Andrews’ Pitchfork was developed by the renown educator Dr. Alan H. Andrews using the median line concept that was established by Roger Babson. On September 5, 1929, Mr. Babson famously gave a speech where he proclaimed “… a crash is coming, and it will be terrific” and, of course, Black Tuesday occurred just a month later. Dr. Andrews expanded upon these concepts to create Andrews’ Pitchfork and the rest is history.
In this article, we’ll take a look at Andrews’ Pitchfork, how it’s calculated and drawn, and how it can be used to improve trading performance over time.
Creating Andrews' Pitchfork
Andrews’ Pitchfork consists of a median line at the center and two parallel trend lines equidistant it, where the outside trend lines represent areas of support and resistance. In Figure 1 below, AAPL remains largely within the bounds of the indicator with the exception of a short false breakdown near the beginning. Traders often look for buying or selling opportunities as the price approaches the ends of these channels.
The technical indicator is created by selecting three points on a chart:
- A beginning point that represents the start of a trend.
- A reaction high coming after the beginning point.
- A reaction low coming after the beginning point.
The selection of these points is somewhat subjective, but it’s a good idea to experiment with different reaction highs and lows to find what works best. In some cases, traders may want to plot multiple Andrews’ Pitchforks on the same chart to provide an indication of where support or resistance may be strongest. Traders may also look at different timeframes to determine long-term and short-term support and resistance levels for a given security.
Using Andrews' Pitchfork
Andrews’ Pitchfork is used in many of the same ways as traditional channels, including as support, resistance, and reversal trend lines. In addition to these standard methods, trigger lines can be used to identify additional areas of support and resistance based on a line connecting the first point (“handle”) to the peak at the third point. These are particularly useful when a breakout occurs from the Andrews’ Pitchfork later down the road.
The two most common strategies falling under the S/R umbrella include:
- Buying the Bounce. Traders may buy when prices hit the bottom of a channel and sell when prices hit the top of the channel to profit from the difference. In these cases, it’s important to wait for confirmation that the price is responding to these levels.
- Buying the Break. Traders may buy when prices breakout from the top of a channel or sell when prices breakdown from the bottom of the channel. In these cases, it’s important to look for a clean break to avoid false breakouts or breakdowns.
There are many other trading strategies that can also be employed. For instance, an options trader may write call options outside of the channel to collect premiums on an option that’s less likely to be callable. The key value of the indicator is it’s ability to predict when prices are likely to face support and resistance, as well as when a breakout or breakdown occurs, which can be useful in a number of different markets using many different strategies.
Of course, there are some limitations that traders should consider when using the indicator. Selecting the initial three points is a very subjective activity, which means that the trading indicator’s success hinges on experiencing in finding the optimal points. As with any technical indicator, there is always a chance that false breakouts and false breakdowns will occur, which makes it important to use a variety of different tools instead of relying on only a single tool.
Examples of Andrews' Pitchfork
Andrews’ Pitchfork can be applied to nearly any chart, ranging from stocks to commodities to currencies. Let’s take a look at a couple examples of Andrews’ Pitchfork in action:
In Figure 2, Andrews’ Pitchfork is applied to a 1-hour S&P 500 SPDR ETF (NYSE: SPY) chart. The technical indicator successfully predicts upside resistance at two points and subsequently indicates that a breakout is likely to occur. After breaking through the upper Andrews’ Pitchfork level, the index gaps above the trigger line and a rally higher follows.
In Figure 3, Andrews’ Pitchfork is used to predict resistance in at least three places in the EUR/USD currency pair. The breakdown below the final support resulted in a gap and the prior support turning into a key resistance level. In addition, it’s worth noting that the trigger line was not reached in the brief breakout from the upper trend line, which suggested that the pattern remained in tact and the trend was headed lower.
The Bottom Line
Andrews’ Pitchfork is a great technical indicator for day traders to use when determining areas of support and resistance. While it’s not perfect in every scenario, the indicator provides a good indication of where prices may be headed. The downside is that picking the three points is a largely subjective process that require experience to master. Traders should also be sure to use the indicator as only one piece of the puzzle rather than relying on it exclusively.