Using The "Andrews Pitchfork" Trend Lines Indicator: A Cool Secondary Tool
The Andrews Pitchfork is yet another one of my "secondary" trading
tools. My "primary" trading tools include basic trend lines and chart
patterns, trader psychology and fundamental analysis. I use the
secondary trading tools to help confirm what my primary trading tools
may be telling me.
The Andrews Pitchfork is a trend-line study developed by Dr. Alan
Andrews a few decades ago. It is also called the Median Line Study. It
consists of three parallel trend lines drawn on a chart. The lines
resemble a farmer's pitchfork. The upper and lower lines of the
pitchfork provide a channel of support and resistance levels.
Basically, you wait for a significant "correction" from an overall
price trend, and then measure that correction and draw and project
trend lines from it.
Remember that trend lines can be applied to all markets in all time
frames. An uptrend finds prices bouncing up off the supporting uptrend
line. A downtrend finds prices bouncing down off its resisting
downtrend line. In an uptrend, the trend line provides a potential
buying point at each potential bounce. If the market is still trending
higher (meaning the uptrend line has not been negated), then there is
no signal given as to when to sell. But by drawing parallel lines to
the trend line (as in the Andrews Pitchfork study), a channel can be
created which contains short-term rallies and declines within the
general trend. The bottom trend line can be used to buy into the rally
and the top trend line can be used to take short-term profits. After
selling, the trader would then wait for the market to hit the bottom
trend line to buy again. This is very similar to the "swing trading"
method about which I have written.
With the Andrews Pitchfork technical study, a trader will pick an
extreme low or high on a chart to define a "pivot point" and then draw
a trend line, called the median line. Then the trader bisects a line
drawn through the next corrective phase on the chart that occurs after
the pivot point. Lines parallel to the median line are drawn through
the high and low points of the corrective phase, hence the look of a
pitchfork
Pitchforks can also help identify trading channels before simple
parallel trend lines can be drawn. By using an already established
market move (correction) as the width of the channel, the median and
parallel lines can be constructed, giving the trader early targets for
short-term trading within the new trend. These market retracements
generally occur at Fibonacci levels, so a pitchfork can almost be
considered to be Fibonacci lines on an angle.
The double channels of the Andrew's Pitchfork serve to identify a
longer-term trend at the same time as the shorter-term trend. As long
as counter-trend moves are smaller than the overall channel width, the
primary trend will remain intact. Trading from one end of the channel
to the other may present short-term trading opportunities. But
breakouts from the overall channel may indicate true trend changes. The
latter should be combined with simple trend line analysis for a more
reliable signal.
Dr. Andrews' rules state that the market will do one of two things
as it approaches the Median Line: 1. Prices will reverse at the Median
Line. 2. Prices will trade through the Median Line and head for the
upper or lower parallel lines and then reverse. He suggested that
prices make it to the median line about 80% of the time while the price
trend is in place. This means that while the basic long-term price
trend remains intact, Andrews believed that the smaller trends in price
would gravitate toward the median line while the larger price trend
remained in tact. Importantly, when that does not occur, it may be
evidence that a reversal in the larger price trend may be under way.
When prices fail to make it to the median line from either side, it
is often an expression of the relative bullish or bearish psychology of
buyers and sellers, and may predict the next major direction of prices.
If prices fail to reach the median line while above the median line, it
is a bullish signal. If prices fail to reach the median line from below
that line, then that is a bearish signal.
Drawing the parallel lines can often be more subjective because most
of the time markets do not trade up and down in neat channels. There
often is "market noise" and overlapping short- and long-term cycles
that make trading appear irregular. To better measure a trading
channel, the Andrews Pitchfork can help by building it around real,
objective market activity that is a countertrend move (retracement or
correction).
Just like with horizontal support and resistance levels, markets
trade within one range and then move to another, similar range and back
again. The Andrews Pitchfork measures a larger trading channel. It is
common for a market to trade in the lower end of channel and then jump
to the upper end and then move back to the lower end. During all of
this activity, the general trend is still intact. When prices move
outside of the larger channel, the overall market trend may have
changed.
Jim Wyckoff
TradingEducation.com | 
