Hidden Truths Of Andrews’ Pitchfork

March 30, 2012 07:00 AM

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.

As can be seen in “Parallel break,” 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.

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.

Timing is everything

Confirmation is a tenet of all trading strategies, Andrews’ pitchfork included. Confirmation refers to using an unrelated secondary technique to validate the signals generated by the primary technique. Indeed, Andrews often practiced this with his pitchfork, even though it always may not have been obvious.

In the 1970s, Andrews would mail a script to his students on a Friday. They were to read the script verbatim to their brokers on Monday morning. Andrews would do this for a period of a few months every year. The results were strong. Students would extrapolate from these periods of exceedingly high profits, and many came to the conclusion that by drawing various lines for buy and sell points, they could make massive profits easily and quickly trading any commodity futures contract at any time.

However, an in-depth examination of Andrews’ trading during these periods — when he would provide these order scripts — reveals some interesting habits that may or may not have been apparent to the students at the time. Andrews’ pitchfork analysis was not done in a vacuum. He applied the timing methods when the market was poised for a strong impulse wave. These waves were identified by specific patterns. One of these casually was termed the “megaphone” or “reverse point wave.”

This pattern encompasses a five-wave move (three impulse waves and two retracement waves). It emerges when a trendline extends in one direction for three of the pivots and in the opposite direction for the other two pivots (see “Making noise”). Andrews watched the market for this pattern, and others, and then applied his pitchfork to time the trade.

Andrew’s use of confirmations and unique applications of his methods did not stop there. He maintained the positions placed during these strong impulse moves for several months. Once in a trade, he used action-reaction lines to find correction points where he would establish additional positions (see “Above and beyond”).

In basic terms, Babson’s action-reaction lines position two lines parallel and equidistant from a centerline, drawn across two pivots, with one line (the action line) keying off past price action and the other line (the reaction line) identifying key points of potential future price action (see “Roger Babson and the arrow of time”). It was his study and application of action-reaction lines that inspired Andrews to develop his pitchfork techniques several years later.

Andrews’ use of these various tools, and adaptations thereof, demonstrate the importance of a complete approach. A properly formed trading strategy requires several layers, from gauging the initial mood of the market to trade execution, management and, ultimately, liquidation.  

About the Author

Ron Jaenisch has been trading for more than 10 years and was a personal student of Alan Andrews. Reach him through his website, www.andrewscourse.com.