Andrew’s Pitchfork is one of the most popular trading tools when it comes to finding strong support and resistance levels, both static and dynamic ones. Furthermore, it shows targets for the moves to come, either bullish or bearish, and therefore it should be part of any trader’s arsenal.
Every trading platform has the Pitchfork tool incorporated and before going into details, it should be noted that the Pitchfork is actually being based on three points of pivots. These three points are giving the general direction of the Pitchfork as from them the three lines are projected: the UML (Upper Median Line), ML (Median Line) and LML (Lower Median line).
By far, the most important line is the ML as its main characteristic is to attract price, therefore it can be used as a target for the move to come. In the example above, the ML is acting as a dynamic resistance as well and the difference between dynamic and static resistance is the fact that the levels are changing without actually the resistance area to be broken.
Having said that, by the time the ML is reached one should exit the longs or even go short for the lower part of the rising channel, with the opposite being true as well in the case that Pitchfork is showing a bearish trend.
The general interpretation is that as long as price stays in the lower upper channel in a bullish Pitchfork (between LML and ML)or in an upper lower channel in a bearish one (between UML and ML), the trend is healthy and one should look to buy dips or sell spikes. This means that by the time the channel is broken (price moves below LML in a bullish Pitchfork) the trend is considered to weaken and it would be a good idea to look for trades in the other direction.
However, that is only partly correct as the trend is considered to have changed only after the so-called Schiff line is broken. Such a line can be obtained by connecting the beginning of the Pitchfork (or the first pivot point) with the end of it (the third pivot point) and projecting the outcome further.
Only a break of this trend line will shift the focus from a bullish to a bearish bias, otherwise market will be bought (like the example above shows) as bulls are trying to regain the area between LML and ML.
Trading with Pitchfork can be done in multiple ways, as some trading platforms, for example allow you to add different levels from the main pivots, for example, to add 61.8% and 161.8% levels from the main ML and use those areas for support and resistance on the dynamic side.
No matter the interpretation though, Pitchforks have a great advantage, and that is the fact that they are extremely visible and a clear invalidation of the Schiff line in telling you that the trend changed and a new one probably started.
The next step then is to look for the new trend and interpret it with a new Pitchfork that usually starts from the previous high or low, but that is not mandatory.
Using the example above and assuming market will break that Schiff line, where would be the accurate place to draw the Pitchfork for the new trend? I would say this one:
In this case, it can be seen that the ML acted like a dynamic support for the move lower in the EURUSD and from there the price jumped aggressively. However, if you address what was mentioned earlier in this article, as long as price stays on the upper side of the Pitchfork in a bearish trend, price is still bearish, so normally one should look for opportunities to short the pair until the Schiff line is going to be broken and a new Pitchfork for the new trend can be drawn.
When trading with Pitchforks, time frames are really important. If you use the monthly or weekly charts then huge stop losses should be placed as the distance to the Schiff line is quite big. However, on the lower time frames such a strategy can be applied with much success.
Because the real invalidation point is the Schiff line, trading with the Pitchfork is considered to be a lagging strategy in the sense that by the time the Schiff line is broken all traders shifted gears already. However, this is not correct when it comes to dynamic support and resistance levels as aggressive traders will use them for early entry/exit places. In any case, knowing how to use Andrew’s Pitchfork tool it’s a must for any trader, regardless what the financial product is being traded.
Moving on, next article here on ForexGator.com will deal with static support and resistance levels, or horizontal ones, given by the apex of a triangle.
