Traders abandon the Taylor method because they expect the cycle to work perfectly. It does not. Approximately 40% of the time, price fails to penetrate an objective. Approximately 35% of Buying Days result in Low Violations. Limit day moves arrive without warning.

These events are not exceptions. Taylor explicitly states they are a very definite part of the method as a whole. The trader who masters the standard cycle but falters here will lose more in the exceptions than he gains in the rules.

Many of the most profitable moves take place from failures to penetrate at both tops and bottoms. You have got to recognize this action and trade on it.

Prerequisite: This guide assumes you know the standard 3-day cycle. If you have not read The Book Trader's Log, start there. The rules below are modifications to the standard method, not replacements.

Buying Day Low Violation — The False Move

A Buying Day Low Violation occurs when the Buying Day low is penetrated on the following Selling Day, creating a lower low. It is caused by a Buying Day low made LAST ( ) with a flat or weak close — indicating short interest is in no hurry to cover.

Signal Flag: Violation Trading Rules

  1. Wait for the Violation low to be made FIRST (early in the session)
  2. Buy at or near the Violation low — this is often the best buying opportunity of the cycle
  3. Primary target: Sell at or through the Buying Day Low (recover the false move)
  4. Extended target: 1/3 to 2/3 recovery of the Real Decline (D column unit)
  5. Maximum target: Buying Day High (if rally is very strong — do not expect this)
  6. Sell out before close — do not hold overnight on a violation recovery

The Violation is a false move — engineered to shake out weak holders. It is caused by short covering plus inside support buying. The rally that follows is usually fast, active, and wide-spread as shorts cover in haste.

Risk: If you buy at the first Violation low and a lower low is made, do not panic. After 2-3 days of decline, a rally is probable from either low. Another small decline should not upset you. However, if the rally fails to reach the Buying Day Low, sell on any rally and take what profit is available — a more serious downtrend may be developing.

Selling Objective Change

When a Violation occurs, the normal Selling Objective changes:

ConditionSelling Objective
Normal cycleBuying Day High
After ViolationBuying Day Low

Sell long stock at or through the Buying Day Low on any rally. Do not hold for the Buying Day High — the rally may fail.

Short Sale at Buying Day High — 4th-Day Exhaustion

Normally, short sales occur on Short Sale Day (Day 3). Occasionally, the ideal setup arrives on Buying Day (Day 1 of the new cycle) when the high is made FIRST and penetrates the Short Sale Day high. This is the 4th day up instead of the 3rd — maximum exhaustion.

A preceding Buying Day Low Violation causes the decline to run one extra day. The rally therefore runs one day later. The result is a delayed high with even greater exhaustion.

Signal Flag: 4th-Day Short Rules

  1. Sell short at or through penetration of the Short Sale Day high
  2. High must be made FIRST on Buying Day (usually after an up-opening)
  3. Cover SAME DAY — always, no exceptions
  4. Cover on the first decline, near the reaction low, or on dullness
  5. Do not buy long after covering — wait for the proper Buying Day setup
Critical: You should not short a stock at a point where, in most cases, it is wiser to be long. Buying Day is for buying, not shorting. Cover protects profit; you can re-short on the proper Short Sale Day if needed. A Short Sale made on the high of Buying Day when it is made FIRST should always be covered during the Buying Day session, no matter how much lower the stock might look.

Failures to Penetrate — Trading the 40%

Top Failures (Bearish)

When price fails to reach the expected high:

  • At Selling Day High: Rally from Buying Day low fails to reach Buying Day high. Activity dries up at the top; the market goes dead. Action: Sell on this rally if long, or sell short as the decline starts.
  • At Short Sale Day High: After an up-opening, rally fails to penetrate Selling Day high. Action: Do not short into this weakness. The market may hold and close up — high made LAST indicates further uptrend.

Bottom Failures (Bullish)

  • Higher Buying Day Bottom: Buying Day low holds above Short Sale Day low. The decline falls short of reaching the previous low. Action: Buy at this Higher Bottom. It indicates support and forecasts a larger rally.
  • Failure to Violate: Expected Buying Day Low Violation does not occur. Price holds above Buying Day low. Action: Normal Buying Day rules apply — this is a stronger indication than a Violation.

Forecasting Failures from the Close

Close TypeForecast
Weak close on Buying DayLower opening; failure to penetrate top
Weak close on Selling DayFailure to penetrate Short Sale Day high
Flat close on Short Sale DayBuy Under next day (lower prices)
Strong close on Short Sale DayHigher Bottom next day
Strong close on Buying DayPenetration of Selling Day high

Limit Day Moves — The Storm

Limit day moves — when a market locks limit up or limit down for multiple consecutive sessions — cannot be anticipated. But the rules keep you positioned correctly when they arrive.

Downward Limit Moves

Begin from comparatively high prices after an extended uptrend. Three possible starting points:

  1. Selling Day Objective — you are already out (sold long). You miss the move but preserve capital.
  2. Short Sale Day Objective — you are short. You stay in (though you may not be able to get out).
  3. Buying Day High Made FIRST — also a Short Sale objective. The apparent lack of rally proves the move is extraordinary.
Capital Preservation
Rule #1
Being out of the market at the Selling Objective is one of the fundamentals of speculation — to protect your capital and be in a position to act on a more favorable opportunity when it comes along.

Upward Limit Moves

Begin from comparatively low prices or after a long slow rise. Entry points:

  1. Buying Day Low — if the turn comes here
  2. Buying Day Low Violation (made FIRST) — if the turn comes here
  3. Short Sale Day Low — from severe sell-off, fast rally then decline

The setup: market appears weak, bearish atmosphere, too many unwise short positions built up, specific news catalyst, and a technical position ready to be influenced. The manipulator starts this move only after a strong technical position has been built up through too many unwise short positions.

Key Rule: On a Buying Day when a stock or future shows no tendency to rally and looks like it will close flat — that is, the low and close at the same price — it usually goes lower. This is often the last warning before a limit move.

Psychology in Fog

Fog trading requires the most discipline because it feels wrong. Buying a Violation means buying into apparent weakness. Shorting a 4th-day high means shorting strength. Trading a failure to penetrate means betting against the obvious trend.

The standard cycle is comfortable because it confirms your bias. Fog destroys bias. That is precisely why it is profitable — the crowd is on the wrong side.

  • Do not abandon the method at the first Violation
  • Do not chase a limit move after it has started
  • Do not short into a failure to penetrate at the top — wait for the decline to start
  • Remember: ~40% failures means two out of five cycles will break. This is expected.
Return to base: For the standard 3-day cycle rules, see The Book Trader's Log. For trend area context that helps forecast when failures are more likely, see The Trade Routes.

Related Guides

The Book Trader's Log

The complete 3-day cycle: Buying Day, Selling Day, and Short Sale Day rules with signal marks.

Intermediate

The Trade Routes

Trend areas, D/R column tracking, and when to expect penetrations versus failures.

Intermediate

The Lookout's Post

Discipline, tape reading, and the psychology of trading against the crowd.

Intermediate

Episode 25 — The Operator's Ledger

The story of George Taylor, the mechanical 3-day rhythm, and the discipline that separates survivors from casualties.

Sea Shanty