so, those of you following my FTSE - Daily Trades thread may know, I'm looking for new strategies to tackle the market.
Was starting to think about this today and made a few thoughts.
First one I came up with in the process is the following and utilises 'Andrew's Pitchfork' a rather odd name for a simple principle.
I was going back to the basics and starting to think about the fundamentals of trading: Buy low and sell high. Or go short high, and buy back low later.
So the key of my new strategy has to somewhat depended on these fundamental trading principles.
Next I was thinking, looking at a chart, in what region can the price considered to be "low" and in what region would I consider it to be "high".
I was looking at a 5min chart and looking at the whole day.
I was drawing one line at the low of day, one line at the high of day, those are obviously the extremes where everyone can agree prices are low / high.
Then I draw a line right in the middle between the two, where the price is neither high nor low.
Then I draw a line at 25% and one at 75% and said, if the price is between the low of day (0%) and 25%, I consider the price to be low. If the price is between 75% and high of day (100%) I consider the price to be high. In between (25%-75%), it's neither high nor low.
If I'd somehow manage to always buy in the low range and sell in the high range (or go short vice versa), then this could be a decent strategy.
The next problem I was facing is, I've done this analysis on the previous day, where we know high and low of day. How can this strategy work out for future price movements, where high and low of day are unknown.
This is where the Pitchfork comes in.
The assumption I'm making is that if I extrapolate the 4 required levels (low of day, high of day, 25% and 75%) from the previous day to the following day, the strategy still works. This is because more often than not, prices move up and down around a certain level, without breaking away from it and moving onto the next level. (This obviously has to be proven with data - more to that later)
The way the pitchfork works is exactly how the 4 required levels are drawn up. The pitchfork is defined over 3 points: High, Low and Mid-point. It then draws 5 levels on the chart: High (100%), 75%, Mid (50%), 25%, Low (0%)
So how does it work
The way I imagine it to work is the following:
1) Identify previous day's high and low
2) Draw the pitchfork in the chart with aligning its high and lows on the daily high and low. The mid point is exactly in the middle of daily high and low. This draws a horizontal pitchfork in the chart.
3) When the price of the asset falls below 25%, place a buy stop order at the 25% level. Once the price rises again and breaks through that level, the order gets executed. (vice versa with shorting above the 75% level)
4) Stop Loss is right below (size of the spread) the low of the pitchfork. Target is somewhere above 50%-75%. You have at least a 1:1 risk-to-reward ratio. Need to calculate target level by asset based on historic patterns.
Does it work?
Don't know yet. So far I've manually painted a few of those pitchforks in the chart for the past couple of days on FTSE100, NASDAQ, CL and NG and it seems it works more often than it doesn't.
Cases where it clearly doesn't work is when there's a strong move to either direction, aka price breaks-out and moves to a different level than it was the day before. Interestingly when this happens, the strategy wouldn't necessarily always result in a loss, but sometimes the entry conditions would never be triggered in the first place. E.g. if we start the day already in the high region (above 75%) and then never fall below it - no order triggered on that day.
On the negative side, huge breakout opportunities are missed with this strategy, so worth looking into a complementary strategy which works specifically for break-outs.
Next, I'm trying to backtest the strategy. Will need to pull a whole lot of data and analyse. Hope to have that done over the weekend. Will update the thread accordingly.
Data I'm trying to get: Win ratio, Where's the optimum take profit level, Time of day where this usually plays out (my idea is to hook this in with the ATR analysis I've done and trade this pattern at times of high ATR, aka FTSE, DAX in the morning, NASDAQ, NG, CL in the afternoon)
First successful example trade taken this afternoon on CL.
You see nicely how the pitchfork is drawn on the chart and is derived by the high and low of the previous day.
At 14.30 today the price dipped below the 25% level. I set the buy stop order at the 25% level, which got triggered at 14.35. The price afterwards makes a sweep move up to the 50% level, where my limit sell order gets triggered at 15.15. It would've been possible to play it up until the 75% level, but wanted to be safe, without having the data yet.
Could've been luck - who knows.
What do you think of this approach?