going to trade lower not, however, the market found support at the
123
level and rallied, generating profits. market-on-close order. One trade was stopped
In the Standard & Poor’s 500 index contract, out with a loss. Significantly, this trade was
extensive computer tests revealed that the same taken relatively late in the day and was stopped
type of pattern was evident. The market could out after only thirty-four minutes. In the two
easily move x points away from the open if it other examples, the profit point was reached.
was headed in the reverse direction; but once it This illustrates the importance of placing orders
went y points, that was the direction in which early in the day, preferably right after the open,
it would likely trend—not, however, necessarily when the day’s market direction is unknown, and
right away. At first, during the early volatility of exiting late in the day, preferably on the close.
the contract, .40 or .50 points seemed the ideal The open is often the best time of day to
spot to place an entry order away from the open. initiate trades. You’d do well to watch the open
But as more data became available, .30 points carefully and enter your orders as soon after the
above the open when selling, or .30 points opening price is known as possible.
below the open when buying, became the logical
entry point. For one, using a smaller variable
when entering will get you into more positions. The Retracement of the
For another, over time this greater number of Intraday Range—the Level 2
positions tends to enhance your profits. Trade
It is important to note that these so-called
Level I trades will be taken as soon as you have Known as the Level 2 trade, the retracement
some clue as to market direction—that is, as soon trade is based on the tendency of a market to
after the open as possible, in most instances. In mount a countertrend before taking its natural
many cases, the opportunity to buy .30 points upward or downward course during the day. The
under the open or .30 points above the opening intraday range is defined in the LSS system as
on days in which you have selected the correct the range of prices after one hour of trading. The
direction, may exist for only a moment. For this retracement trade price is determined by taking
reason, you must be quick to enter your order as the intraday range and multiplying the range by
soon as the opening price is known. Figures 53 .618. The resultant product is then added to the
and 54 illustrate the Level I trade. intraday low when buying or subtracted from
Let’s look at ten consecutive trading days in the intraday high when selling. (See Figures 55
which you are buying or selling at the .30 point and 56.)
variable above or below the open. These are For example, on November 1, 1984, the
actual trades that have been verified by computer. intraday high and the intraday low for the
When the position was stopped out, the table December 1984 S&P 500 contract was 169.85
indicates by showing a loss in the position. and 169.30. The intraday range was the
For the ten days shown, the Level I buying/ difference between the numbers, or .55 points.
selling strategy returned an average of $1,672.50 Multiplying by .618, the result is .35 points. This
per day using just three contracts on each trade. amount is then subtracted from the intraday high
You should note that, for the thirteen trading to achieve the Level 2 buying price at 169.55.
days, three days had no Level I trade. This is The market indeed traded at that price and three
because the market did not trade up .30 from the contracts were purchased at a price of 169.55.
open on selling or down .30 points from the open They were sold on the close at 170.45, resulting
on buying. On some days, how-ever, no trade, in a profit of $1,350 for the day. The maximum
either buying or selling, is indicated and the LSS adversity on this trade was very little, since the
system calls for standing on the sidelines. low of the day was only .30 points below the
Eight out of the nine trades were taken during entry point.
the first thirty-one minutes of trading. Seven out In the following table, we have listed ten
of ten trades were exited on the close using a consecutive trading days of Level 2 trades.
124
The profits on the Level 2 trades almost mirror those on the Level I trades for the same
time period. The profits are a little less: $15,600 as compared to $16,725. But they are still quite
respectable.
You should note that no Level 2 trades are ever taken during the first hour of trading.
By definition, a Level 2 trade can be taken only after the intraday high and the intraday low are
established.
125
this amount is 22.5, so we’ll round the penetration

The Penetration of the Intraday number to .25 points. The intraday high was
High or Low—the Level 3 Trade 154.10 and the intraday low was 153.70. Since
we are buying on this day, we would place an
The Level 3 trade is taken only when the order to purchase September S&P contracts at a
intraday high or the intraday low is penetrated price of 153.45 after one hour of trading.
by a given amount. When selling, the Level 3 At precisely 10:11 that morning, just eleven
trade is taken upon the violation of the Intraday minutes after the establishment of the intraday
high. When buying, the Level 3 trade is taken range, three contracts were purchased at that
upon the violation of the intraday low. The price. They were sold at the close at 154.15. The
variable to use in determining the amount of profit: $1,050. Because Level 3 trades are only
penetration in placing the buying or selling price taken upon a penetration of the Intraday high
of the Level 3 trade is 15 percent of the day’s or the intraday low, there are far fewer of them
anticipated range. Thus, if the anticipated range than of the Level I and Level 2 intraday High
in the Standard & Poor’s contract is 2.00 points, trades. The Level 3 trades tend to be the most
the penetration number will be .30 points above profitable. This is because they are placed at the
the intraday high (if selling) or .30 points below highest price when selling and the lowest when
the intraday low (if buying). Figures 57 and 58 buying. For this reason, the Level 3 trade is a
illustrate the Level 3 buy and sell trade. difficult one to take for most traders. Typically,
Let’s consider an example. On July 6, 1984, the stops are being run at the time the position is
the anticipated range for the September 1984 initiated and you are selling strength or buying
S&P contract was 1.50 points. Fifteen percent of
126
weakness.
In the table below, you will find listed the Level 3 trades for the ten consecutive trading days
shown in the previous tables. Note that there are only two trades—and only one winner.

For the ten days on which trades occurred, the LSS system gained over $35,000 when the three
trading levels are taken together. On only two of these days would a maximum of nine contracts
127
have been traded. answer the questions requested by the program.

The LSS Worksheet To provide the correct trading signals, the
software program will require you to enter the
At the heart of the LSS system is the worksheet. morning’s opening as well as the intraday high
Comparable to Taylor’s Book Method, the and the intraday low. Once this information is
worksheet contains all the important data known, however, the software will do the rest.
you’ll need to calculate the buying and selling The LSS trading system is also available in
envelopes, the cycle, the overbought/oversold, the form of a Hewlett-Packard 41 hand-held
the trend, and the rallies and declines—in short, calculator that has been preprogrammed. Here
everything you’ll need to trade the LSS system again, the user will be responsible for entering
effectively and profitably. correct price data and answering the respective
Purchasers of the LSS software will find that questions concerning opening price and intraday
much of the calculating is performed by their high and low. The calculator will then perform
personal computer. The only requirement for all the mathematical calculations associated with
PC users is to enter the daily price data as well as generating the trading signals.
reaction numbers and the Decline, Rally Buying

For users who would prefer to do all the High, and Buying Under numbers. Finally, the
calculations manually, the accompanying buy and sell envelopes and the respective buy
worksheet should provide a guideline. Note that and sell numbers can be calculated.
the open, high, low, and close are entered every It is important to track this vital market
day. Once this information is available, you can information daily. Unless the price data are
then enter the momentum trend number and the entered daily, the correct trading cycle will be
momentum trend indicator. lost, as will be other important information.
The overbought/oversold percentage can also Even a cursory glance at the table following
be calculated from these numbers, as can the trend should help you immediately make some
128
decisions for the next trading day, Friday, June however, was never reached again during the
14. One would anticipate the next day’s cycle trading day. The Level 3 buy signal, which
day as an SS-day, or the third day in the three- would have been at 185.40 on a penetration of
day pattern with the normal SS-day cycle pattern the intraday low, was not hit either.
of high made first and low made last. But, in The positions were sold on a market-on-close
this instance, you can see from the overbought/ order for a profit of $1,275 for the day. The open,
oversold indicator that the 14 percent reading high, low, and close were as follows:
suggests the reverse: a buying opportunity on
the next day’s open. S&P 500—June 1985
Here’s what happened. The June 1985 S&P Friday, June 14
500 contract opened at 186.50. The LSS system Open = 186.50
immediately signaled a buy at the open minus High = 187,15
.30 points, or 186.20. This trade was taken Low 185.70
during the first hour of trading. Close= 187.05
After one hour of trading, the intraday high
and the intraday low were known. The intraday Note also that the trend reaction sell number
high was 186.50, the opening price, and the was 187.00 and the actual high proved to be
intraday low was 185.70, which proved to be 187.15. Also, the sell number in the selling
the low of the day. By taking this intraday range envelope was 186.85, just .30 points off the
and multiplying by .618 and then subtracting high of the day. By holding the position until
the product from the intraday high, the Level 2 the close, however, the LSS system realized a
buy signal was generated at 186.00. This price,
129
slightly better selling price on the day. simulation tracks the real-time record closely.
Some other observations on the use of the As a day-trading method, the LSS system
LSS worksheet are shown in the table. The carries no positions overnight. All the profits
overbought-oversold percentage worked four and losses that occur in the system are realized
days out of six. Using this indicator alone would on a single-day basis. Stops are used every day,
have had you selling on Friday, June 7; buying and losses are never allowed to overwhelm the
on Monday, June 10; selling on Tuesday, June user. As a result, the system adheres to the well-
11; and buying on Friday, June 14. These were known dictum to “cut your losses and let your
all winning trades. Moreover, using the Level I profits ride.” Whenever the profit-taking point
trades alone, the maximum adversity from the is not reached, all positions are liquidated with a
entry point would have been remarkably small. market-on-close order.
For instance, on Friday, June 7, you would The system was tested on one period of time
have sold the Level 1 position at 191.80, and the and then run against a significantly longer period.
high of the day proved to be 191.95, three ticks All the testing occurred in the most active month
higher. On Monday, June 10, the Level I buy of the Standard & Poor’s 500 contract. The LSS
occurred at 189.05, and the bottom was 188.85, system may very well work equally as well or
four ticks away. On Tuesday, June 11, the Level better on a number of other futures contracts, but
I trade was missed by just two ticks (although there are difficulties in obtaining data to test other
the Level 2 trade would have proved profitable); contracts. For example, none of the New York
and, finally, the winning trade on Friday, June exchanges had tick-by-tick data available. Much
14, would have been taken at 186.20, resulting of the data available at the Chicago Board of
in a maximum adversity of .50 points prior to the Trade were incomplete or downright inaccurate.
move into profitability. Note also that the Level As a result, Chicago testing was limited to the
1 sell on Friday, June 7, was confirmed by the S&P 500 and other futures traded at the Merc.
selling number (191.80) being at the same exact However, the introduction of new stock index
price. The profit on the Level I trade on that day contracts, which haven’t traded long enough
was $3,375 using just three contracts. to have price data histories, should prove good
candidates for the LSS 3-day Cycle Method.
How Profitable Is the LSS Now let’s turn toward results. Over a thirty-
System? two-month period, the LSS system, using just
three contracts at each of the three price levels,
The LSS system was tested by obtaining the returned a gross profit of $408,075.50. This
tick-by-tick data available from the Chicago was on a purely mechanical basis, taking the
Mercantile Exchange and then running the trades and using the stops and profit points just
computerized LSS program against the data. It as has been spelled out in this chapter. During
is important to note that the computer looked this period, the market had trended both up
at every tick of every day in doing its analysis and down as well as sideways. The maximum
of how the system would work under actual drawdown averaged just 12 percent, a healthy
market conditions. Most computerized systems, number by almost any standard, and the so-called
by contrast, are tested only against high, low, Shape Ratio, by which many analysts judge a
close data, which is far less accurate as a testing system, was 3.89. A reading of 2.00 or higher is
model. What’s more, actual real-time testing with considered a good ratio for most systems. About
real dollars in the market since the development
of the system suggests that the computerized
130
half of all trades resulted in profits. Significantly, serious trader is to purchase a membership on
the average profit was much higher than the one of the commodity exchanges. If you become
average loss. a member, your costs will fall significantly.
Depending on whether you trade for your
Rules for the LSS System account on the floor of the exchange or over the
phone through a broker, your cost as a member
The LSS system is a mechanical day-trading will be as low as one dollar per trade or as high
method that does not require interpretation or as $4.00 or $5.00—still a significant savings
judgments during market hours. Because it at below the rates charged to public traders.
tempts to capture a single move during a trading RULE NUMBER 3. Act on the trading sig
session, the system works best on volatile futures nals. The system won’t help you unless you
such as the stock indexes or the currencies. learn to take the trades as they occur. The best
Despite its mechanical nature, however, the trades, unfortunately, rarely present themselves
LSS system can be improved by employing for a long period of time. Typically, the best
certain judgments and intuitive reasoning. The price of the day occurs shortly after the open.
rules that follow can help you trade the system The system is designed to help you find this
successfully. trade. But unless you have the quick-wittedness
RULE NUMBER 1. Track the cycle every to place the order without hesitation, the market
day. To use the LSS system, you must keep track will likely get away from you, and your only
of the daily price data and the three-day cycle. alternative will be to chase the market—a risky
This also involves doing the calculations every strategy at best.
day. Without the calculations and the phasing of The serious money in the futures market is
the cycle, you cannot determine the anticipated made by those fortunate traders who aren’t afraid
range or other essential measurements for trading to fade the short-term trend. Trust the signals and
the system. Fortunately, the math is relatively place your orders before the prices are hit. In
simple. But the trader must be willing to put in this manner, your order will be filled and you’ll
the time to follow the market on a day-to-day be earning profits right from the start.
basis. The software or an HP-41 preprogrammed RULE NUMBER 4. Pay attention to the buy
calculator can help make this task easier. and sell numbers and envelopes. Although the
RULE NUMBER 2. Minimize commission buying and selling levels are clearly spelled
costs. With the trend toward discount brokerage out in the LSS system, the serious trader can
services, this shouldn’t be a hard rule to follow. enhance his trading skills by watching for key
Moreover, it makes sense. Why pay two or three support and resistance areas within the buy
times as much in commissions when you can get envelopes and sell envelopes respectively. When
the same service without paying the higher fees the numbers in both the buying envelopes and
of many brokerage houses? The LSS system selling envelopes match those of the three levels
generates, on average, about ninety to a hundred generated by the system, the trade is apt to be
trades a month. This translates into more than a a good one. What’s more, once the key support
thousand round-turn trades a year. A savings of or resistance is broken by having prices fall out
even one dollar per trade, therefore, will result of the bottom of the buy envelope or soar out
in another thousand dollars in profits that you’ll of the top of the selling envelope, the trend is
have to keep. likely to persist. At this point, you might do well
As a rule, you shouldn’t have to pay more than to use a stop-and-reverse order. Some traders
$20 per round-turn at today’s rates. And, depend make it a policy to double up and reverse when
ing on the size of your account and the volume, their position is stopped out. But you must be
you should be able to negotiate a significantly careful where you do this. Typically, the best
lower commission. opportunities for reversing occur early in the
An alternative to discount brokerage for the day. A violation of the buy envelope or sell
131
envelope is often a sign that the trend is going in the reverse occurs, look for the selling pattern
the direction of the penetration of the envelope. tomorrow. After all, now you have the market
RULE NUMBER 5. Don’t be afraid to take rising and the longs will have profits. To take
losses quickly when you are wrong. Good those profits, they will need to sell.
trades tend to go your way almost from the Typically, the larger traders prefer selling into
very start. Bad trades, on the other hand, have rallies. The morning bulge on the opening on the
a way of going against you and staying that next day typically signals the imminent break in
way. It won’t hurt to take a loss and then try prices. For buying opportunities, of course, the
to take the same position later if the situation reverse is true.
warrants. Otherwise, you run the risk of burying
yourself and overstaying a losing trade. This
is not to suggest that you shouldn’t add to a
loser. Under some circumstances, you want to
take another trade when the stops are being run
against you. Typically, despite the temporary
adversity, the market will soon begin to move
in your favor. But once you get behind and the
market doesn’t seem to want to go your way,
you should be willing to take the loss and get out
of the market. Never, never hold a losing—or
winning—position overnight. You could take an
occasional winner overnight, but never a loser.
There’s a reason why day trading is attractive:
safety. Don’t attempt to second-guess the market
by staying overnight. You are only inviting
trouble when you hold on to losing trades.
RULE NUMBER 6. Don ‘t trade too many
different commodities or financial futures. The
LSS system was designed primarily with the
Standard & Poor’s 500 contract in mind. It is
unlikely that it will work as well with other futures
contracts, although there is some evidence that it
has a good track record in the pork belly market
and the soybean market. One reason for good
profitability is high volatility. Unless you are
in a market that moves, you are going to have
trouble making significant profits. What’s more,
by following too many markets, you are likely to
miss an occasional trade. Good trading requires
concentration. The closer you follow one or two
markets, the better your trading will be.
RULE NUMBER 7. When the cycle seems
out of synch, push it ahead a day. The rephasing
is designed to help you find the correct cycle as
quickly as possible. But a simple rule is to look
for the reverse to occur on the following day.
For example, if you are looking to sell today
with the high made first and the low last, and
132
Current Publications of
Traders Press
12 Habitudes of Highly Successful Traders......... Roosevelt

A Comparison of 12 Technical Trading Systems Brorsen & Lukac
A Complete Guide to Trading Profits................... Paris
A Professional Look at S & P Day Trading.......... Trivette
A Treasury of Wall Street Wisdom....................... Coslow & Schultz
Ask Mr. Easy Language........................................ Tennis
Astro-Cycles: The Trader’s Viewpoint................. Pesavento
Channels and Cycles: A Tribute to j.M. Hurst.... Millard
Chart Reading for Professional Traders.............. jenkins
Cyclic Analysis: A Dynamic Approach to T.A...... Hurst
Dynamic Trading................................................... Miner
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Exceptional Trading: The Mind Game................ Roosevelt
Fibonacci Ratios with Pattern Recognition......... Pesavento
Futures Spread Trading: The Complete Guide... Smith
Gann for the Active Trader................................... Ferrera
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Harmonic Vibrations............................................. Pesavento
How to Trade in Stocks......................................... Livermore & Smitten
Investing by the Stars............................................ Weingarten
Investor Skills Training......................................... Ronin
It’s Your Option..................................................... Zelkin
Keeping a Cool Head in a Hot Market................ Roosevelt
Magic of Moving Averages................................... Lowry
Market Beaters...................................................... Collins
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Mind Over Markets.............................................. Dalton
Option Strategies for Sophisticated Traders........ Crask
Overcoming Seven Deadly Sins of Trading.......... Roosevelt
Pit Trading: Do You Have the Right Stuff?......... Bacetti & Hoffman
Planetary Harmonics of Speculative Markets..... Pesavento
P & F Charting: The Complete Guide................. Aby
P & F Commodity & Stock Trading Techniques.. Zieg
Precision Trading.................................................. Stevenson
Private Thoughts from a Traders Diary............... MacKay & Pesavento
Professional Commodity Traders......................... Kroll
Profitable Grain Trading...................................... Ainsworth
Profit Magic of Stock Transaction Timing........... Hurst
Profitable Patterns for Stock Trading.................. Pesavento
Roadmap to the Markets...................................... Busby
RSI: The Complete Guide..................................... Hayden
Short Term Trading with Price Patterns............. Harris
Stock Patterns for Day Trading............................ Rudd
Stock Trading Techniques (Price Patterns).......... Harris
Taming Complexity: Beating the Dow................. McNicholl
Technical Trading Systems................................... Patel
Technically Speaking............................................. Wilkinson
The Amazing Life of jesse Livermore.................. Smitten
The Complete Guide to Non-Directional Trdg.... Weber & Zieg
The Crowd/Extraordinary Popular Delusions.... Lebon & MacKay
The Handbook of Global Securities Operations.. O’Connell & Steiniger
The Opening Price Principle................................ Pesavento
The Taylor Trading Technique............................. Taylor
The Trading Rule That Can Make You Rich....... Dobson
Trading Secrets of the Inner Circle...................... Goodwin
Understanding E-Minis......................................... Williams
Understanding Fibonacci Numbers...................... Dobson
Understanding MACD.......................................... Appel & Dobson
Understanding RSI................................................ Dobson & Reimer
Understanding Spreads......................................... Dobson & Reimer
Wall St. Ventures and Adventures........................ Wyckoff
When Supertraders Meet Kryptonite.................. Collins
Winning Edge 4..................................................... Toghraie
Winning Market Systems...................................... Appel
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The Taylor Trading Technique

George Douglass Taylor

Traders Press, Inc

Reprinted 2007 by Traders Press, Inc.®

ISBN 10: 0-934380-24-4

Cover design and layout by Shelley Mitchell, editor.

Traders Press, Inc.

(800) 927-8222 • (864) 298-0222

Edward D. Dobson, President

George Douglass Taylor

Part I: The Taylor Trading Technique

Chapter 1 – How the Market Trend Is Made………………………... 7

Part II: Additional Material

Part III: Supplementary Articles

Linda Bradford Raschke

In this same column on the Short Sale Day we put in a Zero.

low and try to buy at or below it on our Buying

We buy a stock or future when we think it Short Sale Objective.

he needs it, therefore, he takes small losses by

column unit loss and more.

Day high made FIRST, is that had the rally been

opening, it is better to pass up the session and not in advance.

It may be that he would find himself in some • MARKET UNSETTLED indicates a

• (I) Opened up then sold down—no short

• (J) Opened up with penetration of 245

• (K) Opened down made Violation FIRST at

Look at the accompanying Seasonal Trend Chart, depicting the normal

his stock at this point—then wait for a reaction

Abbreviations used in trading

CD - closed down on day or previous close

exam­ined; the loss swings occurred 12 times on Example of Objectives made

place this sheet alongside pages for ready reference

at this writing it is electronics.

is a feature of the market prior to bull market on the rallies.

all selling and turn the stock up. The day of

B.A. “Bo” Thunman

concept of “in one day, out the next”. Examples

Copyright © 1979, 1987 and 1990 by George Angell

This book is published by:

be observed in a number of futures contracts—

How To Identify the Three-day Keeping the Book

Rephasing the Cycle indicator numbers = UP trend

this amount is 22.5, so we’ll round the penetration

have been traded. answer the questions requested by the program.

reaction numbers and the Decline, Rally Buying

12 Habitudes of Highly Successful Traders......... Roosevelt

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examined; the loss swings occurred 12 times on Example of Objectives made