Today I want to start touching on the topic of pitchfork analysis and describe a little about the different variations of pitchfork available to the chartist.
First, a little history as to the origins of the pitchfork.
In the early part of the 20th century Roger Babson was someone that believed in a natural ebb and flow in many walks of life. He was a proponent of Newton’s Third Law, every action has an equal and opposite reaction. A ying and yang, tick and tock, up and down… After being hurt in a market correction in 1908 he decided to see if there was a way to apply this natural balance theory to the markets. He devised what he called the ‘Normal Line’, a line drawn through market action with movement both above and below the line. He theorized that any significant move above the line would, in time, be balanced by an equal move below the line.
This model of applying a natural balance to the markets was taken by George Marechal who, in 1933 at the request of the incoming President, produced a stunning 15 year prediction using median lines. You can see Marechal’s famous chart in Figure 1 below.
The upper line shows Marechal’s prediction whilst the lower line shows the actual performance of the Dow Jones Industrial average. Bear in mind this chart encompasses a world war no one saw coming back in 1933.
Median lines are lines drawn through the middle, or median, point of two pivots (B and C) from an initial A pivot, as shown below:
See how price travels close to the median line. This line defines the current trend direction and slope.
Moving forward in time Dr. Allan Andrews added parallels to the median line, forming what we know today as the Andrews Pitchfork. The parallels have been added in Fig 3 below to form the pitchfork. See how price receives support at the lower parallel of the pitchfork, denoted by the green circles.
So, how do you use pitchforks in forex day trading? Simple, select three major pivots from which to draw your pitchfork. Confirm the pitchfork is working by looking to see if the parallels are providing support and resistance and then trade the fork as a simple channel. There are many nuances in precisely how to trade pitchforks but with this simple tool you now have the ability to identify trend direction and slope.
Pitchforks work on many timeframes for any vehicle, from currencies, to commodities and equities to indices and bonds. Besides hand on trading i’ve learned a tremendous amount from attending Paul Coghland’s websinars at coghlancapital.com. He recently also launched a service where a trades Forex in real time. In short, it is a method of technical analysis widely used by those that are day trading forex.