From the April 01, 2012 issue of Futures Magazine • Subscribe!

Hidden truths of Andrews’ pitchfork

There is a lot of information available about Alan Hall Andrews and the pitchfork charting method that he created and popularized. Unfortunately, particularly for novice traders, little of what is available is accurate. Indeed, most of Andrews’ original training on the technique was communicated privately at his kitchen table or in his weekly newsletter in the 1970s.

At its most basic, Andrews’ pitchfork is a relatively well-known trading tool that includes three parallel lines that can be used to produce a simple strategy. The lines are based on recent trends and form prongs and a handle. They combine support/resistance, trend-following and regression-based techniques into one simple method.

However, confusion about this otherwise straightforward strategy persists. Among the misunderstandings are various ways to calculate the ever-important median line, as well as what to expect of price activity at outside support and resistance lines.


Lines and parallels

From the beginning, common questions about Andrews’ methods concerned the median line. An engineering professor by profession, Andrews’ typical explanation went something like this: Once, he digressed from teaching a civil engineering class to discuss how he made his first million as a cotton trader, using technical analysis. He was discussing Roger Babson’s action-reaction lines and how to forecast the movement of the market from one reaction line to the next. A student suggested that something based upon the regression line would be useful for this purpose (see “Regression solution”). 

A linear regression line uses the data prior to the vertical line to calculate the slope of the entire regression line.  It’s a common statistical technique that, in generalized terms, positions a straight line such that the distance between each point of data and the line is minimized. From that line, the additional lines that came to form what became Andrews’ pitchfork were drawn. Andrews reported that his initial tests suggested that prices regress to the median line in about 80% of the cases.

A common misconception is that when prices break outside the median line parallel (MLH), it is time to reverse position. After this fails to be the case, many novice traders proclaim the pitchfork does not work — and they have the losing trades to prove it. However, as is often the case, real-time observation provides the insight to better understand a methodology.

Page 1 of 4 >>
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome