Tag: action-reaction lines

Pitchfork trading, multi-time frame and the scaling factor

This is going to be an important lesson for your perusal. Please take time to read it carefully, it contains essential information to increase your trading efficiency.

We want to discuss today how to trade with pitchforks in multi-time frame (MTF) environment. But before all, one must understand why we are doing it. It is not a matter of confirmation higher / lower time frame, it is not a matter of being more comfortable pending on your personal constraints, it is about decreasing risk and increasing profitability!

Before we dive into the pitchfork trading, let’s understand MTF risk reduction strategy and how we can decrease the risk by scaling DOWN and increase profitability by scaling UP !

For this lesson, we are going to trade EURNZD. Let’s look at this recent price action on the 1-hour graph:

We have two moving averages, 25 and 100 EMA’s, and a smooth ROC indicator which does not care too much about which EMA you enter as a parameter. You have of course noticed a divergence with the ROC. You have even have drawn a kind of triangle of which escape yields a buy signal. However the red short term EMA is lower than the long one, so you may want to wait for a last confirmation with the crossing. Then you enter a trade, stop loss (SL) below recent low and target a 2.5 risk reward ratio (for instance):

Your risk is 1.75456 (entry price) – 1.74377 (SL) = 0.01079 NZD

Can we do better?

Let’s scale down to 15 min, meaning we switch the time frame of our trading software to 15 minutes. Same triangle but of course the moving averages have changed and the crossing is done when we exit the triangle! Momentum is positive and increasing. So nice!

So I can place an order on this time frame.

I keep the same target price and stop as before, but I have managed to enter at a much better price, and my RR is enhanced from 2.5 to 5.22! For 10$ risk, I might earn 52.20$ instead of 25$, more than double my profitability.

What about risk? Risk is now 1.75020 (entry price) – 1.74377 (SL) = 0.00643NZD, therefore a 41% risk decrease!!!!!

How did the trade go? Perfectly!

How does this relate to pitchfork trading? As you may remember, pitchfork gives us some sweat as we need to identify market structure, take the pitchfork, which may work or not during validation. So we don’t want to draw it on 1 minute charts! For the trade above, let’s see what can be done

Market structure is obviously a down trending one, but the mini-pitchfork did not make me comfortable so I had to hybrid it (more on that in future posts). Now I have multiple contacts with warning lines. I feel better and I see prices exiting the pitchfork at the same timing, more or less.

Now you can draw a new pitchfork as SP1 is fully confirm to be a local trough, and a SL can be placed below the lower MLH:

You can of course move your SL along the lower MLH to make a trailing stop!

Your risk is 1.75450 – 1.74436 = 0.01014 NZD

Can we improve?

Well yes! We can keep the purple pitchfork but on 15 minutes, you need to find a new trigger pitchfork (green one) with new market structure at that level:

Place buy order on top of the exit candle. Now your RR has hiked from 2.5 to 9.57!!!!

Your new risk is 1.74770 – 1.74436 = 0.00334 NZD so a 77% risk reduction.

Of course same trade turned out the same

Whatever trading system you use, you can get the same benefit from scaling down.

Now let’s look benefit of scaling up:

On the 4h time frame, once we get a similar golden cross between the short and long EMA’s, we are allowed to scale up:

After the golden cross, your trade is hugely profitable, so you want to secure some profit. For the remaining of the line, you may want to target extra profits. Place your trailing stop below the red average for instance and let your profits run for as long as the market wants.

In this particular case, it did not work but my RR was around 8.

That’s it for today. The example was with forex today but it is of possible to use this strategy on 5min/1min time frame or on crypto and you could get huge RR’s (>30) from time to time. Enjoy.

And until next time, trade safely!

Pitchfork generalization – introducing the action-reaction lines

Trading with a pitchfork requires selecting three consecutive swing points (trough, peak, trough or the opposite) and then draw the pitchfork and validate it by checking it describes accurately price action in the past, in order to guess price action in the future (aka reaction).

Starting from market structures (see previous post), there are some recommended pitchforks to be used, but sometimes unfortunately the warning lines do not confirm the validity of the pitchfork. There exist hybrid pitchforks which we will study in an other post. For now, we are going to discover the action and reaction lines.

In theory, any price action in the past has a symmetric price reaction in the future, the mirror being the called the center line. Center line can of course be the pitchfork median line you have just drawn, it can be also a high-to-low line (see previous post) or it can be a multi-pivot line, i.e. a straight line that contacts at least 3 swing points (peaks, troughs…), what traders call a slant support or resistance line. Horizontal lines are a non sense for this study, since they only deal with price, and vertical lines also as they only deal with time, but studies show this is not (or no longer) relevant to today’s markets.

Theory continues by saying that any swing point in the past could have its image in the future. To be accurate, the action line passing through a swing point (peak or trough) in the past can be mirrored in the future, and there is a strong chance that a new swing points will sit on this line.

Let’s stop the theory and study an example. We are going to trade RNDR crypto for this example in the 1h time frame.

At this point in time, we have identifed market has bottomed out after a strong downtrend structure. As recommended I have drawn a mini pitchfork of which slope does not make you very comfortable buying this market. I will keep only the median line and will start drawing parallel lines to this median.

The median line is now represented with dotted line and I have drawn parallel to the median that go through peaks and troughs. You have to try, it is very easy! Doesn’t it start looking like a pitchfork with teeths separated in uneven way?

Next exercise is simple. We need to note the distance between the action line and center line (the mini pitchfork median line) and draw the symmetric lines on the opposite side of the median at the same distance!

I have drawn the first reaction line in red color. You will want help by drawing a segment to measure distance and move it or duplicate it to get the right distance to reaction line. Notice that trough 1 is now inside the new ‘pitchfork’ and it is a better looking buy signal. Notice also how this line is perfectly re-tested by the market after going above, which gives validity to this drawing.

We need to the same with other reaction lines! There you go:

Now let’s look at peaks and troughs

I have selected this chart at random, trading it on the fly, I had no assurance this would be a nice example! Look again! Peaks in the past have yielded reaction troughs on the reaction lines, troughs in the past have yielded reaction peaks on the mirroring reaction lines. True enough there are new peaks and troughs that were not anticipated, but remember markets have fractal structure, you could probably have found them by analyzing other time frames!

Please not ealso the accuracy of reaction lines decreases after a dozen re-actions lines. When you have identified a new market structure, better draw a new center and re-do the exercise!

Starting from last 2 center lines, we should have up-sloping and down-sloping action and reaction lines, of which the intersect can yield the exact position of a peak or trough in the future. Which we will see in an other post.

Until then, trade safely!

Market structures transitions. Introduction about mini pitchforks

I hope you had some thoughts about the market structures, how they are built and you understand why there is no need to have more figures. Each structure requires the use of specific pitchfork for an efficient trading. But first solution to the proposed exercice. I hope you had fun and did some drawing on a table, result should look like that:

On second thought, there may some transitions missing here. I will let you find out…

There are a few points to remember from this study:

  • When market is is consolidation mode, it can consolidate even more (the circling back for bottom figure)
  • A trending market can move into consolidation without notice
  • Reversal structures don’t end up in flat market

Let’s move now to mini pitchfork subject. On the following gold chart, I selected 4 swing points that describe an unstable market. If you refer to previous post, I can use a mini-pitchfork to get a buy signal.

As you can see, I have selected minor peaks and troughs on the path from SP2 to SP1. I can’t say it is the most relevant choice but if you look at warning lines, prices are indeed stopped or pause before continuing their path.

On the following example, it is not so obvious, but I used the extreme price at the end of wicks to create my pitchfork. An other way to trace it is going down to lower time frame so you get bigger waves….

Sometimes it is not possible to identify minor peaks or troughs, so we work it out manually. You may draw warning or you can attemps using the pitchfork tool to overlay your DIY pitchfork: select first SP on the HL line, take SP2 on upper line, and SP3 on lower line and it should do the trick

The way to use mini pitchfork is similar to other pitchfork. We will see many examples in future posts.

Until then, trade safely.

Pitchfork trading: selecting the right model!

In previous posts, I have made a quick introduction about all pitchfork models, from the basic to the sporty ones and explained the buy / sell signals and how to spot potential targets in terms of price and time. We will have to dig much further into this, be warned pitchfork trading is not just a tool, it is a special art with long training process!

This post will tell you which pitchfork model to select based on market configuration. Previous post highlighted you need 4 swing points that form a falling wedge to identifiy a buying opportunity. But wait, market does not always show this configuration!!!

Gold in above figure does not show a falling wedge, it is more a horizontal consolidation zone, right?

Exercise!!! Given we are looking at a set of 4 swing points, how many figures can we build?

The answer is 6 but I will let you think about it :-))))

In the case, drawing a basic pitchfork yields this:

This example being chosen randomly, it looks not too bad at first sight. SP1 is not sitting on median line meaning market strength and price exit nicely from the pitchfork to hit the hagopian line. But wait, we missed the falling wedge requirement!!! So the analysis is not valid!

For such configuration, the median slope is usually too high (in absolute value) to be of any trading sense. This is why you should change the configuration to Schiff mode.

The chart now looks like this

See the difference. SP4 has been moved vertically down to middle height between 3 and 4. Now we see that SP1 is below the median, then prices have gone up, hit the MLH and … are most like to revert down to median. I have tested and this scenario is much more likely than the previous one.

Now Let’s look at an other example

Ouch, it hurts. Can’t do anything with pitchfork, right? By the way, this is one of configuration expected from the exercise :-))

Drawing a basic pitchfork won’t give any buy signal before long long time :-))))

So first we draw an original pitchforlk (not Schiffed) but starting from last swing point

Then we extend the lines

SP1 is of course perfectly located on the median line. Now you just need to wait for prices to get out of the pitchfork.

In the next post, I will show the 6 configurations and which pitchfork applies in each case.

In the meantime, trade safely!

The boring market report April 7th 2021

The so-called pandemic continues to weigh on some parts of the world (e.g Europe) while some countries like US or Russia seem to see the light at the end of the tunnel! We will therefore continue to be driven by good news but also possibly by new lock-downs as politicians find it is convenient to keep people under control … until people awaken!

Bitcoin is still floating at high levels. Many expect a sharp correction to 40k or even lower, which is not impossible as can be seen in the short history of Bitcoin. Others still point at even higher targets.

I have been a bit too optimistic as can be seen from chart below:

After going through reaction line, there was just no resistance but the problem is volumes did not pick up immediately, resulting in this range bound market. As long as Bitcoin hovers over green average, no worries, I am not changing my position.

Tezos reached my objective almost on time, landing me a cool 40% profit! Nothing to be proud about that. Trade is not over, the volumes, as opposite to Bitcoin, are picking up and reactions lines will most likely be broken for further up move.

Nasdaq has resumed its uptrend in strong volumes. The new objective is 14130 points. A divergence with MACD histogram tends to confirm new all time highs are coming. Before going full speed, just spend some time a weekly chart below: no major correction since early 2020, plus a MACD with stratospheric value and a divergence with MACD histogram indicates some trend change in the future (remember it can be down or just an horizontal wandering)

I was kicked out of the Moderna trade for a small loss. What happened?

MRNA had made a bottom on orange reaction line (blue circle)and started an up move after down slopping the blue reaction line. Volume was low but I thought divergence MACD and its histogram would support me. Market thought otherwise, volumes did not pick up and MRNA even crashed the orange reaction line, which told me to get out even before my stop was triggered! See you on next reaction line, maybe…

That’s it for today. Until next time, trade safely!

Tezos – new departure to the moon?

I possibly mentioned Tezos earlier. Maybe I had not drawn the action and reaction lines. As can be seen from graph below, the trend is still up, Tezos has been taking some leisure time around the reaction line and seems to be going up again. You can draw triangles if you wish, but note there is no special scientific theory backing up such figures!

On the downtrend from 5$ to 3$, of course volume was big, it has decreased a lot but stays at high level. This is why we want to stay with the major trend which is up! Divergence between MACD and its histogram also points to same conclusion. The next reaction line is quite far away, objective could be reached by end of March if we are lucky and market is strong enough!

How do I play it?

I already have a position that I bought at 2$ (green arrow) and I halved it at 5$ (objective was 4.57$). New objective is 6.23$, 40% on top of current price with a stop at 3.70$. So I am buying half a position to restore one full line, half a line invested for as long as long term trend is up, the over half is trading to increase profits. The stop applies only to half my position.

That’s it. This is no recommendation of course. Until next time, trade safely.

Moderna – could the vaccine make your money?

Whether you are anti-VAX or not does not matter, money does not smell! Let’s look quickly at Moderna chart.

My system rings the bell, saying there might be an opportunity today. The 9-day average is point up, as well as the 48 which is still bullish. Only the blue 18-day is still showing negative slope.

The objective (drunkard theory) is 200$ and as can be seen from reaction line, there is zero resistance in the near future. Nothing seems to prevent reaching the objective. Stop of course at 126$

But wait? MRNA is down 7% today… it it? That’s good because distance to stop was big at close yesterday, meaning your position should be small, whereas today we can have either a bigger line or stay with small line but with a better risk/reward ratio!

This is no advice of course. This is how trading goes, we take the bet, and if we are stopped out, then it’s life, we cut the line and forget about MRNA.

That’s it. Until next time, trade safely!

Short Tesla and Buy Ferrari?

Tesla may have gone up pushed by a whale and bulls have bought hysterically the stock. But it was stopped… by a reaction line! Just kidding of course, but it is worth noting that the action-reaction theory works whatever market conditions to predict somehow where market hiccups or changes direction!

Market fundamentalists estimate the real value of Tesla to be around 240$, meaning it was somehow well priced beginning of July before acceleration. Shorting Tesla is an interesting bet but be careful, trend is for now up and very strong, volatility needs to decrease first so it can go up for a downtrend!

No need to say I am very bullish on Tesla in the long term but they need to produce and sell more! Back to basics!

Ferrari on the opposite did not benefit too much from recent rally, a small 50% gain! Because of small volumes and many gaps, I am working on the 3-days graph! Stocks still bumps on random walk lines and Ferrari was also stopped by a reaction line. Ferrari is a totally different business: you order one now for 100k$+ and you will be delivered in 2022! The correction is likely an opportunity to get extra stocks if you can not afford the car itself (even second hand units can be more expensive than the brand new ones!)

I will follow this idea in coming weeks: short Tesla and get more Ferrari stocks with the gains! Careful! Market needs to be re-assessed with each new data and I may totally change my mind. Market is not ready for now.

That’s it. Until next time, trade safely!

July 27th 2020: Will S&P500 go through?

S&P500 is stuck behind the reaction line. It can go through or slide down along the line. Again, see how reaction theory does not predict where market is going, but tells you where market may be in trouble, and that is more than good enough! Just have a stop at 3040 and do whatever you want with your day!

S&P500 market analysis June 15th 2020

S&P500 seems to continue sliding along reaction line but, as you can see, the 3 moving averages are still up, more or less for the red one.Markets may decide to move up again, we will see. A bit too early to to say markets are resuming the down trend. Objective 2680 unchanged but unlikely for now!

What is happening? It is all about COVID-19 again. The epidemic is more or less, rather less than more, under control. There are still hundreds of new cases in most countries every day, even those who have completely stopped the containment measures. If people wear a mask, of course, odds are in their favor they will not catch it. But what about all these demonstration throughout the world? Nothing is really under control, safe vaccine is long way before being available. It is likely markets are going to jump up and down a few times along pandemic making trends or moving sideways!

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