Trading for a Living: Trending with Integrated Pitchfork Analysis
By Dr. Mircea Dologa, MD, CTA*
Posted: Aug 14, 2009
Without a precise strategy, there won't be any profitable trades (refer to the article "Day-to-Day Business Operations When You Trade for a Living". The trader should be aware that determining trading strategy comes after the other two essential trading stages -- the psychological and risk and money management.
From the available trading arsenal of an astute trader, we can think of three trading principles that can be the "bread-and-butter" of profitable traders: Trending, sideways movements associated with resistance and support, and volatility.
It goes without saying that the space in this article won't allow us to describe all of them, so we'll present just the trending mechanism, illustrated in a short and a long trade we consider to be the basis for the low-risk, high-probability trading principle.
Integrated Pitchfork Analysis
The essence of pitchfork analysis -- used for trending but also sideways markets -- resides in its median line (ML) with its acolytes -- the upper median line (UML), lower median line (LML), warning lines (WLs), and so forth. The median line is the main component of a pitchfork's framework, not only for linking the anchor (P0 pivot) to the midpoint of the P1 - P2 pivots swing, but also for constituting a foundation guideline for drawing its associated lines.
The median line's main role is to attract the market price. Dr. Alan Hall Andrews taught his students in the early 1960s that, frequently, the price returns to the median line. Thus, this real landmark becomes the minimum price objective. The median line can also play the role of a symmetry axis -- meaning that market flow will be equidistant to the median line, above or below it.
Both of these features are well illustrated in the chart shown below, from the P0 pivot location to the short trade entry at the 1209 key level of October 3, 2008 (refer to Figure 1).
The median lines (ML, UML and LML) are the most important components of the pitchfork. It constitutes a powerful tool for optimally encompassing (describing) market flow, thus identifying the dominant trend.
The tool is even more efficient when market flow remains within the pitchfork's main body, delineated by the upper and lower median lines, and then bursts out, as it did in the chart shown in Figure 1.
When the price approaches the median line, or any important resistance or support lines, it performs one of the following actions; a:
- Test and bounce, thus performing a reversal (a top pivot is built)
- Test and re-test
- Zoom and test with or without re-test
- Zooming through -- well exceeding the ML
- Violent piercing
- Narrow range, which will prepare market flow for the next price outburst
It will be helpful to monitor market volume concomitantly, so we can more readily determine when the task is accomplished (i.e., higher volumes go hand in hand with zooming through a key level).
In our more-than-20-year quest for the most profitable trading technique, we have seen the extraordinary synergy that occurs between the pitchfork and other state-of-the-art tools, such as:
- Classic chart patterns, including ellipses, channeling and gaps
- Multiple time frames
- Floor pivot analysis
- Elliott waves and Wolfe waves
- Jenkins tools inspired by the Gann techniques
- Fibonacci price and time ratios, including Lucas time tools
- Inter-market analysis
Thus, integrated pitchfork analysis was born! We have created and developed this associative technique for detecting low-risk, high-probability trades well ahead of the crowd. The use of this tool will give the trader a professional edge.
As we all know, the market price evolves in a time-price ethereal (intangible) space. To be consistent, both time and price should be routinely and concomitantly taken into consideration so as to, at least, double the trade's probability. And, our technique is one of the rarest, which uses both elements -- time and price.
The last and probably the most important reason for choosing this symbiotic and consistently profitable associative technique is its sensitivity and applicability to risk control and money management.
Let us demonstrate this technique with an example.
Short Trade Mechanism -- October 3, 2008
The S&P 500 Cash Index weekly chart in Figure 1 illustrates a short trade mechanism done using integrated pitchfork analysis as follows:
- The drawing of the down-sloping pitchfork, which optimally describes market flow in its descent, thus signaling the dominant trend
- The chart's symmetrical triangle and the support line (an old low at the 768 key level)
- The use of Elliott waves, especially Wave 3 (the most profitable wave to be traded) and also the trend lines on the ADX trending indicator's portion of the chart
Figure 1. The Short Trade Mechanism of Integrated Pitchfork Analysis -- October 3, 2008
As shown in Table 1 below, a trading plan always starts with the identification of the first phase -- the pre-signal phase. It constitutes the initiator of the trade. In our case, it is formed by two elements; the:
- Main body of the descending pitchfork, which does not allow any trades to be taken except short ones
- Market flow build-up of the symmetrical triangle, whose lower border's breakout will signal the second phase -- the signal phase
The third phase -- the confirmation phase -- occurs when the breakout of the lower border of the triangle is completed using a test and re-test mechanism, strongly supported by the steep up-sloping ADX indicator and its concomitant –DMI pertaining element.
Finally, we reach the stage of applying proper risk and money management through a three-pawn technique (refer to Table 2), forming the last three phases of this short trade on October 3, 2008:
The entry is chosen at the 1209 key level just below the median line (ML) and the lower border of the symmetrical triangle.
The stop loss is located just above the median line, at the 1225 key level.
The target location (pre-arranged) is computed at the location of the 768 old low-key level. As the trade progresses, we use two trailing stops -- at the 1044 and 1007 key levels.
Table 1. Succinct Synopsis Presenting the Trading Plan
Table 2. Synopsis of Short Trade Management
The details of this short trade are presented in Table 2, which contains the synopsis of the trade's management, including the Trade's Journal.
Long Trade Mechanism -- March 27, 2009
Table 3 presents the risk and money management of our second trade presented in this article -- the long trade (refer to Figure 2) of the same S&P 500 Cash Index weekly chart but, this time, on March 27, 2009.
Figure 2. The Long Trade Mechanism of Integrated Pitchfork Analysis -- March 27, 2009
As always, it all starts with identifying the pre-signal phase. Constituting the initiator of the trade, this phase is formed, in this case, by several elements:
- The termination of the prior down-sloping pattern, at the end of Wave 5
- The two candle reversal pattern of March 13, 2009, also signaling the termination of the corrective wave (A)
- The breakdown of ADX's 53-support line, thus signaling, not only the end of the prior pattern, but also the inception of the new up trend
The precipitating occurrences of two ensuing up gaps (the second and third candles after the W5's termination), just before the established entry at the 772 key level, formed the second phase -- the signal phase.
The third phase -- the confirmation phase -- occurred when market flow tested and then re-tested, in a very volatile way, the lower 50% Fibonacci line of the ascending pitchfork, ensuring the continuation of the new up trend for at least a few bars.
Other confirming elements would be the making of a lower high by the –DMI, thus constructing a down-sloping trend line (TL) and the steep down slope of the ADX and corroborating, not only the end of the prior trend, but also the enhancement of the up-sloping trend.
We finally reach the stage of again applying the three-pawn technique (refer to Table 3), forming the last three phases of this long trade of March 27, 2009:
The entry is chosen at the 772 key level just above the lower 50% Fibonacci line.
The stop loss is located just below the lower 50% Fibonacci line, at the 768.5 key level, for an aggressive trade approach, or at the 749 key level, for a conservative trade approach.
The target location (pre-arranged) is computed at the 944 last high key level. As the trade develops, four trailing stops are used, located just under the lows of the previous bars.
Table 3. Synopsis of Long Trade Management
The details of the long trade are presented in Table 3, which contains the synopsis of the trade's management, including the Trade's Journal.
GMMA -- A Confirming Trending Factor of Integrated Pitchfork Analysis
Figure 3. This S&P 500 Cash Index weekly chart is identical to the previous two charts -- although the P0 - P1 - P2 pivots of the descending pitchfork were modified. This time, the chart efficiently illustrates the intricacy of two elements using the principles of integrated pitchfork analysis (in this case, the integration of the pitchforks with Daryl Guppy's Multiple Moving Averages [GMMA] tool).
The Guppy Multiple Moving Averages (GMMA) technique (refer to Figure 3) consists of two distinct groups of exponential moving averages (emas), which reveal, not only the market's dominant trend, but also the behavior of the investors (long-term emas) in harmony with that of the traders' (short-term emas). The association of the GMMA tool with pitchfork analysis provides an enhanced insight into the market, thus increasing the odds of an earlier entry within the trend's development.
One can easily observe in Figure 3 the confirmation of the down trend corresponding to the short trade of October 3, 2008 described earlier in this article. In the terminal part of the same chart, these associated tools synchronously signal the March 13, 2009 reversal confirmation, thus facilitating the decision tree execution of the long trade of March 27, 2009.
An even closer analysis of the Comparison Vertical Zone n° 1 corresponding to the short trade entry at the 1209 key level reveals the following trend-confirming factors:
The long-term and also the concomitant short-term down-sloping trend strength are expressed by the compression of both ema groups.
The upper median line (UML) of the descending pitchfork corroborates this down-sloping strength by its steep down slope and also by the enhanced downward bounce occurring in this zone.
A similar detailed study of the Comparison Vertical Zone n° 2 corresponding to the long trade entry at the 772 key level reveals the following trend-confirming arguments:
The long-term ema group is performing the "even stacking" behavioral movement so well described by Mrs. Dawn Bolton-Smith -- a great technician, writer and educator and one of the founders of the Australian Technical Analysis Association. This "even-ing" is a precursory signal of a trend reversal.
The short-term ema group is compressing its emas upward, signaling the enhancement of the up-sloping inceptive trend, thus preparing for the penetration of the shorter-term ema group into the long-term ema group territory.
The up-sloping channel formed by the upper and lower 33% Fibonacci lines, pertaining to the ascending pitchfork, corroborates the inceptive up-sloping trend strength occurring in this zone.
Even if the GMMA alone could not implement a trade entry or exit, its association with pitchfork analysis provides greater market visibility, thus giving the trader a professional edge.
How Integrated Pitchfork Analysis Can Benefit Those Who Trade for a Living
Although astute traders are able to perform a trade entry in its first third, most traders have a delayed decision pace, catching the trend only in its second half, when the crowd has already seen the exuberant trade (in reality, really only a vanishing opportunity).
In our more than 20 years of experience, we have found that trading the trend is mainly a matter of using adequate tools for early trend detection and in concert with the degree of risk and money management the astute trader wants to apply -- a conservative or aggressive approach, as the case may be.
For the trades described in this article, we associated the contextual (the market) and the local (the most current market) pitchforks with Elliott wave patterns.
The short trade used the guiding downward contextual pitchfork associated with the W3 wave of the descending impulsive pattern (refer to Figure 1), thus catching the trend in its most profitable impulsive wave stage, even if it wasn't from its beginning. We qualify this approach as conservative.
In contrast, the aggressive approach incites the trader to take a higher risk, which frequently ends up with a much higher profit. Our second trade example -- the long trade -- used both types of pitchforks in association with the termination of the impulsive pattern (refer to Figures 2 and 3).
This time, the entry was precocious in trend development. The astute trader received a great hint from the integrated pitchfork analysis set-up -- the end of the previous descending impulsive pattern, the OSC (5,35) divergence (not plotted here), the short-term emas' reversal and then their abrupt climbing straight into the long-term emas' group, the ADX breakdown of the 53 support and also the down-sloping failure of the market flow, well illustrated by the consistent distance with regard to the warning line n° 2 (WL-2).
Trading the trend requires using an array of tools able to reveal, as soon as possible, the inceptive phase of the trend. The astute traders are always looking for the most profitable trade, which can be detected with, among other means, the integrated pitchfork analysis technique.
*Reprinted (and modified) with permission from Dr. Mircea Dologa, MD, CTA, a Commodity Trading Advisor, Stock Investment Advisor and the founder of a new teaching concept for newcomers and experienced traders at www.pitchforktrader.com. He can be contacted, for any questions, at mircdologa@yahoo.com.
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