Forex (FX) and Andrew's Pitchfork, Part 2

I realized too late that I failed to include the chart in the blog last time. So I will edit the post to add that later today.

For this post let's view another technique in the use of the pitchfork.

We noted last time the median line of the fork which is the core of the indicator, and you could say that everything revolves around it. As prices tend to return to a median over time, we will look for the price to return to the median line of the indicator.

So let's say you are in a downtrend, and the price backs up to the median line. There are three options for price action from here. A continuation of the retracement to the upper line in the fork, a consolidation around the median line, or a reversal of the retracement and a continuation of the downtrend toward the lower line on the fork.

But how do you know which is in the cards?

Let me repeat something I said in one of the early lessons of the blog...NO ONE knows what's coming next. It is true, there are big dealers and sovereign wealth funds that really move the market when they buy and sell, but no one really knows where the market is headed. (This one thought revolutionized my trading.) You look at the overall trend, and you want to catch a wave, just like a surfer. Some waves work out, some don't. But if you want to catch a downtrend, you have to be willing to sell when the currency is moving upward. In a strong downtrend you can make money when it breaks to new lows, because many times it will be blowing through stops and can really pick up steam. But the best short trades will be from higher peaks, not lower valleys.

OK, back to our downtrend and the fork. When price retraces to the median line, it is foolhardy to just hit the sell button and hope for the best. If there is going to be an end of the retracement here, the market will show some weakness. DON'T BE IMPATIENT. Wait for the weakness. This will show up in several possible forms...and it is here that I really like the candlestick charts. Sometimes you will see a shooting star formation. Or a hanging man, or a hammer. We will go into detail with some of these at another time. But instead of reinventing the wheel, just check out some sites on candlestick charting. There are a lot of good ones like the following: candlestickgenius.com, gotcandlesticks.com, candlecharts.com, and chartingwithcandlesticks.com.

Before you enter, you want to see that the retrace has run it's course and is out of steam. Remember, no system is fool proof, and the longer you trade, the better you will become at spotting weakness. If a couple of weak candles appear and nothing happens by way of follow through, don't enter a trade. Assume that consolidation is underway, and look for signs of a break out a bit later. Keep in mind that consolidations like to break out in the direction of the overall trend, so you would look for a short trade. Also remember that consolidations produce frequent false breakouts to the opposite site of the overall trend to produce a "bull-trap". Many unsuspecting traders will jump at a move to the longside coming out of consolidation, only to watch in horror as it reverses and continues the original downtrend. So watch those false breakouts. If it is actually changing trends, and you see a break out to the up side, wait for a retracement back toward the consolidation, then at the candles which give signs of renewed strength, hop in long for the next leg.

Keep in mind your parameters of the pitchfork at this juncture as well. A break up from the median line (during a downtrend) is far more likely to resolve itself by hitting that upper line, and then falling back. In doing so, you have a great point of entry at that upper line, especially if it coincides with a declining trendline, or a fibonacci retracement level. The more concurrence you can have, the more sound your trading venture can be.

That should do it for today.

Happy Trading!

Bill
www.thefxtradingmasters.com