Andrews Pitchfork – 4 Top
Trading Strategies for
Today’s Markets
The Andrews pitchfork indicator, commonly referred to as
‘median lines,’ is one of the most versatile trading tools
available.
We will explore the basics of the indicator and strategies you
can use to identify support and resistance levels.
The Inspiration for the Andrews
Pitchfork
Dr. Alan Andrews drew inspiration from Roger Babson for the
creation of the pitchfork.
Roger developed the concept of action/reaction lines after
witnessing a significant market correction in the early 1900s.
After seeing billions of dollars evaporate into thin air,
Babson believed his action/reaction lines were a preventive
measure for future would-be investors by providing price
action for extreme support and resistance areas in the market.
Like Andrews, Babson also took inspiration from another
brilliant person – Isaac Newton.
Babson’s lines were inspired by the works of Isaac Newton and
the laws of gravity. Most of the pitchfork’s concepts are
focused around Newton’s third law which states “For every
action, there is an equal and an opposite reaction.”
If that was tough to follow, let’s quickly recap. Andrews
pulled inspiration from Babson who also pulled inspiration
from Newton, thus you could say Andrews pitchfork is a
Newtonian trading strategy.
Why is this important to know? You need to know that while the
indicator looks like something a smart fourth grader could
have created, a lot of thought has been given to the
indicator.
Overview – Andrews Pitchfork
Shifting back to Andrews pitchfork, the indicator is a median
line with an upper and a lower parallel line.
The chart below illustrates a sample median line or Andrews
pitchfork applied to a stock chart.
Andrews Pitchfork tool
Time Frames and Markets
The Andrews pitchfork works in any time frame. This, of
course, can range from tick charts to monthly. This allows the
indicator to work well for day trading and long-term
investing.
The indicator can also work on any security. So, whether you
like to trade cryptocurrencies, futures or stocks, the
pitchfork has you covered.
Plotting the Andrews Pitchfork Tool
Correctly
Traders need to identify the right points as the success or
failure of interpreting signals depends largely on how one
plots the median lines.
In most cases, drawing the median lines is rather subjective,
but with practice, one can develop the confidence required. A
rather simple method is after pivot points are identified,
tweak the median lines to encapsulate price action with the
greatest level of accuracy.
Trading strategies with Andrews
Pitchfork Tool
There are many different trading strategies that can be built
using the Andrews pitchfork tool.
According to Alan H. Andrews, there is a high probability of
the following:
Price will reach the latest median line
Price will either reverse on reaching the median line or
gap through it
When prices pass through the median line, more often
than not, prices pull back to the median line
When price reverses before reaching the median line, it
is likely price will move in the opposite direction
Prices will reverse at any median line
One of the major factors that work in favor of median lines or
the pitchfork tool is that various studies have shown and
proven the fact there is an 80% chance for any of the above
Andrews’ rules to be fulfilled.
Is any of this making sense?
Well, let’s talk through four simple ways you can trade with
the tool combining the above rules.
1. The Price Failure Rule
One technique of Alan Andrews’ is the price failure rule which
often catches the larger trading community by surprise.
The price failure rule was well documented and explained by
Gordon DeRoos, in his book, “Trading With The Pitchfork”.
If you follow this link you can see both the book and trading
coursework which goes into excruciating detail.
The price failure rule forces the trader to look at what
prices are not doing, rather than following the herd.
It is widely known that prices gravitate to the median line
80% of the time. Once at the median line, there are two
possibilities – price will either gap through the median line
or reverse course.
With the price failure rule, traders focus on the factor of
when price fails to reach the median line.
A trader waits for the price to reverse near the median line
and waits for the strong counter move.
Real-Life Long Example
The chart below illustrates the price failure rule with the
QQQ PowerShares ETF. Here, you can see a falling pitchfork
encapsulates the downtrend nicely. In this scenario,
conventional wisdom states to look for a short position.
Pitchfork – Price failure method
However, notice how price bounces back and forth between the
median line and the outer median line. The final bounce off
the upper median line shows prices failing to reach the median
line. This eventually leads to a price reversal higher.
For traders, this would have been a surprise on the sudden
change in direction in the markets and lead to a short squeeze
once the daily highs were exceeded.
2. The Mini-Median Line Method
The mini-median line method involves drawing two opposing
median lines. As the name suggests, the mini-median line is
smaller in scope and signals a counter move to the primary
pitchfork tool.
Another unique aspect of the mini-median line methods is that
closing prices are used instead of the high or low prices.
Once a counter or opposing median line is plotted over 5 to 10
bars, the mini-median line can be used as a trade trigger.
Alongside the mini-median line tool, we also need to plot a
sliding parallel line.
Real-life Long Trade Example
The overall slope of the primary pitchfork suggests prices
will continue to push higher.
Mini-median line trading method
As you can see, there are two mini-median lines on the chart.
Once the price breaks the first mini-median line, the stock
gaps higher up to the median of the primary pitchfork.
The stock then pulls back and forms another mini-median line.
Once this line is broken, the stock runs 5% up to the primary
pitchfork median line.
These are just two examples of how you can use trends within a
trend to identify buying opportunities.
3. The Flat Price Action Method
In the flat price action method, the trader needs to look for
price to stall near the median line.
This method is usually indicative that prices are likely to
change direction and is a cousin of the price failure method.
The one difference is the price failure method does not
require consolidation before taking a position.
For the flat price action method, prices need to move in a
strong rally first, typically from the third pivot point. The
fewer pullbacks in this leg of the formation, the better.
Once price hits the median line, look for consolidation near
the median line.
Typically price breaks to the downside and posts a strong
correction back to the third pivot point.
Short Trade Example
Flat price action method (Short trade example)
Here, you can see the strong move from the pivot low and
prices failing to break the median line convincingly. This
develops into a consolidation range between 37.89 and 35.50.
The break down from 35.50 sends prices back to the third pivot
point at 29.65.
Long Trade Example
Flat price action method (Long trade example)
In this example, prices post a steady decline from the third
pivot point high. We then get some consolidation between 75.99
and 72.27.
The upside breakout from this range sends prices higher with a
target of the third pivot point high at 79.47.
Day Trading with this Approach
Day trading with this approach will prove challenging. This is
because consolidation often takes place in the middle of the
day, where the market slows down.
Therefore, if you are going to day trade this pattern, you
need to begin looking for setups in the early afternoon around
2 pm for late day breakouts.
4. Andrews Pitchfork Tool and
Divergence
Another way to trade the Andrews pitchfork tool is to look for
divergences between the pitchfork and another indicator or
price.
Divergence between the Pitchfork and
Relative Strength Indicator
In this first example, you can see how the bearish divergence
was formed with price making a higher high while the relative
strength index was seen making a lower high. Following this
high that stalled near 16.60, price eventually broke down
through the lower median line following the price failure.
Pitchfork divergence method – Short position
In the next chart, you can see that while prices posted a
lower low, the 13 period RSI signaled a higher high, which
indicated a bullish divergence in price. The fact that prices
stalled near the median line indicated that price would be
reversing upward shortly.
Pitchfork divergence method – Long position
Following the breakout from the outer median line, we can see
that the long position resulted in a profit as price continued
to push higher.
Besides the RSI, other oscillators that can be used include
the MACD and stochastics.
Elliott Waves and Andrews Pitchfork
In many cases, the concepts of Elliott wave can be applied to
the median line itself. Not many traders have fully grasped
this method, but when combined, median lines and Elliott wave
can be a great way to trade the market with confidence.
Andrews’ Pitchfork tool and Elliott Waves
The above chart gives a brief illustration of Elliott wave
counts that coincide with the Andrews’ pitchfork tool.
As you can see the Elliott wave counts fit nicely within the
pitchfork. For example, if you have a wave five failure that
barely ticks over the third wave high and also fails at the
median line, you can use this as validation of the wave
pattern.
Summary
Like any other indicator, the pitchfork is not perfect. You
will need to have solid money management techniques in place
before placing any live trades.
The key is to have a set of rules you follow and to remember
to keep your stops.
