Andrew’s Pitchfork Trading Strategy
Alan Andrew’s Pitchfork is
catchy. It catches your attention with its unusual name and its striking
pitchfork appearance. It also catches trends with a channel.
Essentially, Andrew’s Pitchfork
is a tool for drawing price channels. While two lines surrounding price are
usually enough to draw a channel, the Pitchfork has an extra line. It is the
median line or the handle of the Pitchfork.
The median line is central to
this trading method. This is why Andrew’s Pitchfork is also known as the Median
Line Method.
HOW TO DRAW THE ANDREW’S PITCHFORK
There are three steps to
drawing a Pitchfork.
STEP ONE – PIVOT POINTS
You need three points for a
Pitchfork.
For a bull channel, label:
- A
major pivot low as point A;
- A
subsequent higher pivot high as point B; and
- The
following pivot low as point C.
For a bear channel, label:
- A
major pivot high as point A;
- A
subsequent lower pivot low as point B; and
- The
following pivot high as point C.
STEP TWO – MEDIAN LINE
Draw a line passing through
point A. and the mid-point of point B and C. This is the median line.
STEP THREE – CHANNEL LINES
Project parallel lines to both
sides of the median line to form the channel. One line should pass through
point B, and the other through point C. The top line is the upper median line
and the bottom line is the lower median line.
The median line determines the
slope of the channel. This is in stark contrast to the normal trend line
channel method in which the angle depends on the trend line.
TRADING RULES – ANDREW’S PITCHFORK TRADING STRATEGY
There are many ways to trade
using Andrew’s Pitchfork but the basic idea is that price will oscillate around
the median line. In this version, we will focus on trading the first re-test of
the limiting median line.
LONG TRADE
1. Draw a bull channel
with Andrew’s Pitchfork.
2. Wait for price to
fall and test the lower median line.
3. No bar high should
be lower than the lower median line.
4. Buy a tick above
the high of a bull bar at the lower median line.
SHORT TRADE
1. Draw a bear channel
with Andrew’s Pitchfork.
2. Wait for price to
rise and test the upper median line.
3. No bar low should
be higher than the upper median line.
4.
Buy a tick below
the low of a bear bar at the upper median line.
ANDREW’S PITCHFORK TRADING EXAMPLES
WINNING TRADE – SHORT SPY WEEKLY
This SPY weekly chart shows one
of the most impressive Pitchfork in the past decade. After all, it caught a
huge chunk of the market plunge in 2008/2009.
1. After making a new
low in the downwards trend, the market bounced up to test the upper median
line. The resistance was clear as a bearish outside bar formed at the line.
This bar was also our signal to go short.
2. These four points
are possible targets for the bear market. In fact, the last target caught the
exact bottom of the crisis.
3. Price rose strongly
and broke out of the upper median line. This break-out warned us that the
market was not simply having a rest in a down trend. A recovery was underway.
LOSING TRADE – SHORT EUR/USD DAILY
This EUR/USD daily chart shows
another bearish Pitchfork.
1. Price fell and
found resistance at the median line. It bounced up to the upper median line
which resisted it. We entered short with the first bearish bar that overlapped
with the line.
2. Although the trade
achieved more than 1:1 reward to risk ratio, we consider this trade as a
failure because it was a trend continuation trade. Hence, the most conservative
target was the last extreme of the down trend. Price rose up above our pattern
stop at the high of our signal bar before hitting this conservative target.
3. After the trend
resumed, prices tangled with the median line, showing that this
centerpiece was significant.
The timing of this trade was
not perfect, but it was not a bad trade. In fact, this chart gives us a great
opportunity to introduce sliding parallels.
Sliding parallels are added
parallel lines which also act as channel lines. The first sliding parallel
provided excellent resistance in this down trend.
This is a textbook example. In
ongoing chart analysis, you will have many sliding parallels. (Just keep
pushing them to the right by the same distance.)
It is not always clear which
sliding parallel will be effective. Moreover, if you have too many sliding parallels,
you might miss signals of a reversal.
REVIEW – ANDREW’S PITCHFORK
TRADING STRATEGY
Andrew’s Pitchfork is a unique
and reliable tool. The median line provides a different market geometry
perspective. The trick lies in picking the right pivots.
Pick the major pivots. Ensure
that the resulting channel is wide. Wide channels do better and offers a
healthier reward to risk ratio.
When drawing Pitchforks, there
are two common pitfalls.
The first is selecting the last
pivot (point C) too soon. Exercise patience and let price action confirms the
pivot as a major swing point before including it in your Pitchfork. If not,
expect more false signals.
The second problem is with the
person with too many Pitchforks. Some traders are so excited with this new toy
that they draw Pitchforks all over the chart. It’s confusing and not helpful.
Fortunately, there are several
books that discuss Pitchfork analysis in detail. Take your pick.
- Integrated Pitchfork Analysis: Basic to Intermediate Level (Wiley Trading)
- The Best Trendline Methods of Alan Andrews and Five New Trendline Techniques
- Roger Babson’s Action Reaction Techniques (Andrews Babson)
(Alan Andrew based his
method on Roger Babson‘s findings.)
Courtesy - TradingSetupReview
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