Making hay the Andrew’s Pitchfork way
SOMETIMES, trying to find swing points and the right opportunity to take a profit can feel like looking for a needle in a haystack. But using an Andrew’s Pitchfork can give traders a helping hand to identify these points. Though it has fallen out of the mainstream in recent years, the Andrew’s Pitchfork can still be a useful tool for traders looking to identify overall cycles and to trade within a channel.
The system rests on the use of a support and a resistance line as well as a median line. Invented by Dr Alan H Andrews, it is based on his theory that prices would gravitate towards the median line 80 per cent of the time while the price trend is in place, with the other fifth being fluctuations and changes in sentiment.
The channel technique shows areas of support and resistance from the baseline. The idea is to buy near lows and to sell near highs that are identified by the outer prongs of the pitchfork. The idea is to trade from one channel of resistance to the next. Andrews suggested that the failure of a price to reach the median line from either direction should be read as an indicator of the relative appetite of buyers and sellers in the marketplace and so give a prediction of the next direction in prices. Put simply, if prices fail to drop below the median line, then it is a bullish trend and if it fails to penetrate the line from an uptrend, then it is bearish.
So how do you apply an Andrew’s Pitchfork to your charts?
The easiest answer is to click the option on the charting program that comes with your spread betting or CFD platform. For example, GFT’s Dealbook 360 software (see graph, above left).
However, the long-hand method takes a bit more time. First you have to identity a top or bottom that has occurred on the chart (A and A1 on the example). Next you must identify a peak or trough along from this point.
The outer prongs of the pitchfork shape are formed by the peak made at the origin and trough of the retracement. (C and B on the graph and C1 and B1 on the reversal).
When the pitchfork is applied to the chart, traders should plan to sell when the market reaches line C. Traders should also buy when prices drop to line B and take profits when they return above the median.
By making use of the Andrew’s Pitchfork system alongside other technical indicators, traders can look to trade a channel system within a trending market and hopefully pile up their profits.