Using a pitchfork to map out future price movement in any market is a wonderful way to determine two things:
a) Where a market may be heading to and
b) Where a market is most likely to find support or resistance.
Pitchforks work well on any time frame but they become even more reliable when they are combined with our EPS course methodology that includes the use of multi-time frames, wave analysis, corrective patterns and momentum divergence.
Our strategy relies heavily on finding the end of corrections and contains elements that are both subjective and objective.
Subjective trading – is the same as discretionary trading where a trader relies on his/her own decisions when engaging with the markets.
Objective trading – is similar to mechanical trading where a trader follows a rules based system to make trading decisions and can even program a strategy to auto trade on his/her behalf.
When employing the EPS methodology to our own trading our strategy requires that we use pitchforks as one way to find the end of corrections, making this step a bit subjective as it requires a degree of discretion to know which points to connect your pitchfork to. This has caused some confusion amongst members before and the purpose of this article is to determine the best practices necessary to draw your pitchforks correctly.
Although pitchforks work brilliantly, one needs to understand that the markets are dynamic in nature and because of this we cannot try to apply mechanical rules to the use of pitchforks. We do have an objective function in our strategy when it comes to entry conditions but as soon as you employ wave analysis and pitchforks to the mix it becomes subjective and can therefore allow confusion and doubt to settle in.
Drawing Pitchforks the Right Way
Pitchforks require three points on a chart to anchor their lines to but if it was as simple as always connecting the highest highs or lowest lows of any given point then we would be enforcing rules onto the use of pitchforks and they simply do not work that way.
There are however two ways to know which exact points to use to increase the odds of price following the path of your pitchfork more accurately. They are:
1. Using the right time frame as specified by your strategy
2. Using candlesticks with highest/lowest closing prices
1. Drawing Pitchforks on the Correct Time Frame
The EPS course states that we should use multiple time frames when conducting our analysis. We use our 4 hour chart to look for trend line and market structure changes, our 30 or 20 minute chart to draw our pitchforks on and a 5 minute chart to spot momentum divergence and reversal candlesticks.
When we release our EPS Forecasts we do sometimes draw a pitchfork on the 4 hour chart but as you will soon see there are times when this should be avoided.
Above is a chart of NZD/JPY on a 4 hour chart, where we connected a Shiff pitchfork using 3 points on the chart as indicated by the black arrows. Now have a look what happens when we keep that pitchfork on the chart but switch to a 30 minute timeframe:
Look at the first and second black arrows and you will note that the pitchfork lines are not connected to the exact low and secondary high. This does happen often, so to improve on our accuracy we should check if this distortion happens when switching from our higher to
lower time frame and correct it if we note this issue.
We will get back to this chart again when we discuss the second way of allowing historical price action to guide us.
Above is an example on Crude Oil again using the 4 hour chart and a Schiff pitchfork BUT drilling down to the 30 minute chart (below) yields the same results with no distortion.
The example in Crude Oil shows that this distortion does not always occur, so it would be best practice to avoid this situation completely by drawing your pitchforks on your 20 or 30 minute charts only. The first way to draw your pitchfork correctly was very simple, the second way will require a bit more work on the traders behalf and it’s here where the
subjectivity creeps in a bit. However as you will soon see watching historical price action does provide us with valuable clues to aid us in our decisions.
2. Use Candlesticks With Highest/Lowest Closing Prices
One question that many traders ask is whether they should use the standard pitchfork or Schiff setting when doing their analysis. Well in our experience we have found that using the Schiff pitchfork does a better job (in a high percentage of cases), than the standard pitchfork
when finding the end of corrections. That is why some of you might have noted that we almost always use Schiff pitchforks in our EPS Forecast reports.
Above we have the same chart of NZD/JPY that we showed before but on our 30 minute time frame with the distortions fixed. Using the exact points as indicated by the arrows actually worked well to define price action, as seen below:
Connecting our Schiff pitchfork to the ultimate highs and lows using the 3 points, as shown by the previous chart, shows that price has afterwards respected the median lines at all the points we marked with smaller black arrows. That in itself was a good indication that those
were good points to use when drawing the pitchfork BUT there was a better way that improved the accuracy of our pitchforks interaction with future price movement.
Knowing which highs or lows to use at important points when drawing a pitchfork can greatly improve your accuracy when determining future areas for entries. As a rule of thumb it is generally better to avoid candles with long wicks. Look at the red downward pointing
arrow as it would have made better sense to use the candles with the highest closing price at that high than the high made by that long wick candle.
The same goes for the first connection point at the lower left and the last connection point at the right. Using the candles with the lowest closing prices at those two points greatly improved the pitchforks future interaction with price.
The red arrow on the chart above was the actual high that we were looking at to trade shortfrom. In most of our EPS forecasts we find that price tend to reverse from the upper or lower red warning lines when trading the end of corrections and in this case using the candlesticks with the highest and lowest closing prices proved to work better at nailing that high at the red arrow.
Our strategy dictated that we should take that trade setup when we had both momentum divergence and a reversal candlestick at that high and although this trade idea eventually got proven wrong when price moved much higher again, we had no entry conditions present when price reached the upper warning line the second time around (see below).
Here we have Crude Oil again and although the 4 hour chart and the 30 minute chart lines up with no distortion on the pitchfork we can see that we used the candlesticks with the highest and lowest closing prices to connect with. We actually have an active trade idea open on Crude Oil where we would consider an entry at lower levels, so for now we would
stick with this Schiff pitchfork settings.
Here is a classic example on EUR/USD where drawing a pitchfork on a 4 hour chart using the highest and lowest prices would have caused a trader to miss the entry at the lower warning line because it never touched or crossed it.
Switching to a 30 minute chart shows the distortion of the pitchfork lines between the 4 hour and 30 minute charts.
If we instead connect the Schiff pitchfork to the candlesticks with the highest and lowest closing prices like we did above then look at where this correction ended:
Price stopped right at the lower warning line before resuming the uptrend again.
Our last example in this article shows Gold’s pitchfork on the 4 hour chart with price never reaching our preferred lower warning line.
From what we discussed in this article it should become evident that pitchforks should receive careful attention when deciding on which points to connect to. We have shown how it’s best to only draw your pitchforks on a chart like the 20 or 30 minute to avoid distortion
and that it’s best to select the candlesticks with the highest/lowest closing prices.
Watching price interact with your pitchfork lines and to take note of how they interacted to your lines previously can also provide clues that price is following your pitchfork properly.
When we combine additional entry conditions to the mix then we end up with a powerful strategy that has the capability of finding the end of corrections with incredible accuracy.
There will be times that we are wrong about our analysis but when we do get it right the results tend to shadow the minuscule losses we pick up from time to time.
We hope that you enjoyed this article and that you will return to your own charts to find many more examples of what we discussed in practice. Also, feel free to check out my Exponential Profit System.
As always, do not hesitate to email us with any questions you might have.
All the best,