Making Trades Using the Andrews Pitchfork - Pt. 3

[RichardCox 10]

Here is the third and final part of the Andrews Pitchfork tutorial:

 

Breaking Down Trades Using the Indicator

 

The two trading methods methods discussed previously (placing trades from within the pitchfork lines and placing trades outside those lines) might seem complicated but when these strategies are broken down into their component steps, the picture is simplified. One factor that should be considered is that the Andrews Pitchfork tends to work better in stable trends, and this tends to be a characteristics that is seen in the more commonly traded (less volatile) currency pairs. Since some of the crosses exhibit price behavior that is more choppy (and less dependent on trends), there can be more inconsistencies when looking at long term results.

 

So, here we will deconstruct the process, looking for examples of trades from both "within the lines" as well as opportunities "outside the lines" allowing traders to capitalize on the strengths of the indicator.

 

Initially, we will look at the in-line method:

 

• Identify movements in price that have broken from the median line and are now seen moving toward the upper pitchfork prong (marking resistance).
  
• As prices test the higher resistance line, look for evening star (or other bearish) candlestick formations. The candlestick formations will act as an initial trading reversal signal.
  
• Find additional confirmation. Using common oscillators, traders can confirm the initial signals. For example, a downward cross in stochastics can help to confirm the trading bias and signal that the downside is likely to follow.
  
• Trading entries can be placed just below the closing value of the third part (candle) of the evening star candlestick pattern. Trading entries can be close in these cases, less than 10 pips away.
  
• Stop losses can be placed using a 3:1 reward ratio, so with profit targets of 150 pips, stop losses can generally be placed at 50 points away from entry. The Pitchfork tends to give high pinpoint accuracy for entries, so trades should be exited quickly if prices move in an unfavorable direction.
  

 

Next, we look at strategies where price activity moves toward the median line. Here we will outline some parameters for how trades can be placed when alternative scenarios are seen in price movement.

 

• First, find a major line of support or resistance. In the ideal scenario, we will see a break of a major level of support, as this will generated renewed momentum and give better trade entries (improving probabilities as well).
  
• Look for prices to fall back toward the median line (potentially 35 pips below the previous support level)
  
• Risk to reward ratios should be at least 2:1 (preferably 3:1), and this will help to determine appropriate stop loss entries and profit targets.
  
• Use oscillator readings to help confirm price activity. When traders are able to identify downside oscillator crosses (in a stochastics reading, for example). The confluence of all of these factors can help to increase trading probabilities and ensure that a more objective reading of price activity is being seen.
  

 

 

Conclusion

 

When looking at the common applications of the Andrews Pitchfork in technical price analysis, traders are able to isolate opportunities that might not be found with the more traditional “envelope” indicators such as Bollinger Bands or other types. The main goal of the Andrews Pitchfork is to capitalize on larger price swings that are seen in the market.

 

When the Andrews Pitchfork is applied properly and pricing levels are accurately defined, traders can factor these tools along with the readings seen in other forms of technical analysis in order to improve on overall trading probabilities. Additionally, choppier trading conditions can be avoided with the likely effect of improved risk to reward ratios and an enhanced potential for gains.