Clif Droke
©2002 - 2010 Publishing Concepts

The 3-Day Trading Cycle  

Experienced short-term traders of gold, gold stocks, and other commodities may be aware of the 3-day cycle method of trading, otherwise known as the "book trading method."  This unique and highly profitable trading technique was explained by George Douglass Taylor in his now classic book, "The Taylor Trading Technique." 

Essentially, the 3-day cycle for traders in Durban Deep can be used to capitalize on frequent trading characteristics of this stock and others in the gold mining sector on a day-to-day basis.  Our work in following gold stocks such as Durban Deep (DROOY), Kinross Gold (KGC), Pan American Silver (PAAS) and others has allowed us to observe and capitalize repeatedly on this most amazing short-term cycle, which manifests itself throughout the trading weeks.  We have observed that oil operated on essentially the same 3-day cycle for most actively traded gold stocks (including GLG and MDG), although there may be some exceptions to this rule.  Therefore, we will use this chapter to provide a key outline for traders interested in trading primarily Durban Deep using the 3-day method discovered by Taylor.

The 3-day "book trading" method is fairly mechanical in nature in that it calls for a predetermined trading posture on each of the three trading days along the cycle.  Specifically, the first day of the 3-day cycle is the "buy" day, the second is the "sell" day, the third is the "sell short" day, and the following day starts the cycle over again with a "cover and buy" again.  This method is useful for those who can afford to watch the tape closely throughout the day and are dexterous enough to catch the day's highs and lows.

The first day of the 3-day cycle, the "buy" day, is typically a trading day characterized by early weakness followed by developing strength later in the trading session.  This is the day in which the "book trader" watches the tape to find a good entry point for making long commitments in whatever gold stocks is being followed.  After a low has been established according to the rules for tape reading, the book trader makes his move on this day and buys, always watching for sudden reversals along the way that may undo his position.  Provided nothing bad happens to interfere with the trade, the book trader carries his long position into the next trading day, the "sell" day.

The second day of the 3-day cycle, the "sell" day, is typically a day of strength.  This is when the book trader looks to unload his position purchased on the previous day, the "buy" day.  Again, the trader must watch the tape constantly in order to determine the appropriate exit point based on support and resistance levels and volume of sales.

The third and final day of the 3-day cycle is the "sell short" day.  Assuming the stock sells for over $5/share, it can be sold short on this particular day of the cycle.  Prices are often strong in the early part of the trading session on this day due to carry-over strength from the previous "sell" day of the cycle.  However, as the day progresses the trader will begin to notice in most cases that weakness is setting in which becomes more pronounced as the end of the day nears.  This is when short sales are executed, being sure to follow them up of course with a conservative stop-loss order.  The short position is carried over into the following trading day, the "buy" day, which begins a new 3-day cycle.  As noted earlier, the first day of the cycle tends to be weak early on with prices often declining below the previous day's closing value, which is when the trader looks to cover his short position.  Thus we have the completed 3-day trading cycle.  

--Clif Droke
clif@clifdroke.com