Introduction

Trading is a process that is heavily reliant on information and analysis. This means traders need to regularly track the price movements of assets with precision to make informed decisions.

To aid them in their goal, traders use tools like the Pitchfork Indicator, which helps spot reversal points, support lines, and resistance levels.

What Are Pitchforks?

Source: BabyPips

Pitchforks are technical indicator tools traders use to monitor and predict the movement of the price of an asset. It is commonly used to predict major price changes and identify possible trading points, letting the trader know when to enter a trade or exit one to maximize their profit.

Deriving its name from the three-prong farm tool, the Pitchfork Indicator consists of a median line surrounded by two parallel lines, which are evenly positioned away from the median line. The median line cuts through the highest point and the lowest points of the chart, while the other lines drawn are based on significant highs and lows on the charts.

The median line is the resistance level for price action, as it draws prices towards it. Meanwhile, the outer lines are in charge of indicating areas where prices may significantly rise or fall. Its simple design and ease of use make the tool a household name amongst traders, aiding them in making the best decisions depending on the price trends.

History of Pitchforks

The history of the Andrews Pitchfork dates back to the 1880s with Roger Babson, who was addicted to Newton’s third law of motion, which says, “For every action, there is an equal and opposite reaction.” Babson went on to apply the law to many aspects of his personal and business life, including analysis of the stock market, eventually opening the Babson Statistics Organization with his wife, Grace Babson in 1904. His application of Newton’s third law to the stock market gave birth to what we refer to as the Normal Line.

The Normal Line was then modified by Gorge Marechal, a chartist who prepared a 15 year chart for the US stock market in 1933. His chart spanned between 1933 and 1948 and was created using a version of the Normal line called the Median Line by Dr Alan Andrews.

Alan Andrews built on the Median line by adding two lines, which we know as the upper and lower parallel lines today. He added these lines to indicate support and resistance levels, while the median line highlights the slope and point of balance. These two lines extended the Median line to what we refer to as the Andrews Pitchfork today.

How to Draw a Pitchfork

Source: Blueberry

When drawing the Andrew Pitchfork, three essential points have to be selected, leading to the three parallel lines that help the trader analyze the asset’s price. To draw these lines properly, here are the steps to follow:

• Select Pivot Points: You must identify three crucial points in the chart. First is the starting point, usually the highest or lowest point of the price trend. The next step is to identify a significant high or low as your point B, followed by another high or low based on the price movement after point A, which will be referred to as point B.

These points determine the lines of the pitchfork and are used to decide the position of the two parallel lines A, which can either be the highest trade point or the lowest point of the asset.

• Draw The Median Line: Once the pivot points have been determined, the next step is to draw the median line from point A through the midpoint of points B and C.

• Creating The Prongs/Parallel Lines: Once the median line is drawn, the next step is the prongs drawn from points B and C identified above. These lines are placed parallel and equidistant to the median line, creating the pitchfork on the chart.

Types of Pitchforks

After its creation, Alan Andrews taught his charts to several students, which led to the creation of other variations like Schiff Pitchfork and Modified Schiff Pitchfork.

Schiff Pitchfork

The Schiff Pitchfork is a modification of the Andrew Pitchfork. It was designed by Schiff, a student of Alan Andrews, who used it to draw price channels that allow the trader to identify medium and long-term price trends, breakouts, support and resistance levels, and reversals in price trends.

Schiff hypothesized that price trends of an asset are sometimes too steep for the Andrews Pitchfork to monitor and predict. To solve that issue, he devised the Schiff Pitchfork by adjusting the median line to start from the midpoint of the significant high and the significant low.

Modified Schiff Pitchfork

This is a further modified version of the Schiff Pitchfork, which involves adjusting the median line starting point to the slope of the highest or lowest price points. By doing this, the trader can monitor trending and irregular price actions.

How To Trade Crypto Using The Pitchfork Indicator

The Pitchfork allows traders access to different strategies based on specific patterns and market movements. These patterns inform the trader on the next steps to take to make the best out of a trading position. With the Pitchfork Indicator, Crypto traders are provided with two strategies based on the movements on the charts.

Support and Resistance Lines

The two equidistant lines of the Pitchfork serve as support and resistance levels, informing the trader on their next course of action depending on the pattern displayed on the chart. In situations of a downtrend when the price approaches the lower lines of the pitchfork, traders are aware of a chance to purchase the asset in anticipation of a price rise later on.

Meanwhile, in an uptrend, when the price approaches the higher line of the Pitchfork, it indicates a possible resistance point. Once the price stalls to pass the upper line or shows signs of dropping at the edge of the line, the trader sees it as a sign to sell or take a short position in anticipation of a drop in asset price.

Breakouts and Breakdowns

Assets maintain a level of volatility while trading, and some assets tend to breach the boundaries of the Pitchfork. For instance, when the price of the asset moves well beyond the upper line during an uptrend, it could signal a bullish movement for the asset, alerting the trader to buy or add a longer trading position in hopes of a further increase in price.

Alternatively, when the asset price drops below the lower line during a downtrend, it is a sign of possible bearish movement, hinting to the trader a chance to pull out of the trade by selling their asset in case of continued decline in the asset price.

PitchForks and Other Indicators

While the Pitchfork indicator is a powerful tool used in trading, it also provides tremendous results when paired with other tools like Moving Averages, Fibonacci Retracement, and Relative Strength Index (RSI).

Moving Averages

Moving Averages is an indicator used to calculate the moving average of an asset. It identifies the asset’s price direction and determines its support and resistance levels. It is popularly referred to as a trend-following indicator because it banks on information obtained from previous price movements.

Combined with the Andrew Pitchfork, it helps traders properly identify the potential support and resistance levels. For example, when the Pitchforks median line and moving average align, the trader can be sure of their chart readings, assuring them of the selected support and resistance levels.

Fibonacci Retracement

Fibonacci Retracement levels are price levels displayed by horizontal lines placed on the price chart. Each level is linked to a percentage amount that indicates the level of retracement that happened after the former highest price point of an asset. The percentages are based on numbers in the Fibonacci sequence: 23.6%, 38.2%, 61.8%, and 78.6%.

When the Fibonacci levels are plotted on the Pitchfork chart, traders can easily identify possible price reversal zones in areas that sync with the Pitchfork’s median or parallel lines. These merged lines offer stronger indications of support or resistance, assuring the trader of their trading position.

Relative Trade Index (RSI)

The Relative Trade Index (RSI) is a tool used in technical analysis that measures the degree and speed of changes in the price of an asset. It is drawn with a graph ranging from zero to a hundred and is used to identify when an asset was overbought or oversold. It also lets the trader know when asset price trends might make a reversal or a pullback.

When applied with the Pitchfork Indicator, the Relative Strength Index can reaffirm the trader’s support and resistance levels, alerting traders of possible price reversals.

Limitations of Pitchfork Indicators

The Andrews Pitchfork is a very valuable tool for traders. However, it is not without limitations. A major one is its reliance on human accuracy. Before making trading decisions the trader has to identify the three pivot points accurately. When done incorrectly, the trader can suffer from misleading channels and false signals, leading to wrong decisions.

Also, in highly volatile markets, the price of the asset could breach the Pitchfork’s upper or lower lines regularly, increasing the difficulty of predicting the market. Lastly, the tool functions on the assumption that the market will follow certain patterns, which is not always the case, leading to traders having to rely on other technical indicators when making decisions.

Conclusion

By properly understanding and utilizing the Pitchfork Indicator, traders can increase the accuracy of their analysis, allowing them to predict potential market movements properly. However, its limitations give traders an invaluable advantage when dealing with asset price trends.