Trading Indicator: Andrews Pitchfork

27 Mar 2018

 

 

 

 

THE MEDIAN LINE TECHNIQUE

 

“The median line technique enables you to be one of the few investors who always know in advance the probable place where a reversal of the trend will come.” Dr. Alan Andrews Case Studies for Investors

 

He pointed out that no matter which set of three pivots was used, each resulting pitchfork would tell its own story as prices interacted with the median line and parallel lines of the pitchfork

 

THE PRICE FAILURE RULE

 

Traders who have studied Dr. Andrews' techniques in depth, know that he taught ways to anticipate a change in market sentiment- change that often results in a price move that catches many traders by surprise.

 

There's a saying I ran across years ago that goes something like this: “many traders spend a good deal of their time watching what prices are doing, but they would be better off if they spent more time watching what prices are not doing.”

 

A core Andrews technique that ties in with what prices are not doing is called the “price failure rule.” It deals with those times when prices don't reach the median line.

 

A price magnet.... Dr. Andrews said his research found that prices reached a median line approximately 80% of the time....and then reversed direction. 

 

When prices don't reach the Median Line...

 

In the hands of an informed user, it offers valuable clues about the underlying price strength or weakness of an issue as prices interact with the pitchfork lines.

 

One of the things Dr. Andrews observed during his research on the inter-play between the median line and the price action, was that when prices change direction before reaching the median line, they will often move further in the new direction than they did on the previous one. He called that event a price failure, and considered it to be a reliable signal indicating that new strength (as in the above example), or weakness, was showing up in the issue.

 

2 important observations should be noted:

• There is a high probability that prices will reach a median line, and then reverse.

• New strength (or weakness) is indicated if prices fail to reach a median line.

 

Hagopian's Rule....

 

Dr. Andrews' description of Hagopian's rule: The “line at which probability indicates such a reversal could start” is the median line of the pitchfork. The “trendline they were moving along before reversing” is the Hagopian line

 

 

THE MINI-MEDIAN LINE

 

The mini-median line was one of the last techniques Dr. Andrews drew on a chart before making a trade decision. With this technique, he was able to determine the price level at which to place a buy, or sell trade order.

 

The sliding parallel line....A sliding parallel line is drawn whenever prices breakthrough a parallel line. (for purposes of this technique, a breakthrough is defined as that price bar that has all or the largest part of the trading range extending beyond a pitchfork parallel line) Once a breakthrough takes place, a line starting at the breakthrough low (or high) is drawn so that it is parallel to the appropriate minimedian pitchfork parallel line. The idea behind the sliding parallel is that when (if) prices penetrate it, new trader sentiment has very likely entered the picture, and prices can be expected to continue on

 

 

 

OSCILLATOR STUDIES

 

Oscillator studies such as the Relative Strength Index (RSI), the Moving Average Convergence/Divergence indicator (MACD), and the Stochastics indicator, to name a few of the more popular studies, are designed to graphically measure the velocity of price movement.

 

In a nutshell, when price movement is confirmed by momentum, then the trend can be expected to remain intact. If price diverges from momentum, then the market is about to reverse direction. The key to understanding divergence is simply to find where the study and the price are moving in different directions.

 

Standard bullish divergence: Prices made a lower low (c), while the oscillator line showed a higher low (c)

 

Standard bearish divergence: prices made a Higher High (c), while the oscillator line showed a Lower High (c).

 

Reverse divergence patterns....Its primary difference, however, is that it usually signals that a sizeable swing in the direction of an issue's underlying trend is about to take place

 

Bullish reverse divergence takes place when prices hold above the previous low, but the oscillator moves to a lower low.  

 

 

Bearish reverse divergence takes place when prices make a lower high, but the oscillator moves to a higher high

 

Recognizing divergence patterns that have already formed is one thing....but for most traders, knowing how many divergent peaks or valleys to expect can be a problem. Sometimes the market sentiment is so strong that even though divergence is present, the market continues to make new highs (or lows). When that happens, traders who make their trade decisions based solely on oscillator divergence are likely to experience a large number of unprofitable trades, and worse, find their trading capital steadily eroding. That's where the Andrews techniques you'll be using, along with the divergence patterns you've studied in this manual, can make all the difference.

 

 

PITCHFORK LINES IN ACTION

 

The studies used in the examples are:

• The dominant trend on the chart.

• The Pitchfork.

• Oscillator divergence.

 

The chart shows three studies that would have helped a trader determine the reversal probabilities when prices reached the pitchfork median line.

 

In addition to Dr. Andrews' observation that prices will more often than not reach a median line, and then reverse, two supplementary indicators shown on the chart supported a reversal probability.....the dominant trend was down, and the oscillator had formed a bearish reverse divergence pattern. Those three basic studies then; the dominant trend, price proximity to the median line, and oscillator divergence, reflected the prevailing market sentiment, and would have alerted a trader that prices would very likely reverse after reaching the median line.

 

Unlike the median line, which he said acted like a price magnet, drawing prices to it, parallel lines have no similar drawing power. They serve only to show future levels of support or resistance in the event prices penetrate, and then continue to move beyond the median line.

 

Prices at a parallel line....

 

Dr. Andrews taught his course members to draw a new pitchfork whenever prices reached one of the lines of a previously drawn pitchfork. The purpose for doing that, he said, is to help stay in tune with developing prices in anticipation of a reversal in that area. After drawing a new pitchfork, he made special note of the price level of the new median line, reasoning that if prices did in fact reverse, they could very well reach that median line.

 

 

THE STRATEGIES

 

1. The very first step is to identify the price trend of the time frame you are interested in

2. The second step is to select three recent pivots that you'll use for drawing a pitchfork that slopes in the same direction as the trend of the time frame under study

 

 

The price failure strategy....

 

After drawing the trendline and the pitchfork on your chart, note where prices are in relation to the median line of your pitchfork. Remember, the median line is the target. The probabilities are high that prices will continue until they reach the median line, at which time a reversal is likely. But, if prices are moving away from the median line instead of continuing on towards it, a price failure, and possibly a trend change might be in progress.

 

The Setup Rules

 

Here is the sequence that will set up the price failure strategy:

• Prices reverse before reaching the median line.

• Prices penetrate a pitchfork parallel line.

• Prices penetrate the sliding parallel line.

• Prices penetrate the Hagopian line.

• Oscillator divergence has formed.

 

 

Sell order

 

• Prices reversed before reaching the median line.

• Prices penetrated the lower pitchfork parallel line.

• Prices penetrated the sliding parallel line.

• Prices penetrated the Hagopian line.

• Bearish oscillator divergence had recently formed

 

 

 

 

 

 

 

Buy order

 

• Prices reversed before reaching the median line.

• Prices penetrated the upper pitchfork parallel line.

• Prices penetrated the sliding parallel line.

• Prices penetrated the Hagopian line.

• Bullish oscillator divergence had formed

 

 

 

 

 

 

 

 

A brief reminder - when looking for a potential trade setup on a daily chart, it's a good practice to first study the weekly chart of that issue. Make note of your studies, and be sure to determine the dominant trend on the weekly.

 

http://www.scotsman.china8.org/Trading%20with%20The%20Pitchfork-No%20Password.pdf

 

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