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To draw the Andrews Pitchfork on a chart, click the Andrews Pitchfork button. The cursor will change to a pencil while in the draw mode. The Pitchfork uses three points on a chart to create a triangle. The three points should be constructed from a key High or Low price, and the next two swings in the market that form a correction. Pitchfork lines extend from the triangle at specified intervals to dissect the market. The Pitchfork shows possible price levels where the market could extend to. Watch for support and resistance on the Pitchfork lines. Drawing the Pitchfork Adjusting the Pitchfork Properties
One of the problems off-floor traders find with all of the interest rate products is that they have several sharp moves. But between those sharp moves, there are long periods of inactivity—some traders call this "flat lining". This "flat lining" tends to deform or diminish the effectiveness of trading methods, because time continues to pass while the contract stops moving. When using Median Lines, I say that price "drifted out" out the Median Lines because time has moved to the right [or marched on] while price has stayed still. Is there a way to address this drifting and thus make these contracts more tradable? Actually, there are several ways to address the "drifting effect" and I’ll show you today one of these ways, in detail, and how to combine it with Median Lines to trade these markets effectively. The oldest and most well known method is point and figure charting, and you could use this method, along with Median Lines, to trade these contracts. But I don’t find the combination of Point and Figure Charts and Median Lines to be a good combination. Instead, I like to use "tick based" bar charts, where each bar on the chart shows X amount of ticks of trading activity. So if I choose to look at 300 tick bars, each bar on the chart will show 300 ticks of activity and the range, open, high, low and close that happened while those 300 ticks unfolded. Once 300 ticks have been reached, a new bar is started. By choosing to look at tick based bars, I have taken time out of the equation, which "can" be a good thing. In this case, it is a positive, because it generally eliminates the drifting effect I just mentioned, and that makes the Median Lines much more effective in showing me where price is liable to run out of energy, and where price is likely to find support and resistance. Let’s compare a time based bar chart and a tick based bar chart:
This is a 15 minute time based bar chart. Note how price tends to stall, dead in the water, at times. This causes price to "drift" through the right" of any Median Line you draw, reducing their effectiveness. Now lets compare this time based chart with a tick based chart, of the same time period:
Note here how the "dead periods" have literally disappeared from the chart, although it is a chart of the same "time frame." Because the bars are based on numbers of ticks, these dead periods are hidden within the tick bars. Now let’s look at a few actual trades, in a step by step manner, and see how to trade using tick bars and Median Lines:
Example 1: Price has made a nice run up but it has now re-tested its highs once and when it failed to make a new high, it traded a bit lower and then left triple tops in place at 119-10, below the swing highs of the move. You can see that I added a red down sloping Median Line set, drawn from the prior three alternating pivots. Now note that the last bar on this chart, the last of the three triple tops, "zooms" or runs back lower through the Upper Median Line Parallel after trying to get and hold above it. And note that price closes in the lower third of this "zoom" bar. We say this bar closed with "good separation," which is an indication of the selling pressure or momentum it had to the down side, once it failed to hold above the Upper Median Line Parallel. The quality of the separation found in a zoom bar gives us clues to its likely reliability. That means that if a bar zooms through a Median Line or one of its parallels but closes near or on the line it just zoomed, it had poor separation and is a poor example of a zoom bar, and thus, less likely to be reliable in a trade set up. Zoom bars can be used for high probability trade set ups, and that’s what we’ll try to do in this first trade example. Let’s see what I can diagram as a potential trade that makes sense and has a good risk reward ratio.
Because price closed with good separation and also left triple tops above the down sloping Upper Median Line Parallel, I want to be a seller of this market IF price gives me a high probability trade entry with a solid risk reward ratio. Let’s look at all of these things, one by one: By a high probability trade entry, I mean by looking at tens of thousands of actual trades I have made over the thirty plus years I have been trading, I am able to categorize each trade taken in the past according to the trade entry method associated with each trade and then do in-depth statistical analysis, telling me the probabilities of success of each of the trade entry set ups I use when trading. In this particular trade, I am looking to sell after a "zoom and re-test," which is a trade set up that I used thousands of times, so I know after a great deal of actual trades the probability of success of this trade is better than 70 percent. As I mentioned earlier, the quality of the separation in this zoom bar gives it a higher likelihood of success. Again, separation visually tells us about the quality of the selling or buying pressures associated with the bar. Better separation in the same direction as the contemplated entry shows a strong correlation with the probable success of the trade. Now the trade plan: I want to sell a re-test of the just-zoomed Upper Median Line Parallel at 119-08. My initial stop loss order will be at three ticks above the 119-10 triple tops, at 119-13. That means I am risking 5 ticks per contract, which is $31.25 per tick times 5, or $156.25. My profit target is a test of the Lower Median Line Parallel, which initially comes in at 118-20. That means that if I am correct, I expect to make 20 ticks, which is $625 per contract. This gives me a risk reward ratio of 20/5, which equals 4. I don’t take trades that have a risk reward ratio of less than 2, so this trade set up is more than acceptable. And I’m certainly willing to risk $156,25 per contract on the initial stop loss. I like the look of this trade set up, as well as the probabilities associated with it. I enter a limit order to sell 30 year bond futures at 119 08/32, and I also enter a stop loss buy order at 119-13, so that I have limited my loss right from the beginning. Let’s see if the market let’s us get filled:
Price comes back up and re-tests the down sloping Upper Median Line, getting me short bond futures at 119-08 in the process. Remember from the Median Line theory that we expect price to run out of energy at or near the Median Line or its parallels, so it shouldn’t be a surprise that price stopped going higher after testing the Upper Median Line Parallel—In fact, that’s exactly what I was expecting and why my order was to get short at the re-test of the Upper Median Line Parallel. Once I get confirmation from the exchange that I am indeed short, I enter my profit target: I enter a limit order to buy bond futures at 118-20, and I make it "OCO" with my initial stop loss order at 119-13 ("OCO" means that once one of these two orders is filled, the remaining order is immediately cancelled). Note that price closed on its lows, something I like to see when short. This indicates that price likely still carries additional downside directional energy. Now that I am short, I’ll have to watch as price unfolds:
Price continues to sprint lower, again making a wide range lower bar that closes on its lows. And when price penetrates and closes below the down sloping Median Line, it’s a sign that I should be evaluating my outstanding risk and if possible, reduce it by trying to move my stop loss closer to the current price action. But I’ll have to be careful! I want to move my stop closer if possible, but I need to stay far enough away that I don’t find myself in the "noise" of this market and get stopped out right before the market resumes its downward move. Looking at the price action that’s unfolded since I’ve put the position on, I’m in a quandary: There have been only two price bars, both of them wide range bars with price closing near or on its lows. Because price has come straight down, there is no price context for me to use to hide my stops behind. What do I mean by that? I can use market formations like double tops or bottoms, trading ranges, swing highs or lows to hide behind when bringing my stops closer to the action, if they are available. As you can see in this example, there are no market formations [no context] to hide behind. The best I can do as this bar closes is cancel my initial stop loss order and put in a break even stop order at 119-08, meaning I am now risking nothing but brokerage on this trade.
Price makes another new low but then rebounds, climbing well back above the down sloping Median Line before falling all the way back down to close unchanged, below the Median Line. The next bar tests the Median Line again but then heads lower, making another new low and closing near its lows. The next bar opens unchanged, then leaves a double bottom before climbing up above the Median Line briefly, although it manages to close back below the Median Line. Note that we have now had four bars close below the Median Line. The next bar opens unchanged, below the Median Line, and makes a new low for the move, breaking through the double bottoms but climbing back up to close unchanged. I note with interest that the range of this bar is narrower than the bars I have been seeing. In general, as the ranges of the bars narrow, it is a sign that price may be running out of directional energy. It isn’t a bad thing, but instead, it is a red light, telling me to be on the look out for further information—and to be trying to reduce my risk when possible. I am tempted to move my stops closer, but I want to give price a bar or two more. The next bar opens unchanged again, then climbs back to test the Median Line, where it runs out of energy. And this bar closes on its lows. Finally, the last bar opens unchanged, trades lower, leaving a double bottom, but closes on its highs. And it is also the narrowest bar in this series of bars that form a range or "Energy Coil," which is an area where price is re-storing its expended directional energy. Two things prompt me to move my stop order closer: The narrowing ranges of the bars and the alternating closes at the extremes of the bars within the range. Both of these things reiterate to me that price is re-storing energy and that it is important that I have my stop orders as close to the action as possible without being within the "noise" of the market. I look at the chart and note the mini swing high price made when it briefly came back above the Median Line at 118-31. I then move my break even stop at 119-08 down to 119-02, three ticks above the mini swing high, making it a profit stop now. In essence, we are playing with the market’s money. I call this "boxing in profits" and our goal is to get to the point where we are playing with the market’s money as soon as possible, as long as we stay out of the "noise" of the market. I also re-calculated my profit target, by simply determining where price would intersect with the down sloping Lower Median Line Parallel. Because I am short against a down sloping line, as time goes by, my profit target moves lower, meaning I get paid more IF I am smart enough to keep adjusting my profit target. My new profit target is now at 118-18.
Now price forms a true energy coil, which runs for about sixteen bars. Even though price action has slowed down directionally, note that unlike traditional time-based bars, tick bars are still showing us price formations. While we are in this agonizing energy coil, I’d love to move my stop profit order closer to the action, but I don’t see any market formation or context YET that will allow me to do so without being too close to the noise of the market. I’ll just have to be patient until the market gives me more to work with. I AM able to move my profit target lower, however. I check where price will intersect with the Lower Median Line Parallel and then move it down to 118-16. Once again, I get paid for being short against a down sloping line as time goes on.
Price finally breaks below the current energy coil. Once the first bar closes below the energy coil, I move my stop profit order from 119-02 down to three ticks above the 118-26 top of the energy coil that price just broke out of, giving me a new stop profit order of 118-29. Again, I just keep boxing in profits as price approaches my profit target. As several more bars form, note that they are again narrow range bars. I’ve just moved my stop profit order as close as possible, so there’s nothing to be done there. But I measure where price will intersect with the Lower Median Line Parallel and note that its time again to move my profit order lower, because I am short against a down sloping line. I move my profit order down to 118-14.
Price breaks out of the narrow range [or the second energy coil] and closes on its lows. As I said earlier, bars of consequence that close on or near their extremes give an indication that price has further directional energy to spend in the same direction, and after spending that much time in energy coils re-storing energy, you’d expect that price had enough directional energy to quickly make it to my profit target. And indeed, it does during the next bar, punching through the Lower Median Line Parallel and filling my 118-14 profit order in the process. Once I get confirmation from the exchange that my profit order was filled, I make certain my stop profit order at 118-29 is cancelled and that I am working no further orders. This was a nice clean bond trade, netting me 26 ticks in the bond futures, which is $812.50 per contract. The important keys to this trade were 1) Picking a high probability trade set up that had a solid risk reward ratio associated with it; 2) Hiding stops behind market formations; 3) Boxing in profits while staying far enough away from the "noise" of the market; and 4) Remembering to monitor the profit target and move it accordingly as the bars unfold. Because I was short against a down sloping line, I got paid an extra 6 ticks to be short as time passed, because of the slope of the line. Article by Timothy Morg Timothy Morge is one of the most respected names in the futures industry today. Throughout his remarkable 30 year career Mr. Morge has been a floor trader on the CME, an institutional trader managing cash forex positions in excess of $2 Billion U.S. Dollars, the author of the highly acclaimed book "Trading With Median Lines," the owner of AutoForks software, a mentor and teacher to hundreds of professional traders, as well as the Managing Director of Spike Trading’s Proprietary Trading Group in Chicago. Mr. Morge regularly teaches "Market Maps" seminars to professional traders at the CBOT and the CME. These half day seminars focus on teaching the trading tools Morge uses in his own trading, as well as the money management and risk reward tools he has developed over his thirty year trading career. In February, Mr. Morge and Spike Trading will begin allowing non-professionals to take the Market Maps seminars in person or via the internet. Mr. Morge is giving a free CBOT webinar on Wednesday, Feb 15 at 10 am, and will use Ensign charts. The link to the registration for the Feb 15th event is: http://www.hotcomm.com/virmeetCID_ARR.asp?CID=YMDZYQ&MID=6B4WZD For further information on Market Map Seminars, go to: http://www.marketmaps.org AutoForks Software, which runs on Ensign, is at: http://www.marketgeometrics.com "Trading With Median Lines," written by Tim Morge, can be ordered at: http://www.medianlines.com/bookorder.html Last modified 4/30/09 12:18 PM |
