Making Trades Using the Andrews Pitchfork - Pt. 2

[RichardCox 10]

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.

 

Trading Inside the Andrews Pitchfork Lines

 

In the next sections,we will look at the various ways traders can profit from trading from within the lines that are drawn by the Andrews Pitchfork. The first attached picture shows prices in the EUR/USD moving off of the median area to hit the resistance prong in the Andrews Pitchfork at the second red arrow.

 

Looking closer at the price activity, evening star or doji formations will often become visible, giving traders another indication that the buying momentum is starting to weaken and suggesting a reversal is imminent. When this appears near the resistance that has been established by the upper end of the Andrews Pitchfork, downside moves can be expected. Additional confirmation can be had when using oscillators (such as Stochastics) which can help to verify this momentum is valid.

 

In these cases, trades could be initiated on the following candle with proper money management rules and an appropriate stop loss in place. In the chart example shown, large gains could have been recovered if trades had been placed based on this information.

 

 

Trading Outside the Andrews Pitchfork Lines

 

When looking at the Andrews Pitchfork, trading outside the support and resistance lines occurs much less often than trades that take place when prices are caught inside these areas. The positives of these types of trades is the fact that price moves can see major extensions once these activities is seen but at the same time there are negatives, as there are some aspects of these trades that are more tricky to anticipate.

 

Again, the primary assumption is that price action will move back toward the median line at some stage, just as this would occur when values are trading from inside the pitchfork lines. But at the same time, there is always the possibility that instead the market has shifted in terms of its general direction. In these cases, a break outside the Pitchfork lines would suggest that a new trend is on the way.

 

So, in order to avoid major losses, trading parameters must be constructed so that any retracements back into the channel can be captured (and capitalized on). At the same time, however, traders must look to filter (and remove) any adverse price movements that can result in a trade being closed too early (missing the profitable move).

 

In many cases, traders will be given several opportunities to place trades before prices actually move back into the overall trend slope. These typically are seen when prices are consolidating or caught within a shorter term range. The best opportunities, however, can be seen when the broader moves are seen, as these extensions allow for the most profitable trades.

 

Some traders will use oscillators to spot divergences in price activity, as this additional confirmation will help to reduce false moves. As always, entry levels are key and the combination of these factors can help to pinpoint areas for greater accuracy.

 

Placing Trades

 

So, when placing trades, we must first wait for a prong area to be tested. Prior to this point, trades should not even be considered. Without these tests, there is always the possibility that an oppositional trend is actually present and this can help to avoid being stopped out of a position. If prices break outside the prongs, we can consider trades based on the expectation that prices will continue in the direction of the break, as fresh momentum is entering into these markets.

 

Trades can be placed 25 pips above the initial line break with stop losses 10 points above or below the previous high or low of the session. These trades are based on the assumption is that the new momentum will lead prices away from the previous high or low and that those levels will not be seen again in the near term.