Pitchfork is a technical drawing tool which can be used on a chart for the purpose of technical analysis. The pitchfork has 3 main components. It has a centre median line which is also called as trend line and two parallel lines above and below the median line. The parallel lines lie at a distance of specified standard deviations from the median.
A pitchfork is created by first drawing a trend line between a first point and a second point. A third point is placed either above or below the second point to set the direction of the pitchfork. The default pitchfork setting needs two additional sets of lines to be drawn.
The pitchfork is a set of parallel lines which create a type of a trend channel. A trend is considered active until the price stays within the Pitchfork channel. Trend Reversals happen when price breaks out of a Pitchfork channel.
The technical indicator known as Andrews Pitchfork is not popular and is rarely used by novice traders. However, it is a quick and easy way for traders to find out the probable levels of support and resistance for a stock’s price. It is created by placing three points at the end of previous trends and then drawing a line from the first point which runs through the centre of the other two points. This indicator is named as “pitchfork” because it creates that shape on the chart.
Generally, traders will purchase the asset when the price approaches near the support of either the center trendline or the lowest trendline. Conversely, traders will short or sell the asset when it approaches the resistance of either the center line or the highest trendline. The center line can be used to identify areas where an asset may acquire support or resistance, it is usually not as strong as in comparison with the two outside lines. While trading, the levels identified by this indicator are very helpful for identifying strategic positions for stop-loss orders.
Implementing Andrew’s Pitchfork
Let us observe the Weekly Candlestick Chart of Bank NIFTY, the index has received support near the bottom trendline once which allows us to place a stop loss trigger just below this level. The index has received heavy resistance at the upper line which shows that profit booking has occurred near the upper line. If the security breaks above the resistance of the center line in this example, the target will then change to the top line and the center line will then become the new support where you may trail your stop loss. It is not uncommon for a trader to sell a security near the resistance of the center line and then see it break through and head higher. This is the main reason why other indicators should be used to confirm the reversal.
Therefore, there are strict rules for placing your points to draw the channels. A trader needs to have the judgment which can be achieved through from experimentation.
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