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

Hidden truths of Andrews’ pitchfork

As can be seen in “Parallel break” (below), prices went down nicely and then briefly went above the MLH, where a lot of investors wrongly went long and got caught in a trap. In Andrews’ comments in his weekly newsletter from the 1970s, we can glean some insight: “Prices will go outside the MLH, and this is no reason to reverse your position on their first time outside. Simply draw a sliding parallel to adjust for this occurring.” Still, many new students of Andrews’ Pitchfork, then and now, consider prices outside the MLH as a signal that the trend has changed.

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But, this is trading, and no outcome is guaranteed. Studies show that when prices are in a third wave up, they often continue climbing ever so slowly outside the MLH. To deal with this particular scenario, Andrews suggested using the sliding parallel. The sliding parallel is used to adjust for the market behaving imperfectly when it comes to the median lines. 

The second chart in “Parallel break” includes an example of a sliding parallel. It’s simply an additional line outside the original MLH along which price trends during these third-wave situations.

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