The technical indicator known as Andrew's Pitchfork is not that well known and is rarely used by novice traders. However, it is a quick and easy way for traders to identify possible levels of support and resistance for an asset's price. It is created by placing three points at the end of previous trends, and then drawing a line from the first point that runs through the midpoint of the other two points. The reason this indicator is called a "pitchfork" becomes apparent from the shape that is created in the chart.
In general, traders will purchase the asset when the price falls near the support of either the center trendline or the lowest trendline. Conversely, they'll sell the asset when it approaches the resistance of either the center line or the highest trendline. Even though the center line can be used to identify areas where a security may find support or resistance, it is generally not as strong as the two outside lines. In practice, the levels identified by this indicator are very useful for identifying strategic positions for stop-loss orders.
Implementing Andrew's Pitchfork
As you can see from the chart above, this stock has found support near the bottom trendline twice over the past quarter, which makes positioning a stop loss just below this level a logical choice. 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. 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.
Although Andrew's Pitchfork is usually applied primarily to the equities and futures markets, it can help currency traders find profitable opportunities in the intermediate and long term. A disciplined investor who can wait out the choppier forex markets can apply the pitchfork to identify and isolate breakouts to the upside or downside. A basic price oscillator can then confirm the trade.
Ultimately, there are no hard and fast rules about how to place your points and draw the channels; it's a matter of judgment that can only come from experience. (See also: Introduction to Technical Analysis.)