The construction of a gap median line is no different than a traditional pitchfork because it uses the same logic. The only difference is that we use a gap to choose our starting anchor point. In this example, we'll draw our pitchfork using the lower point of an opening gap up and the two major pivots from the first significant swing following the gap's formation.
As with other pitchfork types, the main criteria for determining if a pitchfork is likely to predict the future market movement is how the price reacts to its main lines or whether the median line acts as a symmetry axis. Here, even though the price could not reach either of the pitchfork's upper or lower parallel lines, the median line has served as a perfect symmetry axis for the market's movement. The pitchfork could not properly encompass the market if we were to use the gaps high as our anchor point.
So if for whatever reason you are long on the market, you should not be worried about a trend's reversal until the price leaves the lower parallel line of the pitchfork with the formation of this downward gap. This can be an early sign of reversal, especially if you consider the apparent divergence between price and RSI indicator. As a result, you may want to consider closing your position and keeping a close eye on the market.
The price then begins to wrap like ivy around the first warning line of the pitchfork. This price behavior is not unknown to us. In the previous chapter, we learned how this phenomenon could eventually shift market sentiment, especially when an evident divergence like this accompanies it.
So we prepare to go short after getting final confirmation about trend reversal. We can do this by drawing a channel and waiting for a breakout signal. Finally, the price breaks out of the trading range and provides an excellent selling opportunity after retesting the channel's lower trend line.
Eventually we can go short below these two down fractals. As expected, the market resumed its downward trend, with excellent responses to almost every warning line. As discussed in the third chapter, the lower trigger line of the pitchfork can be an ideal spot to place our take profit level in a bear market.
Despite the price dropping even more, we stick to our guidelines and exit the market with a decent profit. Here, following a period of consolidation, the appearance of an opening gap down after completing the head and shoulders pattern suggests considerable selling pressure. Subsequently, after a brief correction, the market plunges even more with the emergence of another gap. This setting seems perfect for drawing a gap median line.
As a result, we begin to draw our pitchfork by choosing the lower point of the opening gap down and the two significant pivots from the first swing following the gap's formation. The pitchfork's median line, which also passes through the middle of the second gap, serves as a symmetry axis once again. Also pay attention to the apparent divergence between the price and indicator.
Subsequently, after forming a solid Marubazu candle, the price breaks through the upper parallel line of the pitchfork and after retesting it, maintains its upward momentum. Here again, the price reaction to warning lines is quite apparent. and we can utilize the trigger line as our take profit level just as we did in the previous example this example resembles the previous one in many respects but with notable distinctions so the first thing that springs to mind is to employ a gap median line to determine where the price will ultimately reverse its trend unlike the previous examples the the price reacts significantly to the pitchfork's upper and lower parallel lines and the median line itself. As a result, according to our guidelines, this pitchfork appears to be exceptionally qualified. However, when the price eventually decides to exit this pitchfork, the first warning line works as a powerful obstacle, pushing the price back inside the pitchfork where even lower values might be found.
This price behavior often triggers traders'stop-loss orders. So we must be very cautious about how the price behaves around the first warning line and look for a definite break of this line before entering the market because false breakouts and early entries can cost you a lot of money. Then, after reaching the lower parallel line of the pitchfork, which intersects with the 0.618 Fibonacci retracement level of the previous major uptrend, we can confidently claim that this is the lowest level at which the price may fall.
After that, the The price bounces back away from that region and hits the pitchfork's first warning line for the second time, but it behaves quite differently this time. As can be seen, the price begins its oscillatory movement around this line after a period of energy accumulation. Those who are more acquainted with price patterns and how the price might behave after leaving them would instantly recognize this particular type of broadening wedge. Finally, after testing the first warning line for the last time, the price started a powerful rally that lasted many months. In the third chapter of this course, we learned about Fibonacci parallel lines, one of the distinctive but sometimes overlooked components of a pitchfork.
Here, after drawing a gap median line, the price continues its downward trend inside a narrow channel defined by the upper parallel and the median line. Even though the price looks to be approaching the lower parallel line, the 50% Fibonacci line serves as a powerful barrier, pushing the price back toward the upper parallel line. When the price fails to pass this line for the second and third time, it falls to test the 50% line for the second time. However, when we zoom out to the daily time frame, we notice that the price has formed two distinct candlestick patterns around the same zone.
The first is a near flawless hammer with a long lower shadow and practically no upper shadow, which in fact, is just a part of a more complicated pattern known as the morning star. which when combined with the apparent divergence between the price and MACD indicator, gives us the idea of going long. When the price finally leaves the pitchfork, the only thing we should look for is a legitimate break of the first warning line.
As can be noted, after hitting the first warning line, it didn't run into much resistance and after a brief correction, kept going up with a strong green candle, which finally convinces us that the market's sentiment has shifted. We are now in a bull market. This example illustrates another type of gap median line, which instead of choosing the gaps high or low as the anchor point, employs another point that is located outside the gap. The anchor point of this pitchfork can be a pivot itself or as we learned in the fifth chapter, can be found like what we did about a shift pitchfork.
But the more significant difference between this example and the previous ones is how we choose the two other pivots. These points are located respectively at the high and low of the gap, thus measuring the gap's height. As can be seen, the price has shown notable reactions to the upper, lower, and median lines on several occasions, proving that this pitchfork is valid. When the price is unable to break the lower parallel line of the pitchfork after three attempts and as in the previous example, forms a morning star, it should trigger an alert that the market may be nearing its bottom. This is especially true when two back-to-back divergences between the price and the indicator confirm the reversal in the market.
So we can enter the market based on a sound money management strategy and see how it develops. As expected, the market starts a powerful rally, exits the pitchfork with minimum resistance, and finally reaches the first warning line and the trigger line. Traders who entered the market at lower price levels are well in profit and may wish to exit all or at least a portion of their trades and wait until the market gives them another chance. The price can not cross the first warning line in its first attempt, but after a brief correction, it bounces back away from the upper parallel line and prepares itself for the second attack.
When the price finally breaks through the first warning line, it moves away from it by making another morning star pattern, which reveals that the rally isn't over yet and that the higher levels are still attainable. But the main question that arises here is when should we get out of the market? We can draw another pitchfork that perfectly encompasses the market and use the upper parallel line of this new pitchfork as our ultimate take profit level.
The price eventually hits the upper parallel line of the pitchfork. Then, after two failed attempts to cross this line, it runs out of steam and plunges, leaving a massive gap in its wake. If you have any questions, feel free to ask me in the comments.
Also, you are always welcome to share your knowledge and experience here. Thank you for watching.