From the June 01, 2011 issue of Futures Magazine • Subscribe!

Andrews' pitchforks and the price failure rule

Those who have studied Alan H. Andrews’ trading techniques in depth know that he taught ways to anticipate a change in market sentiment — a change that often results in a price move that catches many traders by surprise.

Andrews’ best-known technique is Andrews’ pitchfork, found on most charting software programs. Andrews’ pitchfork consists of three parallel lines identifying recent trends. Two of the lines form what appear to be prongs, while the third forms a handle, thus, the "pitchfork" descriptor. The lines are drawn across support and resistance pivots that identify recent trends.

A question often arises regarding pivot selection for Andrews’ pitchfork—that is, identifying what three sets of pivots would be the best to use in any given situation. Here is how Andrews addressed that question: "Usually, it seems best to start with the most recent three alternate pivots of the time frame you are interested in. That will give you the current view. But don’t stop there, because any three alternate pivots can be used, and no matter which set is chosen, each resulting pitchfork will add something to the outlook as it tells its own story."

One part of the pitchfork story is the price failure rule. The logic for this technique is grounded in one of Andrews’ best-known quotes.

"Someone once remarked that most traders spend a good deal of their time following the markets to see what prices are doing," he said at a trading seminar. "I suggest they would be better off if they spent more time observing what prices are not doing."

The price failure rule is a core Andrews technique that deals directly with what prices are not doing. It comes into play when prices don’t reach the median line, or the middle line of the pitchfork. Before we look at the technique, let’s first consider the broader interpretation of price action vs. the median line.

Price magnet

The median line technique is Andrews’ best-known work. Indeed, it is the basis for the Andrews’ pitchfork method itself. The primary feature, according to Andrews, is the high probability that prices will reach a median line and then reverse (see "Profitable attraction").

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That aspect is pretty well known among users. Less known is that the Andrews’ pitchfork offers a great deal more than that.

The discovery of this phenomenon prompted Andrews to develop complementary techniques that would help confirm the outlook of trade positions already on the books, or alert him to a potential shift in market sentiment as prices interacted with the median line. The price failure rule is one of
those techniques.

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