Andrews' Pitchfork. Best trading techniques from Alan Andrews
The basis of the Andrews Fork graphical plotting is the Median Line that made Andrews famous. Andrews, always claimed that the Median Line is based on the laws of physics. He believed that the principles of physics could be applied to the financial markets. The diagrams below show the principle upon which the Midline is based.These principles are that natural cycles return to their centers, and for every action there is a counteraction.
The diagrams show sinusoidal cycles. On the left is the incomplete one, and on the right is the completed one. The starting pivot point is marked as A, the Midline is drawn through the center between B and C. In the right diagrams, the wave goes back to the Midline at point X. At this point, the sinusoid ends the cycle. When the fluctuation in the financial markets returns to the Midline, it also ends the cycle. Andrews believed that price returns to the Midline about 80 % times.
Construction of Andrews' Fork
To build Andrews' pitchforkThe trader must first Allocate a maximum or minimum, appearing on the graph (to facilitate the construction and highlighting of highs and lows, you can use ZigZag indicator). The first point, or center, will be drawn from this peak or bottom, it is marked as point A (as shown in the picture). Once the center has been chosen, the trader must identify the peak and the bottom on the right from the first center. Most likely, it will be a correction in the opposite direction from the previous move up or down.
Returning to the figure, we see that a slight correction from the bottom (point A) allows us to identify points B and C. Once these points have been identified, we can start drawing. The formation handle starts from the center point (point A) and serves to midline. The two prongs formed by the peak and the bottom (points B and C) serve as support and resistance to the trend.
Andrews' Pitchfork trading rules
Andrews made some important observations for traders about the pitchfork. These are not absolute rules; but just general observations made by Andrews that will help traders know what to expect when using Andrews Forks. A trader can increase the accuracy of trades by using Andrew's pitchfork in combination with other technical indicators.
Andrews Forks Trading Principle 1: When the Andrews Pitchfork is plotted on the most recent fluctuations, price should return to the Pitchfork Median Line in about 80 % cases.
Andrews Forks Trading Principle 2: When price returns to the Pitchfork Midline, this location often becomes a new pivot point on the Midline.
Andrews Forks Trading Principle 3: When price returns to the Midline, it often forms a few small swings around the Midline before moving further. Here is an example of these Andrews Pitchfork trading principles. The above daily chart of the EUR/USD pair (the higher the range, the better Andrews' theory works, but Andrews' pitchfork can be used up to the 15-minute chart). The Midline is drawn through the turning points A, B and C. After point C the market moves back to the Midline at point D. When the price reaches the Median Line, the upper turning point D appears, which is followed by a rapid counterflow downwards. Price then tests the support line a couple of times (E and F), then rises again to the midline and after successfully breaking the support line at H, goes down sharply.
The Principle of Andrews' Pitchfork Trading 4: Another observation made by Andrews with respect to the Midline concerns situations when price fails to reach the Midline. In these situations, Andrews observed a change in the direction of the price and its movement over a greater distance than the previous swing. This observation can be used to set a price target after the price has not reached the Midline.
Andrews Forks Trading Principle 5: If the price does not reach the Midline, the price moves in the opposite direction by a distance greater than the previous swing.
Trading rules for Pitchforks and Signal Lines
Below are some of Andrews' rules for using Forks and Signal Lines.
Buying Rule 1: When the price breaks above the descending upper parallel line, it indicates market strength and can be considered a buy signal.
Sales Rule 1: When price passes below the rising lower parallel line, it indicates market weakness and can be considered a sell signal.
Buying Rule 2: On descending Forks and the upper Signal Line, if price does not reach the Midline and then rises and breaks above the upper Signal Line, it is a buy signal.
Sales Rule 2: On rising Forks and lower Signal Line, if price fails to rise to the Middle Line and then falls below the lower Signal Line, this is a sell signal.
Let's look at these rules using the example below: the graph shows Andrews' descending pitchfork plus the upper signal line. When the price does not reach the midline of the pitchfork and crosses the top line of the pitchfork, it is an early signal to buy or just an indication that the signal line is likely to give a buy signal soon: you can place a pending order. As you can see from the chart the signal line also serves as a support line and the price often confirms the upward trend by rollback to the signal line (you can place a repeated buy order).