By Richard Krugel
Introduction to Pitchfork Trading
Within most trading platforms lies a very powerful yet often overlooked drawing tool called the Andrews Pitchfork. Traders these days mostly rely on the use of indicators as a means of technical analysis, so much so that they never give any second thought to drawing tools such as pitchforks to help them define market structure and price action in a more visual and simpler manner.
In this article I will present to you a quick overview of what the pitchfork is and how the Andrews pitchfork can be used within a strategy to improve your accuracy when entering trades.
What is the Andrews Pitchfork?
The pitchfork was developed by Dr. Alan H. Andrews many years back and can be drawn on charts to project future price action. The chart above is a great example of how well a pitchfork contained future price action, within a trend, by simply selecting 3 important points or pivots on a chart.
To draw a pitchfork one needs to connect a pitchfork to 3 points, like I did on the chart above. The first point was an important low in Crude Oil late June 2017. The second point was a higher high before a proper correction occurred and the last connection point was where that correction ended before the trend continued higher again (look at the green arrows).
The middle line, from where the new uptrend started, dissects the two other connection points in half or 50% and projects that line forward into the future at an angle. This line is called the median line.
Two other lines are also projected from the 2nd and 3rd connection points equidistant and parallel to the median line. They are simply called the upper and lower median lines.
Some analysts, including myself, draw extra lines called warning lines which are again parallel to the upper and lower median lines. When price reaches a warning line it often signals a change in trend or the last place where an existing trend needs to reverse from after a correction.
Judging by the chart above it becomes clear how well price found support or resistance at the median lines during that trend.
Variations of the Andrews Pitchfork
The Andrews pitchfork is considered a standard pitchfork but there are two other variations of the standard setting: Schiff pitchforks and modified Schiff pitchforks.
We will be focusing on the Schiff pitchfork as the modified Schiff pitchfork setting is not commonly used. A Schiff pitchfork is drawn using three important pivots (green arrows), exactly the same as a standard pitchfork but what differs with the Schiff setting is that the angle or slope of the median line is much flatter than that of a standard setting.
All that the Schiff setting does is to angle the median line to 50% between the distance from the first connection to the second connection point rather than dissecting the second and third connections in half. This results in a flatter or less angled slope of the median lines.
Most trading platforms will only require that you select the 3 points you want to connect to and allow the option to then choose which setting you want to use afterward. It is sometimes necessary to change between a standard and a Schiff pitchfork to better define price action.
I have found through the years that a Schiff pitchfork setting works better in defining price action when dealing with a correction because corrections are generally less steep in angle than trends tend to be.
Pitchfork Trading Strategy
What follows will be a demonstration of how I use pitchforks as part of my strategy when trading. My strategy aims to find the end of corrections within a trend and to enter trades with very little risk when the main trend resumes again.
This is obviously easier said than done but by following a step by step process I often manage to find the exact ends of corrections with a unique but powerful approach.
To do all of this effectively I need to be able to determine the following:
- Determine trend direction or a change in trend.
- Determine where a correction is most likely to occur within a trend.
- Wait for a correction to unfold and determine which correction I am dealing with.
- Determine where the correction is most likely to end.
- Enter trades with the lowest amount of risk and highest probability of working out.
Determining all of the above requires a strategy that uses a combination of multi time frame analysis, knowledge of corrections, market geometry and entry rules. We will next take a closer look at a recent trade setup in Crude Oil but mainly focus on how I used my pitchfork to assist me in finding the possible end of a correction ahead of time.
Recent Trade Setup in Crude Oil
I love to trade markets that are in strong trends and by drawing simple trend lines below this strong uptrend it was evident that Crude Oil would need to fall quite far in price to signal a change in trend. So I had to assume that the trend would continue and since I trade the end of corrections I only needed to wait for a correction to appear.
Correction and Pitchfork
After a correction was confirmed to be underway, I switched to a lower time frame where I applied my trusty Schiff pitchfork over market structure using 3 important pivots. Most corrections I follow unfold in waves that are labelled A-B-C. There are plenty types of corrections but by using my Schiff pitchfork as my guide, I identified 2 price zones where I was confident this correction could end at. Those entry zones correlated with the lower median line and lower warning line.
Low Risk Setups
Trade entries are only considered when price reaches a zone I identified beforehand and interacts with one of my median lines. To limit my risk as much as possible I employ a set of entry condition rules that where designed to filter out the bad trade setups from the ones with the highest probability of working out.
The chart above is that of my smaller entry time frame with only one indicator applied to it. What you see is a MACD Histogram and I use it to spot momentum divergence at an area I want to trade at. Momentum divergence and reversal candlestick patterns/formations are included in my trade entry conditions rule set.
Momentum divergence right at my lower warning line together with the formation of a reversal candlestick signaled to me that I needed to take an entry for the first time. These conditions were not present at the higher median line zone I identified before and saved me from taking a losing trade!
Entry and Result
After all of my entry conditions signaled a trade, I placed a buy order slightly above that reversal candle with a stop loss slightly below it. The total risk on this trade was ideally 14 ticks and dependable on how quick a trader would have reacted to placing their orders.
At the time of writing this article, I managed to take partial profits and still have a remaining target set at around the area where this entire correction started from in the first place. Using this type of strategy helped me find a trade setup ahead of time where the profit potential dwarfs the minuscule risk that I took on this trade.
I have only touched briefly on the procedures I take to find the end of corrections but what should become evident is that pitchforks can be a powerful addition to any trading strategy.
After spending many years developing and fine-tuning my strategy I have found that pitchforks, and in particular Schiff pitchforks work great at pinpointing the end of corrections but knowing how to use them properly in combination with other methods have truly made a difference to my accuracy and success as a trader.
If you liked what you have seen in this article and ever wondered what it takes to make a difference in your own trading, take a moment to read about my course here.
Taking trades with big payoffs like this one is entirely possible only when you get to understand price action for what it really is and know how to exploit repeatable occurrences within any market.
Using the Andrews pitchfork and pitchfork trading as part of my strategy has taken my trading to the next level and it can do the same for you.
To your trading success,