Forex Trading Strategy – Parallel Lines

[Zack Zarr 5]

Forex Trading Strategy – Power of Parallel Lines

 

[With a 240 pips example]

 

This is a favorite strategy on mine which I cam across with few years ago. I have been testing it for a while now and have seen tremendous potential in it. This is why a portion of my book is dedicated to explaining its basics where I showed a real-life example of my trades in the EURUSD pair.

 

The method has gained significant attention since a guy named Alan Andrews started compiling findings of several people who used similar concepts in the past and came up with his own method. Hence, the name Andrews’ pitchfork was coined. In its core, the method relies on the key concept of balance and imbalance in the market. If you go over the chart of any instrument being a forex pair or stock chart, you could find a “median line” around which the price clearly fluctuates. The price might go above and below the median line, but it always comes back to it as if the line is a magnet.

 

Personally, I got interested in this method because it relies on this fundamental concept of the market. There is always a price where the buyers and sellers are somewhat in agreement for a certain period of time. It has much deeper implications if you think of it in terms of economics of that instrument for the institutions that are controlling its movements in order to meet certain criteria in their financial books. In short, the median line is there for a reason, and it IS NOT because it is a good looking trendline respected by many traders. This is an important concept which most retail traders do not pay attention to. Instead, retail traders see the Andrews’ pitchfork on a trader’s chart and think “oh, I can draw that”; I let the rest of story to remain untold. See an example of a fork below:

 

 

Essentially, the chart is split into two regions: below or above the median. The market intends to remain above the median line as long as it is economically feasible (to the big players in the market of course). So, you want to trade above the median line as much as you can during this period. Once the market giants decide to move the price below the median line, you also want to trade with them below the line. The high and low swing lines are there to indicate market extremes. The bigger theme is determined by the direction of this median line. So, if are trading against the overall theme, be prepared to position yourself in a way to minimize your risk, and not to get stopped out preferably. Key point: these are not rigid and unbreakable lines so' so don't treat as such.

 

I went over the details of this method in the book, so I keep it short by only showing another example that I recently tried on EURCAD.

 

Here is an example of how I positioned my trades in an area where I thought institutions would start re-adjusting their accounts towards the general theme of the market. That is in the long direction.

 

As you can see, I spread out my trades to minimize the risk and maximize profit. The trade went against me for a few days so be prepared for emotional times. Always remember: trust yourself and be patient.

 

 

Two key findings which I like to point out when looking at this chart are as follows:

The institutions clearly decided to dump their long positions and added serious short orders judged by the large body candle you see at the time I placed my limit buy orders. So, I have that in mind when I place my buy orders. I cannot expect the price to go above that level because these big players most likely have more short orders to fill. They also do not flood the market with all their short orders at once. That is just not possible.

There is another set of large body bullish candles at the left side of the chart at the touch of the low line. This is where the institutions added to their longs. In order for them to reduce their long exposure, one big drop does not cut it. They most likely pump the price further up and slowly reduce their long exposure.

Knowing these key concepts, I would not get out of my long trades unless the prices shot through the previous low level. And that is not something that happens often in the forex market. We are talking about the exchange rate between two G10 currencies.

 

I waited over the time when institutions positioned themselves to have another push higher. I used the large body bearish candle and the median line as my exit points. Overall profit of 240 pips was reasonable for me so I closed the trade.

 

 

I hope you could see that there are times when you doubt yourself and analysis and want to close your trades so that you don’t see those big negative numbers in your terminal. If you have learned the key fundamental concepts, have thought about the dynamics of the market and made your decision, do not give up on yourself. Let the market to prove you wrong. It is normal and OK to make mistake. Every mistake is an important lesson so learn from it. Manage your risk and position your trades in a way that you can absorb the necessary pain to succeed.

 

Zack

[LC 0]

Excellent post Zack! Could you explain a little more on your criteria placing the pitchfork? You use the daily chart to place the pitchfork? Are you using daily chart to enter the trade to?

[Zack Zarr 5]

Hi Luis, Daily charts are the most common time frame I trade based on. Once I find a working pitchfork, I keep it as guild line  while still using the supply and demand and COT data to build the case for my trades. You can see the weekly trade ideas in the forex forum. I try to use all the data available to make decisions, and please keep in mind I trade for longer terms, days, weeks, and up to month some times.

Please let me know if you have further questions. Some of the basics of my trading style are outlined in the e-book available on Amazon, link below:

https://www.amazon.com/Trade-Forex-Currency-Markets-Understanding/dp/1980450722/

Thanks,

Zack