Traders can use the trend-lines generated by the Andrews’ Pitchfork to make a variety of trades based on resistance and support from the upper and lower bounds, the pull of the middle trend-line and breakouts from breaches of the upper and lower bounds.
Generating an Andrews’ Pitchfork
The Andrews’ Pitchfork indicator is intended for use with price trends featuring a significant positive or negative slope. Many technical indicators are less applicable to these types of strong price trends, so Andrews’ Pitchfork is a favorite indicator for these situations.
The Andrews’ Pitchfork indicator is generated by selecting three successive peaks and troughs, drawing trendlines for each point, and then drawing a perpendicular line between the second and third point, which provides the indicator with a distinctive pitchfork appearance on the price chart.
The result is an upper bound trendline, a lower bound trendline and a median trendline. The bisecting line between the second and third points acts as the starting point after which the price action should be responding to the support and resistance levels provided by the upper and lower bounds, as well as the tendency of the price to revert back to the median trendline.
Trading with an Andrews’ Pitchfork
The Andrews’ Pitchfork indicator is not intended to provide unequivocal buy and sell signals. Rather it is intended to be used as a general framework for making trades based on experience, intuition and other complementary technical indicators.
The upper and lower bounds provide a sense of the general boundaries of the current price trend, while the price will tend to revert to the median trend-line after failing to breakthrough resistance and support levels.
In addition, because the Andrews’ Pitchfork is such a strong trend indicator, any significant breach of an upper or lower bound should signify a strong breakout that will rapidly transform the price dynamics and make the current Andrew’s Pitchfork outdated.
For example, many day traders will watch a securities price as it tests an upper or lower bound of the Andrews’ Pitchfork.
If the price fails to break through this resistance or support level, then it tends to trend back toward the median trend-line before attempting another test of an upper or lower bound.
This predictable reversion to the median can provide a number of days of trading where the day trader can reasonably predict the short term trend of the price, allowing them to trade alongside the short term price momentum.
As a contrasting example, when the price breaks significantly above or below the bounds of the indicator, this is a strong signal that a substantial price increase or decrease is likely. Breaking the bounds of the Andrews’ pitchfork is a strong indication that the recent trend is going to change dramatically, and day traders can position themselves to profit from the significant market rebalancing.
Trading with Support and Resistance Indicators
Chart-based support and resistance indicators, such as the Andrews’ Pitchfork, are best used as rough guidelines for further analysis before trading. The key to the effective use of the Andrews’ Pitchfork and similar indicators is to identify price action where the chart pattern fits perfectly or nearly so, which indicates that the price action is following a predictable pattern based on technical factors.
Chart patterns that do not strongly match a technical indicator are unlikely to produce the predictable technical price action that allows day traders to make solid predictions.
If you feel that you are stretching the pattern indicator too far to make it fit, then this is a good sign that it is an inappropriate use of that indicator.
While the use of the Andrews’ Pitchfork remains subjective, it is used most effectively when there is little doubt or nuance involved in its application to a price chart.
Andrews’ Pitchfork is a very useful indicator for navigating the boundaries and median of a strong price trend.
While Andrews’ Pitchfork is not intended for use as a direct indicator for buy and sell signals, it does provide a very strong analytical framework for developing trades, often using complimentary technical indicators to create actual trades.