Strategies


TRADING WITH ANDREW’S PITCHFORK PART 1 - RULES

One of the greatest trading tools that exist, Andrews Pitchfork appears on all trading platforms with the default settings. No matter what you trade, the three lines that make the Pitchfork will always help in finding the right market direction. That is correct: the whole concept is based on three parallel lines. Developed by Alan Andrews, the Pitchfork starts with a great debate: where to position the initial three points?

It may not appear as necessary, but this represents an enigma still for various market technicians. The thing is that Alan Andrews referred to the three points as pivots. The problem is that a pivot may appear in the middle of a trend, suggesting a continuation pattern. Or, at the end of one, indicating a reversal.

However, in both cases, the Pitchfork shows essential support and resistance levels to trade with. Moreover, traders project those levels further in time. And, they also use Fibonacci levels for even more complex analysis. Here is how the three lines are derived:

  • P0 – the first pivot point gives birth to the most critical line in the Pitchfork: The Median Line, or the ML
  • P1 – the second pivot corresponds to the Upper Median Line (UML)
  • P2 – the last pivot corresponds to the Lower Median Line (LML)

 

Below is the silver chart, or the “poor man’s gold.” It shows the XAGUSD (the financial “name”) for silver on the daily time frame. As you can see, recently it dropped quite some. From middle 2016, silver can’t recover the highs.

Pitchfork 1

 

The two blue crosses show the P0 and P1 with the Andrews Pitchfork tool. The question now comes where to place the P2 or the last pivot? The problem is that the resulting lines are parallel. It makes it extremely important where the P2 starts, as the entire Pitchfork’s angle changes.

One of the rules that define a trend says that if the series of lower highs continues, a bearish trend won’t stop. In the chart above, while the series seems to be broken, the break was a fake one.

The market turned and made a new marginal low, enough to confirm the third pivot point. Here how the Pitchfork finally looks:

Pitchfork 2

 

Out of the three lines that make the Pitchfork, the middle one, or the ML is, by far, the most relevant one. It is said that it has the power to attract price. 

Before focusing on the ML, let’s review again why the P2 was placed where it was. Let’s go back for the reasons:

  • P0 – typically this one starts from the end of the previous move. Depending on the strategy used, most of the times it represents the high or low of the trend that just ended. Or, in the case of trading with Elliott Waves Theory, it merely represents the end of the previous wave (that one isn’t mandatory to be the absolute high or low!!!).
  • P1 – the market starts falling, and it makes lovely lower lows and lower highs series. Until it holds, there’s nothing we can do. But suddenly, the XAGUSD pair jumps and breaks the string. This gives the place for the second pivot point with the Andrews Pitchfork
  • P2 – finally, the same principle applies to the last pivot. The newly created bullish trend sees a sharp reversal, and the series of higher lows is broken. It is enough for placing the last pivot at the top of the previous swing.

 

Pitchfork 3

 

From this moment on, we can delete the everything from the chart and merely use the Pitchfork, as we just had confirmation for the way to use the pivot points. It is now, when the real Pitchfork analysis starts, from a chart like the one below.

Pitchfork 4

 

Risk Warning: Trading may not be suitable for everyone, so please ensure that you fully understand the risks involved. Especially trading leveraged products such as Forex and CFDs carry a high degree of risk to your capital and can result in the loss of your entire capital. Only invest with money you can afford to lose.