Pitchfork, or Dr. Andrew’s Pitchfork as it is also known is a great trading tool because it is allowing traders to build a channel, and this is extremely important because channels have great characteristic: they are visible, hence making the trading decision easier to spot and make. Any trading tool that looks easy enough to be used but offers a tremendous amount of information for future price action is a valuable one and any trading platform in the world is offering the Pitchfork as a trading tool.
Pitchfork allows to pick the right entry price and after, in case of binary options, one should adapt with the right expiration date according to the time frame the pattern it is forming. Regular forex traders do not have this problem since they cn close the position whenever.
Channels are of three different times: bullish (rising), bearish (falling), or horizontal. In the first instance we should look to BUY the currency (or use CALL options), in the second instance SELL orders should be used (put options), while the horizontal channel is offering the possibility of doing both by looking at price and oscillator to diverge.
Any Pitchfork starts from three points called pivots and those three points are important as they are the starting point of three different lines: the median line (the one in the middle and the most important one), the upper median line and the lower median line.
The median line is important as it has the characteristic of attracting price and therefore we should avoid trading by the time it is reached.
However, the upper and lower median lines are acting as possible places of support/resistance and if the median line is attracting price, then both directions can be traded.
A Pitchfork represents a great trading tool when it comes to analyzing markets from a technical point of view as it gives a lot of information regarding future support and resistance levels as well as when a specific trend ends or not.
Like mentioned at the start of this article, any Pitchfork comes from three points or pivots and because of that one needs to actually click the trading chart on three different places in order for the Pitchfork to be plotted. This makes choosing the pivots the most important decision as based on them the angle of the Pitchfork is changing and the analysis will change accordingly.
The way to deal with this situation is to start from a high or a low the market is making and that would be actually the first click or the first pivot. The next thing to do is to look at the first move lower in a bearish trend that is corrected by another move higher this time but the highs in the first pivot should not be broken. This way we have three pivots (the high on the first pivot, the end of the first swing lower and the end of the spike higher that corrected the swing) and we can plot the Pitchfork.
The resulted three lines should give important dynamic support and resistance levels for future price action and they should guide the trading based on the principle that the middle line has the tendency to attract prices.
How do we know when a trend is ending and when to look at another Pitchfork corresponding to the new trend? The way to solve this puzzle is to draw a trend line from the beginning of the Pitchfork until the end of the third pivot and wait for price to break it. Normally it should act as a resistance in a bearish trend and a support in a bullish one and most of the times it is being broken and retested. A clear break there has huge implications on the future price action as the whole previous trend is considered to be completed and a new one should start.
The three parallel lines that are starting from the three pivots are forming two equal channels and these channels can be split into two different parts as well. The resulting fifty percent line is offering as well support and resistance levels for any call or put options one may trade with the expiration date being adjusted according to the time frame the Pitchfork is used.
Some traders are using 61.8% extensions on both sides of the Pitchfork in order to find out further support and resistance levels to guide their trading but I would say that information is not really useful as at that moment of time there will be too many levels on the screen and no one knows anymore what is the right one the market will react from.
More details related to how to draw a Pitchfork, what to look for when deciding for the right pivot as well as how to interpret the whole trend are to be found by watching the two video analysis that are coming with this educational project.