Andrew’s pitchfork is used by traders to establish profitable opportunities and swing possibilities, and it can also be used to identify and gouge overall cycles over longer periods of time.
Andrew’s pitchfork is chiefly used for equity markets and futures markets, but can be utilized for other markets as well, including currency markets.
Applying Andrew’s Pitchfork
The application of Andrew’s pitchfork offers two formidable support/resistance lines with a middle line that can serve as both support/resistance or a pseudo-regression line. According to Alan H. Andrew, who was the one who popularized the pitchfork and after whom it is named, market price action will gravitate towards the median line 80 percent of the time, while the remaining 20 percent will be characterized by wild fluctuations or changes in sentiment. Andrew made his trades based on the assumption that the overall longer-term trend will remain intact regardless of the small fluctuations, until sentiment changes and a new trend will be created.
- Identify a high or low that has previously occurred on the chart. The first point should be drawn at this peak or trough. We call it Point A.
- Identify a peak and a trough to the right of Point A. (This will probably be a correction in the opposite direction of the earlier move up or down.) The minor correction will be used to establish Point B and Point C.
- The handle of the formation starts at Point A and serves as the median line.
- Two prongs are formed by the following peak and through Point B and Point C. These two prongs are the support and resistance of the trend.
- You can now either trade within the channel, or isolate breakouts to the upside or downside of it.
Trading outside the channel
Trading outside the channel is less common than trading within it, but can be highly profitable when executed correctly. The key is to spot when the market is shifting and establishing a new trend rather than gravitate back towards the old median. Breaks outside the channel can be a sign of a new trend forming.
Using Andrew’s Pitchfork for currency trading
As mentioned above, Andrew’s pitchfork is usually utilized for trading in equity and futures, but can be used for other markets as well, including currency trading. Generally speaking, it will work best with major currency pairs since they tend to trend rather than range, and their patterns are usually less choppy. This is especially important if you use Andrew’s pitchfork to generate signals to trade binary options.
- You want to trade in EUR/USD. Start by identifying price action that has broken through the median line and is heading near the upper resistance prong.
- Look for a bearish candlestick pattern, such as an evening star. This will be your first signal.
- Use a price oscillator to confirm a downtrend in the currency.
- Make your entry a few pips (5 pips is a good rule of thumb) under the close of the third and final candle of the formation.
- Set a stop at 50 pips above the entry.
Pitchfork Primer: Pitchforkprimer.com : English : Fetched 2016-01-13
Make Sharp Trades Using Andrew’s Pitchfork: Investopedia : English : Fetched 2016-01-11