If you are a fan of channel trading techniques, then you will definitely want to know about this old forgotten trading technique that projects potential support and resistance lines known as Andrews Pitchfork. You may be wondering what that is:
The Andrews Pitchfork trading strategy is a channel-based analysis technique developed by Dr. Alan Andrews. It is a popular trading tool that uses three to five parallel lines to find sharp trading opportunities. The middle line is called the median line, and there are two consecutive resistance trendlines above it and two consecutive support trendlines below it, which are potential reversal levels.
Let’s take a look at this trading method and the technical tool for it. At the end of the article we try to make a backtest of the indicator.
What is the Andrews Pitchfork trading strategy?
Developed by Dr. Alan Andrews, the Andrews Pitchfork trading system is an old trading technique that projects potential support and resistance lines. It is a channel-based analysis technique that uses three to five parallel lines to find sharp trading opportunities. The middle line is called the median line, and there are two consecutive resistance trendlines above it and two consecutive support trendlines below it, which are potential reversal levels.
The Andrews Pitchfork trading system is based on the general theory that if the price gets through the median trend line, about 80% of the time, it would retest the top of the Andrews Pitchfork channel.
On the flip side, if it gets below the median trend line, it would retest the bottom of the Andrews Pitchfork channel. Being a trading channel, the system follows the price trend.
Since the price tends to be mean reverting by nature, just like any other time series, when using the Andrews Pitchfork trading system, you notice that the price tends to gravitate toward the median line. So, the median line serves as both support and resistance — in other words, it can be seen as a regression line.
In essence, the Pitchfork trading system combines three of these powerful trading systems into one simple method:
On a long-term basis, Andrews’ Pitchfork can be used to identify and gauge overall cycles that impact underlying spot activity. As we stated earlier, Andrews believed that market price action would gravitate toward the median line 80% of the time, with wild fluctuations accounting for the remaining 20%. Thus, the overall longer-term trend will (in theory) remain intact, regardless of the smaller fluctuations.
If sentiment changes and supply and demand forces shift, prices will stray, creating a new trend. You can increase the accuracy of these trades by combining Andrews’ Pitchfork with other technical indicators.
Before we continue with the strategy, let’s define what the technical indicator is and how to apply it to a trading chart.
What is the Andrews Pitchfork indicator?
The Andrews Pitchfork indicator is a technical tool for drawing the price channel in a trending market. Depending on the trading platform, the Andrews Pitchfork indicator may consist of three or five parallel lines, with the middle line being the median line. For example, in TradingView, it consists of five lines, while in MT4, it has only three lines. See a TradingView chart showing the indicator below:
The middle line is the median, around which the price tends to swing about, serves as a pseudo-regression line. The two parallel lines above the median serve as resistance levels, while the two parallel lines below serve as support levels. The reason the indicator is called a “pitchfork” becomes apparent from the shape that is created in the chart. The indicator is constructed from three consecutive highs or lows on a chart. For an uptrend, the indicator is constructed from a low and high and then a low in that order. For a downtrend, the pitchfork is constructed from a high, a low, and then a high in that order.
The price tends to reverse on crossing the outer lines of the channel. Thus, the tool is used for trend trading to predict market reversal levels. The pitchfork shows continuous points of support and resistance. It shows the channel within which the price is likely to trade most of the time until the trend is seen to have reversed.
The Andrew Pitchfork indicator is available on numerous programs and charting packages and is widely used by both novice and experienced traders. The tool allows traders to trade channels when the market is trending by helping them to identify market corrections that you can use to time your entry to a trade. One can buy when the price tests the lower outer line and reverses and sell around the median line or the upper lines.
How to draw Andrews Pitchfork channel
If you want to apply Andrew’s Pitchfork on a chart, you need to identify the early stages of the trend and locate the pivots you want to apply it to. If it is an uptrend, your pivots would be consecutive low, high, and low. For a downtrend, your pivots would be consecutive high, low, and high.
Mark these so-called pivots or turning points on the chart. The key points are highlighted in the chart below:
Since it is a downtrend, we marked prominent high, low, and high in that order. Next, we attach the Andrews pitchfork indicator to the marked pivots, with the first point attached at the first swing high and the other points at the following swing low and swing high. See the chart below:
A line from the first pivots forms the indicator’s central or ‘median’ line and resembles the handle on a pitchfork – hence the indicator’s name. After attaching to the other two pivot points, two other lines that start from those pivot points and run parallel with the median line emerge. These form the prongs of the pitchfork. The image in the chart above shows how the Andrew’s Pitchfork indicator appears on charts when applied to an asset’s price.
While plotting the Andrew’s Pitchfork indicator can be tricky, not least because identifying significant highs and lows in an asset’s price is subjective, the indicator is fairly simple to use once plotted. Most trading platforms come with the indicator, but you have to select the key pivot points to use, which can be highly subjective.
What is a Fibonacci pitchfork?
The pitchfork indicator does not normally use the Fibonacci ratios in its construction, so the pitchfork indicators in various trading platforms are not structured with Fibonacci ratios. Nonetheless, it may be possible to create a customized pitchfork that uses Fibonacci ratios to measure the lines of the pitchfork.
That is, for a 5-line pitchfork, the inner and outer resistance lines can be based on Fibonacci ratios. For example, the inner resistance line could be 61.8% away from the median line, while the outer resistance line would be 38.2% away from the inner resistance line. The same also applies to the support lines below the median line — the inner support line could be 61.8% away from the median line, while the outer support line would be 38.2% away from the inner support line.
Another way to get the Fibonacci effect when using the pitchfork indicator is to combine the Andrews pitchfork indicator with the Fibonacci tools — the retracement or expansion tool. In this case, you attach both the Fibonacci tool and the pitchfork indicator to the chart and look for areas of confluence between the indicator and the Fibonacci levels. The price is likely to react more forcefully at such confluence points.
What is a pitchfork in trading?
A pitchfork is a fork-like tool used to identify a channel in which a security’s price could trade while it is trending up or down. It is made up of three or five parallel lines that are plotted using three consecutive major highs or lows in the price. Those lines could predict where the price might change direction or experience a correction.
The tool allows traders to trade channels when the market is trending, as it shows continuous points of support and resistance — ascending or descending support and resistance lines.
Uses of Andrews Pitchfork channel
The Andrews Pitchfork indicator can be used in different ways, but the two common strategies traders employ when using the indicator are the mean-reversion strategy and the breakout strategy.
This strategy is based on the fact that the price, just like any other time series, has a central tendency. That is, it tends to revert to the mean after any significant move away from it. In a trending market, the mean, just like the price swings, is either gradually rising or falling.
By showing the price channels with the median line, the Andrews Pitchfork indicator makes it easy for traders to identify the extreme price levels and the mean. Generally, one would buy if the price falls to the lower line of the channel and take profit when it rises back to the median line or the upper line. Short-sellers can also sell when the price rises to the upper line of the channel and take profit when the price reaches the median line or the lower line.
Channel breakout strategy
One can choose to trade the breakout from the channel. A descending channel may give an opportunity for a breakout to the upside. For an ascending channel, a downward breakout could be a signal to go short. It may be wise to even wait and short when the price retests the channel.
Andrews Pitchfork trading strategy (backtest and example)
We would like to make a backtest of the Andrews Pitchfork with strict trading rules and settings. However, it requires time and we believe it adds little value compared to the other channel trading indicators that exist out there. For example, we have the following channel indicators:
- Are the Bollinger Bands profitable? (Including strategies)
- Average True Range trading strategy (ATR indicator – how to use it)
- Keltner Bands strategies (Keltner Channels strategies)
- Williams Volatility Channel — What Is It? (Trading Strategy)
However, backtesting and a data driven trading approach is no sure thing, but at least you have an idea that something has worked in the past. If it has not worked in the past, you can skip it immediately. If you know how to backtest with historical data you can develop a portfolio of trading strategies pretty fast. There is no best trading strategy because you need many to smooth returns.
(If you are new to backtesting and statistical testing and it looks like a daunting task, you might be interested in our backtesting course.)
We do have the Amibroker code to Andrews Pitchfork, though. You can get access to that plus lots of strategies among our best free strategies.