Pitchforks Follow Normal Distribution
Pitchforks are a very popular TA tool and easy to use. However the fundamentals are often glossed over. For example, many beginners and vets don't know that it is based on Normal Distribution which has 3 Sigma Limits. This is commonly referred to as a "Bell Curve". It's a natural rule of thumb used in Statistics and Probability Theory, for all manner of sciences. The 3 Sigma Limits are 3 Standard Deviations from the median line, which is located in the center of the mean distribution of data. For us, this data is price action.
The 3 Standard Deviation on a fork are:
1st STD DEV from -0.5 to +0.5
2nd STD DEV from -1.0 to -0.5 & +0.5 to +1.0
3rd STD DEV from -1.5 to -1.0 & +1.0 to +1.5
The 3 Sigma Limits Rule is also known as the 68-95-99.7 Rule.
What this means is, while in a trend, natural price action will:
1) Remain within the 1st STD DEV 68% of the time.
2) Remain within the 1st & 2nd STD DEVs 95% of the time.
3) Remain within all 3 STD DEVs 99.7% of the time.
What about the remaining .3%?
Usually breaking out of the 3rd standard indicates the trend is done, however .3% of the price action can fall outside of the 3 STD DEVs and still continue the trend!
This is a rule of thumb for natural law, but stock market price action can be manipulated! If the price action doesn't fit the Normal Distribution model, then it is likely unnatural. Also, since our data never stops coming, the mean can move over time, while staying in the same general trend; making the previous median lines invalid.If a unnatural amount of your price action is falling outside of the 1st STD DEV, then your original median line is likely invalid.
A new pivot should show itself to correct the median.
That could be what's happening here on the chart, if the bear trend continues back into the fork, with so much price action outside of the 3 STD DEVs. You can draw a new pitchfork on the pivot from June to August which would include more price action. I will include that below.
The 3 Standard Deviation on a fork are:
1st STD DEV from -0.5 to +0.5
2nd STD DEV from -1.0 to -0.5 & +0.5 to +1.0
3rd STD DEV from -1.5 to -1.0 & +1.0 to +1.5
The 3 Sigma Limits Rule is also known as the 68-95-99.7 Rule.
What this means is, while in a trend, natural price action will:
1) Remain within the 1st STD DEV 68% of the time.
2) Remain within the 1st & 2nd STD DEVs 95% of the time.
3) Remain within all 3 STD DEVs 99.7% of the time.
What about the remaining .3%?
Usually breaking out of the 3rd standard indicates the trend is done, however .3% of the price action can fall outside of the 3 STD DEVs and still continue the trend!
This is a rule of thumb for natural law, but stock market price action can be manipulated! If the price action doesn't fit the Normal Distribution model, then it is likely unnatural. Also, since our data never stops coming, the mean can move over time, while staying in the same general trend; making the previous median lines invalid.If a unnatural amount of your price action is falling outside of the 1st STD DEV, then your original median line is likely invalid.
A new pivot should show itself to correct the median.
That could be what's happening here on the chart, if the bear trend continues back into the fork, with so much price action outside of the 3 STD DEVs. You can draw a new pitchfork on the pivot from June to August which would include more price action. I will include that below.
Comment:
This actually seems to fit the distribution better, but either case could be made at this point. Trend break or adjusted mean?
Comment:
Forgot Trigger line
Comment:
We broke out of the bear fork perfectly