Tag: trading | Cozy Dragon Trading Club

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!

Pitchfork validation: your most important work before trading!!!

Pitchfork trading is not that tough providing that rules are followed. So far we have covered market structures, how to get a signal from pitchfork, which pitchfork to select based on market structure, and what to expect by knowing about possible market structure that are coming after last pivot or swing point has been confirmed by a signal. Please review previous posts, signal is always given by the exit of a valid pitchfork. But wait… what is a valid pitchfork? This is what we are going to answer in this post.

Let’s start with a story though. When traders say that they trade ‘price action’, it is a non sense, they are trading price reactions. Supports for instance are about price hitting same range of price a few times in the … past! Resistance is the same. A moving average tells you the average price in the timeframe between now and a few days or units of time before. It is expected that prices will bump again or react in the future on these same levels of the past. And why would prices do that?

Reason is self fulfilling prophecy as many traders expect these levels and play accordingly. So they can manage, some with good level of success. But it does not work when market is trending or shows more erratic behavior. Also predictions come in terms of prices, not time, which can be an other issue in flat market. The random walk strategy (see other posts) addresses some of these concerns in adequate manner.

Pitchfork trading takes the problem out of the box. We know there was some market action in the past, which can be shown with market structures. Newton has stated that for each action, there must be a reaction similar and equal. Does this apply to market? Market structures or fractals (by Bill Williams) indicate there is fractal nature or some ‘beauty’ like things in nature. Note that we observe the market in some naive way, not an in the box thinking. Markets are free sort of to move the way they want, but if we push them too much in one direction (pivots), they are likely to revert and move in opposite direction relaxing the energy accumulated in first move. The moves are not (always) equal in price movement, because energy released is based on time, so duration of movement.

Having said that, you will read in many books or other websites you should draw a new pitchfork as soon as you get a new swing point or pivot.

How many of you would draw that pitchfork after, of course validating SP1 with a mini pitchfork and say ‘fine, looks like I can put a Target Price on the median’ maybe at the intersection with some Fibonacci levels???

This pitchfork is just NOT validated!!!! Look, price even gets out of the pitchfork a few candles after your entry (Assume for now you are reasonable and have put a SL below SP1). Let’s see what happened next:

Maybe you managed to take some profits but prices never reached the median. And maybe you are going to short, because prices are supposed to go below SP1 in that case because they did not reach median line? Wrong again:

What happened? A pitchfork is validated if it is tested before going forward (so it fails when prices go below) and pitchfork and its warning lines describe accurately the price action (in the past!)

Here we see some ‘impacts’ but major peaks and troughs are not sitting on pitchfork or warning lines.

Can we improve?

See? I now have major peaks or troughs on the pitchfork itself extended to the past. Pitchfork is now re-tested, and no surprise prices go to median and reverse. There might be other possible or even better solutions. But look at the graph again: price oscillate nicely over either the median or MLH’s, it gives a good feeling you are in sync with the market!

What did I do? I moved the anchor (SP3) of my pitchfork to a previous trough, and I am getting a less sloppy pitchfork, with more trading value. I could even have move the anchor to some unknown price area, thereby entering the realm of hybrid pitchforks. For another time!

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!

Pitchforking as a trading system – The basics

Andrew Pitchforks are not just a ‘channel’ type, they are a very accurate trading and market anticipation technique with no equivalent. I will focus today on the basic usage, laying out a basic pitchfork on a chart, getting a buy or short signal, getting confirmation, placing stops and estimating some target areas. Big agenda, isn’t it?

Let’s start immediately. Open a chart and select the last 4 peaks and troughs that must alternate. If you are not sure, you can use fractals or oscillators that go above and below zero, even average. Your eyes are also a good indicator :-))) Don’t worry about having the ‘right’ pivot points, each set of pivot have a story to say and Dr Andrew never put rules to select these points. We will see in other posts how to validate a pitchfork, that is more advanced discussion.

As a beginner pitchfork trader, make sure you the 4 pivots you selected form a wedge, like this:

Note the numbering. Last pivot is always called for 4.

Now we can draw our first pitchfork by selecting pivots 1, 2 and 3:

Pitchfork is made median line, 2 median lines high (MLH) parallel to median lines. Line 1-3 is called Hagopian line. Note that both median and Hagopian line are slopping down.

Buy Signal. The basic buy signal is when prices (a full candle) exit the pitchfork. Easy!

Confirmation After exiting the pitchfork, prices usually retest the MLH, which can also be a good entry point.

More secured entry An other possible entry is after breaking the Hagopian line. Note that it can be retested as well before price actually start going up.

Stop Loss – Assume pivot 4 as a good level for stop loss for now

Target Price Case 1. When price don’t reach the median line like in our case, it is expected that prices will go back to pivot 3 level with 80% confidence, and possibly much higher.

Target Prices Case 2. We draw parallel lines to median line. Like this:

Then we draw a new pitchfork by selecting pivots 2, 3 and 4.

That is the trick now! Assuming both pitchfork are valid (more in future post), the intersections of MLH, medians and warning lines are potential target prices, defined with also a timing!!! You can say price should reach this price by this time wiht pretty good accuracy.

Let’s look into the future:

As you can see, price went up though it did not reach pivot level (80% probability only!). I went beyond the median anyway. Because pivot 4 was not a the median (remember the hybrid pitchfork?), intersections are not accurate here.

That is the basic story. Hope you noted the assumptions. We have to study what to do when pivots do not form a wedge, how to validate a pitchfork, etc, etc…

In the meantime, please trade safely.

How long does it take an average bloke to power on a light bulb?

You might think this post is about joking, maybe not so, but I will attempt to make you smile. We are living in a world that has gone insane because not only people are not thinking any more, but they also let others think on their behalf. As I have been advocating many times on this blog, thinking by yourself will let you see the light! Let’s go through many examples of current lunacy.

Let’s start with mainstream economists. They are usually the laughing stock of deep thinkers. Now they are telling us that debt, whatever the size, does not matter any more because the cost is so low that the interests needed to be paid back are smaller than 20 years ago. Yeah right! But are we not supposed to pay back the capital at some point? And what if interest rate go back up? (because they will!)
Ecologists are a cute little specie without brain and absolutely zero scientific or human psychology knowledge. They keep repeating what a group of idiots called Intergovernmental Panel on Climate Change (IPCC ) under United Nations Organization are saying. Those guys have established a correlation between CO2 level and Climate warming. It does not take long to look at raw data and see that this correlation does exist, but only from time to time! Data from last 20 years (average temperature has not gone up) is therefore ignored. Instead they claim that a 2°C increase by 2100 will be a total disaster for the planet (most of us will not be there to verify that claim anyway) and it legitimizes the attempt from Bill Gates to cool the climate by throwing chalk in the atmosphere, thereby …. choking (pun intended) in the process any existing life in that area. Totally insane. Why 2°C? Why not 1.5°C? or 3°C? Are oceans really going to immerse vast land areas (Archimedes would laugh at this idea!)? Relying on wind on solar energy only, will people accept to have electricity only during windy or sunny weather?
Green growth is also a chimera. Electric cars don’t do more than fuel powered cars, so when you switch to ‘green’, you create jobs for electrical car manufacturers but delete many more with traditional care makers. Negative impact again!
The pandemic and vaccine strategies clearly show how quickly our politician have reached burn out status due to smaller than average number of neurons in their brains! Imagine a vaccine based some technology born in the 1960’s but never approved for commercial usage, being suddenly approved for huge clinical trial…. It should make you wonder and investigate. The mRNA can modify your DNA. You are not eating transgenic wheat, right? And you want your genes to be modified without the knowledge of the impacts in 2 or 5 years? You are NOT a conspiracy theorist when asking questions, whatever they say!!

If you don’t know how to ask questions, go back to history and read old wisdom books. The old Chinese book ‘Tao Te Ching’ will definitely ignite brain power, then continue… there are thousands of books to read. You will also find that strong limbs, biceps, triceps, … muscles are best tools when coping with stress wherever it comes from, some Daoyin (Chinese) movements will help you think more clearly too! You may also humbly read again previous blog posts such as this one about challenging assumptions…

How long will it take you to switch on the light bulb? That is the question!

You may end up with different conclusions, those are mine:

Dismantle those idiotic and useless organizations such as IPCC mentioned above, but also IMF, WHO, WEF, EU, … because they are led by insane people.
Dismantle Facebook and alike which make you waste your time without being paid back, and prevent you from thinking by yourself!
Spread sound culture, always get back to basis when needed. Have a good relationship with money
Prevent finance from playing with money or our savings. French Bank Societe Generale currently wants to issue a product made of a bond and an option, all secured by Tezos blockchain. When it all fails, they will blame crypto technology!!
<add your conclusions in the comments!>

Let’s finish this post by a look at Bitcoin chart. Yes Bitcoin is possibly a kind of Ponzi scheme where new entrants are paying for those who want to get out. But, by blaming Bitcoin and other crypto currencies, the crypto haters make buying opportunities for open minded traders who are trading, not investing in the long term (HODL). For as long as crypto’s are allowed, then there is profit to be made!

My red objective was reached (64891 vs 64808 calculated!) even before reaching the reaction line. Hidden Divergence with MACD, moving average still pointing north, and more than average volume points to a recovery in coming days but we have to be careful. Closure under 52k and I am out for the short term. On the longer term, I am out under 46k.

That’s it. Until next time, use your brains to 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!

Static versus dynamic, investing versus trading

In many of previous posts, I highlighted the necessity of asymmetric trading ie. a reward/ risk ratio that is as big as possible. Even in today’s very complicated markets, with millions of news per minutes, the random static trading model that I have shared is working beautifully. It is is static because it only based on an ‘observation’ period. The dynamic counterpart is about analyzing how a stock or index behave over an observation period with respect to a specific moving average, here we enter the realm of Laplacian distributions, too complicated to explain on a blog but the news is that I am progressing on my eBook writing and I plan to release it by end of the year! It will be extremely expensive but definitely worth it! Will prevent you being on the wrong side of markets!

Asymmetric investment is a totally different job. You don’t rely only on mathematics to make your decisions. You need to have a vision, anticipate what may happen, … Very few services are capable to do it! And you can see it through the performance of investments funds, most of them never beat index performance. Investing on index fund (what I call static) for next five ten years is probably the worst idea you may have these days. Economic crisis has barely started, though you already know for sure some good businesses that are now worth zero because they can not open to customers. So what should you do for long term? I can not help you too much here except recommend NoHypeInvest (click on picture!). I get no commission!

They share a lot of advice for free and if your portfolio is big enough, it is worth subscribing to their premium service. It is not for tender at heart, they are looking for 3 digits gains over a few years, even if they are true only 25% of the time. As explained earlier, this means you can have a long series of loosing trades, don’t blame them, you are warned! They are however capable to explain the key elements sustaining their reasoning.

Speaking of of vision, take a look at Chris’s forecasts for the coming years. Don’t say he is conspiracy theorist, and look at all laws being voted in your country and you will see he is right… unless we, folks, do something!

OK, man, but what are we doing? It is the same subject I called for you to think multiple times on this blog. Open your brains and don’t take every bit of news for granted. When you have a Facebook account, FB knows everything about you, even things you don’t know yet. Same for Google. They have started to decide what you can say, what you can not say, …. and they sell the data you have given for free for huge profits. So it is time to either leave or scramble their data and make it worthless: change you GPS positioning, address, name, encrypt data, … In Google database, I am weed and alcohol addict, looking at pink elephants in Sahara desert right now, which of courses gets me some hilarious advertisement!

Those looking for alternatives software or websites can look here for instance

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

[Beginner series] Trading with a pitchfork – Part 1

We begin a series of posts dedicated to newbies in trading. I wrote a few times, there would be no such posts, but of course I will take radically different approaches from other web sites. Again, I only target methods of trading that makes sense for those with small portfolio, so there is no need to spend too much time on candlestick theory other than a few key information.

Trading with a pitchfork sounds weird, but it is one of easiest and most reliable and profitable method… providing you know what you are doing. The second part of the sentence is exactly what is missed on some popular sites! Pitchfork trading is usually compared to channel trading, which it can be, but that is very poor usage of this wonderful tool!

Before we introduce the tool, you need to first major in peak and troughs analysis. Don’t go away just yet, it is pretty straightforward with a little practice. Peaks are … peaks and troughs are … just troughs! The major ones are usually easy to identify!

Let’s start immediately with an exercise. Can you point peaks and troughs on this Netflix chart?

Maybe you ended up with this, peaks with green ‘P’s and troughs with yellow ‘T’s

If you did not end up with same collection of peaks and troughs, that is fine. We are working with random system, you are allowed some deviations!

There is one important rule is that peaks and troughs must alternate: P – T – P – T – ….

Is there any way to automate the discovery of peaks and troughs? Answer is yes, and there exists more than one. But in order to respect previous rule, you will sooner or later meet some ghosts!

One way to to identify a trough (same for peak) is by using a two steps approach, first one can be automated easily, second one is more complex!

First step is to identify short term ‘swing’ points (SP), generic term for peak or trough. A swing point for a trough is simply a day where the low of the day is surrounded by two higher lows on each side. Example:

A medium term trough swing point is surrounded by one higher low short term swing point on each side:

Easy, isn’t it?

The medium term swing points will be the first ones of interest when playing with pitchforks.

Before I let you think on your own, remember the rule above, swing points must alternate tops and bottoms. But sometime, you will be missing a medium term swing point with the proposed method, so you know there is a ghost swing point!

Next time, we will look at how to anchor pitchforks to swing points

That’s it for this post! Comments are welcome!