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Monitoring Trends with Andrews’ Pitchfork
Traders are always seeking trends, but monitoring them is not always an easy feat. To help simplify this task, many traders choose to employ trendlines, channel lines and moving averages to help separate the false breakouts from the real ones. Four decades ago, Dr. Alan Andrews developed a method named Andrews’ Pitchfork to identify and border the deviation from the main path of the market in an effort to better deal with the spillage of markets from the “core” of the trend.
As shown in the figure above, traders will initially seek the uptrend between A and B, and during this phase, they will use the standard trend analysis methods. Andrews’ Pitchfork comes into play only after the market has formed a significant peak at point B and turned against the direction of the original trend. How far will this countertrend move go? The immediate answer can be found by using a full set of Fibonacci retracement levels.
In the example above, you would connect the coordinates A and B of the original uptrend, and then connect point C, where the market found support. This will create a channel in the general direction of the trend that is bordered by point B and C. This will also divide the channel in two equidistant sections. The centre line, which will become the handle of the pitchfork, will then stretch back to point A, which marks the beginning of the uptrend. This grouping of lines resembles a pitchfork, hence the name.
Figure 2 shows an example of a weekly chart with an upward trend on EUR/USD (Euro/U.S. Dollar). The initial uptrend unfolded between points A and B. After the pair formed a peak at point C, a line was drawn down and backward to B before turning up again. The lines making up Andrews’ Pitchfork were then plotted. The line arising from point C (which was the trendline, in this case) provided good, but not perfect, support. In addition, the parallel line rising from C (which was actually a channel line) held strong until the last week displayed on the chart, when EUR/USD blasted it away. While that could be construed as a failure of the indicator, traders who were long for the duration of the uptrend would still have profited by holding their long positions.
The outside lines of the pitchfork should provide the sloped trading range of the market, so a trader may choose to buy after a bounce back from the support or following a pullback from the resistance, with the size of the trade biased in the direction of the trend. If the declining resistance in a downtrend or the rising support in an uptrend gives way on a closing basis, then the trend is in danger and probably over. If the market price fails to surpass the centre line in either direction, then you may want to look at a pause in the trend. Finally, if the rising resistance in an uptrend or the declining support in a downtrend gives way on a closing basis, then the trend is accelerating.