Alan Andrews designed Andrew’s Pitchfork to define a trend with support and resistance lines around a median line, all three of which are derived from three points at peaks and troughs around the onset of a current trend. The overlay takes the shape of a trident or pitchfork, with Andrews calling the lines “tines,” after a pitchfork’s prongs.
The origin point is placed at the location of a major trend reversal or a definitive support/resistance level, forming beginning of the pitchfork’s “handle.” Once the incline of the pitchfork is suitable, traders can attempt to use it for indications of overbought/oversold conditions, or to indicate a transition to a new trend.
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The next point will be at a significant correction on the course of the new trend, forming the start of the channel lines for either support or resistance, depending on whether the pitchfork is for an uptrend or downtrend. The third point is placed at the point where the prices bounce back and resume the original trend.
The midpoint on the line between the last two points will be connected to the origin point, and this line will be the median trend line for the pitchfork, extending out into the future. Lines parallel to this median line will be drawn from the other two points, forming the upper and lower “tines” to the pitchfork. The slope of the line from the midpoint of the second and third points to the origin point will define the slope of the entire pitchfork, and it is common to adjust the location of the origin point to give the pitchfork a more appropriate direction that captures the predominant trend within its tines.
When the security's price crosses above the top (resistance) trend line of the pitchfork, it could be an indication that the security is overbought (price is too high). A trade may consider taking profit here or exploring put options. On the flip side, if a security's price crosses below the bottom line (support), it could be a sign that the security is oversold. A trader may see this as a buying opportunity and could pick up shares or perhaps explore call options.
Like any technical indicator, the Pitchfork has limitations. No single indicator works well for all securities, and the Pitchfork is only a useful tool if the bounce occurs at a point below what appeared to be the forming trend line, and placing its points requires expertise and skill.
Another very popular approach for technical analysis in trading is “Pattern Trading” and trading with trends. There are several common patterns like the Cup-and-Handle pattern, the Head-and-Shoulders pattern, the Pennant pattern, and the Broadening Wedge patterns. Each pattern is described in an article on Tickeron’s site.
Analysis software is now capable of finding and adjusting pitchforks, however, improving accuracy and increasing a trader’s odds of success. There are myriad ways to use technical analysis in trading, and which indicator or methodology a trader decides to use usually depends on their experience, skillset, and the quality of the tools (A.I.) available to help them find trade ideas.