Even though there are hundreds of indicators out there, people still can't find one (or a few) that fit their trading style and methodology. I've been a fan of Greg Fisher from Median-Line-Study.com, and his work for a while now. Today I've asked him to teach us a little more about the Median Line AKA Andrews' Pitchfork. Please leave him some comments with your thoughts and questions!
Imagine having the ability to draw a single line - the Median Line - on any stock, forex, or futures price chart, and know there is a high probability prices will reach that line. That is exactly what the late Dr. Alan H. Andrews proposed in his “Action/Reaction Course” in technical analysis of the markets in the 1960’s and 1970’s.
The method is more commonly known today as Andrews' pitchfork. However, as I have learned from several of the students that took Andrews' course - he hated the term pitchfork!
Andrews stated in his course:
“…drawing a single line will enable you to know where the price of any stock or any future is now headed and the probable time it will reach there.”
And, the Median Line method would,
“…enable the user to be one of the few who can tell where the prices are headed, and the place they will reach about 80% of the time, and when approximately that place will be reached.”
Andrews definitely thought in terms of probability. In fact, in the chart-filled 60-page original course, the word “probability” shows up about 40 times!
Line studies such as the Median Line can serve as LEADING indicators of potential price direction. They have a PREDICTIVE nature. Most other indicators are LAGGING indicators. They RESPOND to price action AFTER the fact.
The Median Line often serves as a magnet to price. When price gets near the Median Line, it often does one of three things:
1.) Price reverses,
2.) Price accelerates,
3.) Price consolidates.
The Median Line also often serves as a barrier to price and holds similar characteristics to horizontal support and resistance lines. However, there are significant advantages the Median Line holds over standard horizontal support and resistance lines. The main reason is the Median Line is often drawn at a slope and therefore:
1.) Gives an indication of the direction of the trend in addition to providing a “support/resistance” line,
2.) Adds a “time” factor,
3.) Presents a mathematical relationship (probability) of price reaching it.
Horizontal support/resistance lines offer a potential “place” where price will find support/resistance. Median Lines not only offer a “place” where price will potentially find support/resistance, but a “time” as well.
This reiterates the idea introduced earlier by Andrews’ statements at the beginning of the article - "where" and "when" price will reach the Median Line.
How do you draw the Median Line?
The beauty of the method is its simplicity. To draw Andrews’ Median Line, first identify three consecutive, alternative pivots on a price chart. Pivots are extreme prices on a chart where a change in trend takes place. The pivots used to create the Median Line follows the sequence: high, low, high or a low, high, low.
To draw the Median Line:
STEP 1. Label the pivots in sequence P0, P1, P2
STEP 2. Find and mark the midpoint of line P1-P2
STEP 3. Draw a line from P0 through the midpoint between P1 and P2 and extend the line.
That's it! You have drawn a Median Line.
To finish the Median line set (or Andrews' pitchfork); draw a line parallel to the Median Line at P1 and another at P2. The two outer lines are the Median Line parallels. Price often finds support/resistance at these lines.
Andrews also set out five basic rules concerning the Median Line and its parallels in his original course,
"There is a high probability that:
1. Prices will reach the latest ML,
2. Prices will either reverse on meeting the ML or gap through it,
3. When prices pass through the ML, they will pull back to it,
4. When prices reverse before reaching the ML, leaving a “space”, they will move more in the opposite direction than when prices were rising toward the ML,
5. Prices reverse at any ML or extension of a prior ML."
When I found the Median Line method over five years ago, I wondered, "Does a method developed almost 100 years ago still apply to today’s markets?" "Does the claim Dr. Andrews' made that price returns to the Median Line 80% of the time hold true?"
I decided to test the claims and set up a study of the five basic rules. I wrote, "Using Median Lines as a Trading Tool: An Empirical Study - Grain Markets 1990-2005" for an independent study course on my way to getting an MBA. What did I find? The most interesting result I found was that the "80% rule" was right on the mark. I also found some high probability repeating patterns as price cycled within the Median Line set.
There are numerous trading systems and methods out there. I encourage you to test each method thoroughly and prove to yourself the truth behind the claims. And most importantly - don't discount the simple, time-tested, and "old-fashioned" methods of technical analysis like the Median Line method. You may be surprised with the results!