How to Day Trade with the Andrews Pitchfork
Andrews' pitchfork tool, commonly referred to as median lines are one of the most versatile trading tools available for trading. Developed by Dr. Alan Andrews who drew upon the action/reaction lines concept from Roger Babson, the pitchfork tool has stood the test of time and has its own set of followers when it comes to charting the markets.
The action/reaction lines developed by Roger Babson came as he witnessed a stock market correction in the early 1900's. Upon understanding the billions of dollars that was wiped out as a result of the market drop, Babson took it upon himself to build a tool and techniques on how traders could prevent such losses.
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Babson's action/reaction lines which later became known as Andrews' pitchfork tool, was inspired by the works of Isaac Newton and his laws of gravity. Most of the pitchfork's concepts are focused around Newton's third law which is states that "For every action, there is an equal and an opposite reaction."
The median line or Andrews' pitchfork works as a trend line which is in fact the median line. It is surrounded by an upper and a lower parallel line which are plotted by taking into consideration, three pivot points which are high, low and high or low, high and low.
The chart below shows a sample median line or Andrews pitchfork applied to a stock chart.
To learn the basics about Andrews' pitchfork tool, read this article.
The Andrews’ pitchfork tool is widely used as it can be applied to any markets irrespective of the time frame. Thus, the pitchfork tool is ideally suited for day trading as well to analyze the long term technical markets.
Trading strategies with Andrews Pitchfork tool
There are many different trading strategies that can be built using the Andrews’ pitchfork tool. Some of the most commonly used methods are simply based off the pitchfork’s rules which are outlined as below:
According to Alan H. Andrews, there is a high probability that:
- Price will reach the latest median line
- Price will either reverse on reaching the median line or gap through it
- When prices pass through the median line, more often than not, prices pull back to the median line
- When price reverses before reaching the median line leaving a space, it is likely that price will move in the opposite direction
- Prices will reverse at any median line
One of the major factors that work in favor of median lines or the pitchfork tool is that various studies have shown and proven the fact that there is an 80% chance for any of the above Andrews’ rules to be fulfilled.
No matter what trading strategy one uses, with the Andrews’ pitchfork tool, you can always expect one of the rules to be fulfilled.
Here are four simple ways to get started with trading with the Andrews’ pitchfork tool
1. The price failure rule
One of the main principles of Alan Andrews' trading techniques was to anticipate changes in the market sentiment. Andrews' described this as a price change that often catches the larger trading community by surprise.
The price failure rule was well documented and explained by Gordon DeRoos, in his book, “Trading With The Pitchfork”
Traders would know that every now and then, prices tend to behave erratically and more often than not, such moves are accompanied by strong reaction in prices. Traders are usually sitting on the sidelines, having missed the big move, while some might be nursing their losses.
One of the core techniques taught by Andrews' was the price failure rule. The price failure rule forces the trader to look at what prices are not doing, rather than follow the rest of the crowd into watching what prices are doing.
It is widely known that prices gravitate to the median line 80% of the time and from the median line, there are two options. Price will either gap through the median line or reverse direction.
With the price failure rule, traders focus on the factor of "when price fails to reach the median line."
Thus, with the price failure rule, a trader simply waits for price to reverse near the median line and position their trades ahead of a strong market move that could follow. Due to the nature of this price action, the day trader can expect to see higher risk/reward ratio in most of the cases.
The chart below explains this aspect with the QQQ Powershares ETF chart. Here, you can see that a falling pitchfork is created as price posts lower highs. Conventional wisdom states to look for short positions here.
However, notice how price bounces back and forth between the median line and the outer median line. The final bounce off the upper median line shows prices failing to reach the median line or interacting with it. This eventually leads to price reversal that shows a bullish trend in the markets.
For traders, this would have been a surprise on the sudden change in direction in the markets.
2. The mini-median line method
The mini-median line method is rather unique as it involves drawing two opposing median lines. As the same suggests, the mini-median line is smaller in scope and usually signals a counter move to the larger or the original median line or pitchfork tool that is plotted.
The mini-median line method can be used to day trade the markets, or used to time the entry of the trade with higher precision. Another unique aspect of the mini-median line methods is that closing prices are used instead of the high or low prices.
Once a counter or opposing median line is plotted over 5 – 10 bars, this mini-median line can be used as a trigger to take a position which is in favor of the original pitchfork tool. Alongside the mini-median line tool, we also need to plot a sliding parallel line.
The following chart shows the major Andrews' pitchfork tool that is plotted. The overall slope of this major pitchfork tool suggests that prices will continue to push higher.
However, it is evident that when it comes to taking a position, a better method is required.
In the first instance, we have a mini-median line plotted by connecting the closing prices. This first mini-median line goes opposite to the original pitchfork tool's direction.
After the median line reversal, you can see how price gaps higher and goes in the direction of the original or the larger pitchfork tool. Similarly, we have another instance, where another mini-median line is plotted.
The breach of the sliding parallel line following the reversal at the median line suggested a long position in the stock price, which shows another 5% gain as a result.
3. The flat price action method
In the flat price action method, the trader simply needs to look for price to stall near the top and closer to the median line.
This method is usually indicative that prices are likely to change direction and in a way ties in with the price failure method. However, unlike the first method, here traders look for tell tale signs of ranging price action.
For the flat price action method, prices need to move in a strong rally first, typically from the third pivot point. The lesser pullbacks there are in this leg, the better the chances.
Once price hits the median line, look for consolidation near the median line. Watch for the highs that are formed and typically a higher low as well. Thereafter, price tends to move sideways within the range established.
Typically price breaks to the downside and posts a strong correction back to the third pivot point.
The chart below gives a short trade example.
Here, you can see the strong move from the pivot low and prices failing to break the median line convincingly. After some consolidation, you can see the range established between 37.89 and 35.50. The break down from 35.50 sends prices back to the third pivot point at 29.65.
Likewise, we also have a long set up shown in the next chart.
Here, prices post a steady decline from the third pivot point (high). The sharp drop is signaled by the median line practically supporting the prices. We then get to see some consolidation underway with the sideways range established at 75.99 and 72.27.
The upside breakout from this range sends prices higher targeting the third pivot point high at 79.47.
4. Andrews Pitchfork tool and Divergence
Another way to trade the Andrews pitchfork tool is to use divergence and of course price action at the median line. Because divergence is a leading technical indicator, it complements the concept of anticipating price action by means of using the Andrews’ pitchfork tool.
For divergence, any oscillator can be used. In this example, we make use of the relative strength index.
In this first example, you can see how the bearish divergence was formed with price making a higher high while the relative strength index was seen making a lower high. Following this high that stalled near 16.60, price eventually breakout from the lower median line following the median line price failure.
A quick pull back towards 16.60 signals a short term downtrend in price with a relatively tight stop loss. On the same chart, what follows next is a potential long signal which is marked by a bullish divergence.
In this chart, you can see that while prices posted a lower low, the 13 period RSI signaled a higher, which indicated a bullish divergence in price. The fact that prices stalled near the median line indicated that price would be reversing direction shortly.
Following the breakout from the outer median line, we can see that the long position resulted in a profit as price continued to push higher.
Besides the RSI, other oscillators that can be used include the MACD, Stochastics or just about anything else as long as the oscillator can be used to predict the divergence in price.
Plotting the Andrews Pitchfork tool correctly
What’s important to note is that identifying the right pivot points when plotting the Andrews pitchfork tool is essential and is one of the key elements in determining one’s success in using the tool. Therefore, traders need to spend a lot of time in correctly plotting the pitchfork tool as the success or failure depends largely on how one plots the median lines.
In most cases, drawing the median lines is rather subjective but with due practice one can develop the confidence required. A rather simple method to practice is to ensure that after the pivot points are established, traders need to tweak the median lines around to ensure that price action interacts with the parallel or the median lines.
Elliott Waves and Andrews Pitchfork tool
The pitchfork tool can be plotted for any market and used in any time frame, making it a great tool to depend on.
What’s even more interesting is that in many cases, the concepts of Elliott waves can be applied to the median line itself. Not many traders have fully yet grasped this method but when combined, median lines and EW can be a great way to trade the market with confidence.
The above chart gives a brief illustration of the Elliott wave counts that coincide with the Andrews’ pitchfork tool. Thus, Elliott Wave practitioners will find that they can build a rather powerful trading system when combining the rules of Alan Andrews and the principles of Elliott Wave Theory.
Besides the above outlined methods, there are a number of other ways one can put the Andrews pitchfork tool to use. It works best with any existing day trading strategy including other technical indicators as well as price action methods.