The American crowfoot

January 28, 2016 09:00 AM

The American Crowfoot is an independent probability signal that is based on price and clearly identifies a change of the present price action. It is like market breath or volume. In other words, it may not always be obvious, but it is always present.

The Crowfoot will normally produce an excellent entry or exit, and it makes no difference if the larger market is long or short. Identifying the Crowfoot will get you in or out long before a change of direction is apparent to the market at large. Perhaps its greatest value is that because it provides an early execution signal, it helps to hold down slippage.

The Crowfoot is simple and occurs regularly. And when it occurs, it identifies a reliable execution point. Most important, it does so early-on. In fact, it is one of the better anticipatory execution signals you’re likely to find. It will get you in or out near the ideal execution point.

The only problem with waiting for this chart pattern to evolve is that the last price paid — a required bit of data for the signal — is not always that easy to identify. Nonetheless, it is an excellent trading tool to use when you see it developing. Whenever the Crowfoot occurs, it is normally effective, and it is relatively safe. 

Identifying the pattern

To establish a Crowfoot, the first thing we do is identify what are known as the “horns.” These horns represent the last failed price extreme, which is known as horn A, and then regress to the next preceding price extreme that is identified as horn B. The horns roughly correspond to waves two and four of a classical Elliott Wave Impulse pattern. (See “Crowfoot: Step by step,” below, for details.)

Anyone who has dabbled with Elliott Wave analysis for any length of time is aware that the biggest problem with the technique is found in identifying the patterns as they occur.

Many “Elliotticians” on the Internet will often predict a “Wave 4,” only to watch it fail and then come back with the excuse that what they meant was it was really a “Wave 2” and the next test is going to be a “Wave 4.” Then, a “Wave 5” will follow. Of such nonsense, negative account balances are made.

The difference between the Crowfoot and an Elliott Wave impulse pattern is that the horns of the crowfoot are restricted to being the last two tests that have occurred in the previous move. It makes no difference how many tests the previous move may have produced.

It is not uncommon to see as many as seven “tests,” each one of which at the time could be classified as an “Elliott Wave 4”— and each one occurred before a strong trend finally resolved itself. 
The important thing with a Crowfoot is that it makes no difference how many times the previous move tests, only that we keep identifying the last two.

By using the Crowfoot, you are not trapped into the interpretation of waves, or indeed much of anything else. All you have to do is connect the horns with a baseline, draw the split, and then execute when it is violated. Even when you are wrong — and you will occasionally be wrong — you will not be wrong by much and a good stop-loss order will take care of most of that.

Execution

When price takes out the split, it provides an execution signal. This is well before the world sees a new move developing and thus helps to hold down slippage. In addition, it also is an aid in establishing a hard stop.

The good part of this whole scenario is that even when you are wrong, and you will occasionally be wrong, you will not be annihilated because the previous price extreme provides a good hard stop.

Prognosticating the future direction of the market and having an effective stop loss in place are the key to profitable trading. We should always have a stop in place and know the most we are willing to lose on any trade before we ever execute. Nobody should ever enter a position without simultaneously establishing a hard stop.

In fact, as you stand at the hard right edge of the split, traders should always have two stops in mind:

  • The first is a hard stop. In other words, a working order filed with your broker. 
  • The second is a soft stop. This is actually a trailing mental-stop you should use in conjunction with the ladder.

The crowfoot is a great aid in establishing the hard stop. One of the fringe benefits that we get from using the  the Crowfoot is that the previous price extreme always provides every trade with a clear place to set a hard stop. All you have to do is go to the last price extreme and enter it as a stop order with your broker.

Ladder

By immediately placing a horizontal trendline at the point where the price action violates the split, an excellent tool is produced to define the markets directional probability and synergy. This is called the horizontal trendline, or the “ladder.” It is basically a hand-holder that functions as the finger on the pulse of the price action and also serves as an aid in determining your soft stop. 

Anytime the price action doesn’t promptly head for the baseline after breaking the split, but instead extends sideways with the ladder, the odds are that any position you might take is usually going to fail, or at the very least will not have much in it.

But beware. If prices trade back and forth across the ladder, and then break strongly up or down, you should consider drawing a new Crowfoot to confirm the move before you enter. 

The ladder clearly defines if the price action is going to:

  • profitably confirm the violation of the split,
  • tread water and consolidate, or
  • fail and force a new Crowfoot. 

Failure

After any execution, only one of two things can ever occur: we are either right or we are wrong.
If we are right, the price action will take off toward the baseline. It is worth noting that good trades usually start out being good trades. The minute that the price action takes out the baseline, other traders will see it as the violation of a trend and the start of a new move that is now apparent to the world. 

If we are wrong, we must exit our position as soon as possible. Then, as long as there are no major changes, promptly re-engage as soon as the next Crowfoot develops. It is worth noting that we may be wrong several times before we actually get a position that we may want to keep. The beauty of the Crowfoot is that it usually allows for relatively tight stops. 

Confirmation

It is obvious that at times you may enter or exit a position using probability signals other than the Crowfoot. Nevertheless, in such incidences by reverse engineering the Crowfoot you can provide an excellent confirmation signal for any trade.

About the Author

Bill DeBuse has been engaged with the markets since 1959 and is presently a proprietary trader for a family foundation.