This piece focuses pitchfork analysis and median line trading, and reviews how parallels of these trendlines can be utilized to give structure to a market advance or decline. The objective of this methodology is to attempt to identify the gradient or slope of the market trend in order to zero-in on possible levels of support and resistance.
We’ll start by exploring pitchforks and median lines in more detail followed by a deconstruction of a setup. This will illustrate how we formulate a given trade opportunity using pitchfork analysis and median lines.
This article on trading with pitchforks and median-lines is the second in a series exploring pitchforks and slopes:
What is Andrew’s Pitchfork?
Pitchforks were developed by Dr Alan Andrews as a basic trend tool that identifies price channels and gives structure to a market advance or decline. These trendlines offer reaction zones and offer a guidance in both price and time.
EUR/NZD chart showing a pitchfork
What is a Median-line?
A median line is simply the bisector of a given channel or range. The median-line of a pitchfork often offers a point of reference and may trigger inflections or pivots in price. If a price breaks above the median-line, the target shifts to the upper parallel – likewise if price breaks below the median-line, the target shifts to the lower parallel.
EUR/NZD chart showing a parallels within a pitchfork
Using Pitchforks and Median Lines
The base case scenario is that when prices comes off the lower parallel they will gravitate towards the median-line or bisector of the given range and vice versa off the upper parallel. With the same respect, once the median-line is broken as resistance it will serve as support for a rally into the upper parallel – and the opposite when the median-line is broken as support (median-line will offer resistance on a move into the lower parallel).
The simplest way to get started in pitchfork analysis and median line trading is to identify an initial trendline of support or resistance that the market has been responding to. Once that trendline has been found, a parallel (copy) of that trendline can then be extended to the other side of the move (most recent key high / low) to create a channel – this is the very basics of identifying slope.
The parallel should now serve as the support and resistance structure for the trend and as the market continues to advance, look for pivots off corresponding parallels of that slope for further validation that we have identified the proper gradient or angle of the trend.
AUD/USD Price Chart Showing a Trendline
Consider the trendline (resistance) connecting the two major peaks in late-2015 and early-2016 in AUD/USD. A parallel of this slope extending off the 2016 low was critical in identifying support on the late-April decline as Aussie was in free-fall.
This rudimentary use of parallels can be extremely useful in identifying basic pivots in price- which for us as traders, means entry / exit points. But where would we look for resistance on this reversal off support? Enter the pitchfork.
AUD/USD Price Chart Showing a Median-line
In the AUD/USD example above, the June rebound off the lower parallel calls for a rally into the median-line of the range. Indeed, a parallel bisecting the channel (extending off the 2015 September low) offered a clear pivot in early 2016 and was an effective target for the rally which capped out just higher later that month. This simple example illustrates how we use slope as a basis for targeting support / resistance.
AUD/USD Price Chart Showing a Pitchfork