Making Trades Using the Andrews Pitchfork

[RichardCox 10]

The Andrews Pitchfork technical indicator was invented by Alan Andrews and is used to isolate profitable trading opportunities that are based on swing strategies. Longer term,the indicator can be used to gauge cycle activity that can determine price direction in the forex markets. Here, we will take a look at some key factors measured by the indicator and the various ways it can be used to establish new trade ideas in two critical ways - trading inside the lines and trading outside the lines.

 

The Andrews Pitchfork Defined

 

The Andrew’s Pitchfork (which is sometimes called a “median line” study) is made available to traders on a wide variety of trading platforms and charting packages. Similar to standard “support and resistance” lines the Andrews Pitchfork creates two strong areas of support and resistance, along with a middle line (something of a regression line) that can serve as either support or resistance, depending on the conditions.

 

Andrews worked off of the assumption that price activity would move toward the regression line 80% of the time. In the remaining 20% price activity would likely be experiencing major changes in sentiment of rapid fluctuations. Because of this, longer term trends tend to remain intact even when smaller fluctuations are seen.

Once sentiment has changed, the forces of supply and demand will shift and this, according to Andrews, will create a new trend. With the Andrews Pitchfork, these changes provide the primary trading opportunities in the forex markets.

 

Applications of the Andrews Pitchfork

 

In applying the Andrews Pitchfork, traders will first define a significant high or low seen previously. This peak or trough area will be used as a pivot and thought of as point A. Once this point is isolated, identify a peak and a trough that can be found on the right side of the original pivot. This is generally a corrective move that comes in reverse of the previous wave (whether it was higher or lower). These corrective moves will serve to act as points B and C. The first chart graphic shows an example of this at work.

 

Once these three areas have been found, the Andrews Pitchfrork can be plotted. The Pitchfork handle starts with the pivot seen at point A, and this will act as the median line in the application. The two Fork prongs are formed using the preceding peak and trough seen at the B and C points. These areas will act as support and resistance for the trend. This support and resistance is based on angles, however, and this can be seen in the second chart example.

 

As the Andrews Pitchfork is applied traders will be looking to trade within the channels themselves or to wait for breakouts (to the upside or downside) relative to the channel lines. Because of this, traders will either base trade entries either when prices bounce off of the support line or drop from the resistance line - based on the assumption that prices will always be attracted to the median line. To give these trades a higher level of probability, an additional oscillator can be used as a means for providing confirmation.

 

Basing Trades on Breaks

 

In addition to this, traders can base trades on breaks of the support or resistance lines. In these cases, the Pitchfork is giving the indication that market sentiment is changing, with prices deviating from the median lines and then breaking through one of the channel lines. In these cases, the median will remain the central focus as major windfalls tend to be seen once the price activity loses its original momentum. But given the alterations seen in market behavior in these cases, money management becomes more of a critical issue and additional oscillator confirmation will also provide increased trading probabilities.

In the next section of this article, we will look at the ways trades are placed inside and outside of the channel lines when using the Andrews Pitchfork.