As technology has developed, so have the tools available within technical analysis.
These days, you would be hard-pressed to find any trading in the financial markets that do not rely on the use of new methods/ strategies.
Trendlines/ S&R play a part and are used to provide insights into the probable price movements of a coin in the future.
The insights they provide are based on various metrics such as trading volume and historical price data.
In this guide we will look at the Andrew Pitchfork strategy.
What Is The Andrews Pitchfork?
The Andrews’ Pitchfork is used to identify support and resistance and highlight
potential breakout and breakdown levels. It was developed by Alan Andrews and is described as a pitchfork due to the pattern that its price movements make on a price chart.
You can see an example of Andrews’ Pitchfork below.
If you examine the chart above, you will see a central “median” line running through the center of the pitchfork.
Through study and observation, Mr. Andrews concluded that the price of a security would gravitate toward the median line 80% of the time. Wild price fluctuations could account for the remaining 20%.
The general approach to trading with this pitchfork indicator is found in these wild price fluctuations. Since you know that the price will generally retrace towards the median line, you can enter long or short positions when the price moves away from this median line. This is a fundamental trading strategy using the Andrews’ Pitchfork indicator.
Further down in this guide, we will examine a more sophisticated approach to
trading this indicator in more depth.
How To Draw Andrews Pitchfork?
Andrews Pitchfork Trading Strategies
Whilst there are many different trading strategies with Andrews’ Pitchfork, they are centered on the same three basic principles.
Firstly, prices typically move around the median line. When examining the price movements of a security using a pitchfork, you should note that the price movements generally revolve around the median line the majority of the time. Secondly, when the price breaks away from the median line, there is an 80% chance that the price of that security will regress to this median line.
The Final Principle is that when the price of the security breaks through the range of the pitchfork in the opposite direction of the general trend, this represents a signal for a potential reversal in the trend.
Since we know that this trend reversal signal exists, one of the most popular
strategies for trading an Andrews’ Pitchfork is based on this final principle and
involves trading breakouts outside the expected range. Let’s take a look at how we might do this in a situation where the uptrend is about to reverse a er a bearish breakout.
Assume that you are observing a price chart and notice a potential breakout. At this point, you should wait for the breakout to be confirmed. This confirmation will occur when the price falls below the pitchfork to create a bottom before rising again to the bottom of the pitchfork, testing the resistance.
After this resistance has been tested, the price has a high probability of falling back to its bottom. If the price falls below this bottom, the breakout has been confirmed, and you can begin to enter your short positions.
As always, you should look for your entry point and keep an eye out for a good
position to set your stop loss. In this trade, you should set your stop-loss order at the resistance level that was tested before the price fell back to its bottom.
Similarly, your profit target should be twice as much as your risk. Therefore, if you enter a $200 position and have a stop-loss order at $180, your take-profit order should be at $240, twice the amount you stand to lose.
There is no concrete methodology for placing the various points when it comes to Andrews’ Pitchfork. Instead, it would help if you use your own judgment when
placing these channels.
As with most aspects of technical analysis, there is a subjective component that is required to succeed. This subjective component is why you need to build experience by experimenting with the strategy before using it in a live setting.
Since reliably placing these three pitchfork points will be the key to successfully using this strategy, traders must have the experience necessary to do this before risking any significant amount of capital.
If you have any further questions please message me on Telegram @chiefrafba