Table of contents:
There are countless possibilities to draw a trend line in the chart. The flexibility is an advantage and disadvantage at the same time. Trend lines become problematic if they support preconceived opinions. This sometimes results in a trend channel being drawn in which has only a secondary importance in the overall price picture. There is a lack of objectivity. And those who cling to their prejudices turn a small mistake into a big one.
The pitchfork makes it possible
The pitchfork offers one possibility to draw its trend lines objectively and in line with the market into the chart. To be more precise, it is about “Alan Andrews Pitchfork”.
Visually, the pitchfork looks like a three-pronged pitchfork. But it doesn’t make a mess, but is a powerful instrument within the technical analysis. Every trader who deals with trends should actually always work with the pitchfork. Either it is ignorance or it is underestimated by most analysts. Otherwise, it is impossible to understand why it is so little used.
The idea of the pitchfork is based on the cyclical movement of the market.
Figure 1: Price cycle in the pitchfork
The left picture describes the sinusoidal movement of a market. A straight average line is drawn in the middle. This is called the median line. The right picture has two additional trend lines. Starting from points A and B, they are parallel to the median line and form the trend channel. A cycle is complete when point C is touched.
The next picture 2 shows the implementation of the pitchfork theory in a price chart. In this case it is the DAX in an upward trend. All rules are shown here as examples of the upward trend. In case of a downward trend, the rules must be reversed without exception.
The pitchfork has three important trend lines:
- ML = Median-Line = middle and most important trend line
- UML = Upper Median Line = upper trend line
- LML = Lower Median Line = lower trend line
Picture 2: The pitchfork in practical use. Three prominent points form the starting point. Point 0 is the starting point. The high A and the low B are the construction points. Point C is the minimum course target of the upward movement. The trend is perfectly represented.
Below the chart, the stochastic fast indicator with the setting 14-3 serves as an aid to pitchfork construction. The starting points of the pitchfork are usually located in the extreme areas of the stochastics. In the case of an upward trend, the starting point 0 in the stochastics is below 20. The high A can be found in stochastic above 80 and the low B again in stochastic below 20 (see marked blue circles).
How to draw the pitchfork
The first step is to identify a significant upward wave. The prominent wave starts at point 0 and ends at point A. The Stochastic Fast(14-3) reaches a level of over 80, followed by a consolidation. The consolidation regularly falls into the stochastic level below 20, which means that all the conditions are met for drawing a pitchfork.
A great advantage of the pitchfork is that the construction of the trend channel is always in harmony with the market. The trend lines are therefore never chosen arbitrarily, but the result of striking highs and lows.
Basic rules and forecasts with the Pitchfork
The pitchfork not only indicates the direction of the price trend. It offers a collection of trading recommendations resulting from the three trend lines.
Alan Andrews has defined the most important thesis when using the pitchfork: “80% of the median line is touched again”. The pitchfork works so well because the price always tends to complete its cycle. If we take the upper picture 2 as an example, the price will move upwards from starting point B in 80% of the cases. Until the median line is touched. This will be point C.
The trend is broken when the lower trend line (LML) is undercut with the closing price. In this case the pitchfork becomes invalid. Should the price unexpectedly make it back into the pitchfork immediately, the pitchfork becomes active again.
If several pitchforks overlap, so that the course is surrounded by several upward pitchforks, then there is a very strong upward pressure. The trend accelerates.
If the median line is touched, the following market behavior occurs. In 40% of the cases the price bounces off the median line and then moves to the lower median line. This bounce indicates a weaker trend. At 20%, the price continues to oscillate upwards around the median line. The trend is strong in this case and will continue for a while. To further 40% the price penetrates the median line and moves in the upper half of the pitchfork. This is the strongest signal of the uptrend. In this case the trend is so strong that it can easily break through further resistance. Under no circumstances should one trade against the trend direction.
Every trend line of the pitchfork serves as resistance or support for the trend. Typically, the lower median line is a buy point and the upper median line is a take profit point. It is best to study the price behavior when the price touches a trend line. Depending on how the price reacts, indications of the trend strength of the market emerge. Every price reaction when the price touches a pitchfork confirms the value of the pitchfork.
Improve your trading with the pitchfork
Hardly any other technical analysis tool is as versatile as the pitchfork. It can be used in any market. Any time frame is possible, whether it is a weekly chart or a minute chart. And there are many more techniques and tricks that can be implemented with the pitchfork. The rules described above only provide the basic understanding.
Test the Pitchfork and let yourself be inspired by the prediction power. Remember that you need a certain period of acclimatisation with every new tool. And only practice makes perfect.