Using Andrews Divergence to Find Reversal Points
By Ron Jaenisch, AndrewsCourse.com
Times were very different a hundred years ago. If one had the inclination and the intelligence, it was possible to attend and graduate from the Massachusetts Institute of Technology and Harvard University at the same time. This is what Alan Hall Andrews did. He received his education in what was “high tech” back then, aeronautical engineering.
His father, who ran an investment business, was more interested in Alan being involved in something that made money, and lots of it. He charged his son with making over one million dollars in his first year while working in his fathers’ investment firm.
It took Alan three years to accomplish the goal. He achieved it by using techniques his father taught him to trade cotton with. Later he learned additional techniques from George Marachel and Roger Babson. After many successful years in the investment business, he decided upon a less hectic life and moved to Miami. There he became a college professor at the University of Miami.
As an Engineering Professor at the University of Miami, he taught some of the brightest students. When the stock market was in the news he would digress from his normal lectures and discuss how geometry is used in trading. His students were fascinated to learn from his real world experiences. In one of his classes he was discussing the trading technique he learned from Roger Ward Babson, the founder of the world famous Babson Business College. A student in the class suggested that the median line could be used in conjunction with the Babson techniques.
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After drawing hundreds of median lines by hand on paper charts, Professor Andrews came to the conclusion that prices make it to the median line about 80% of the time, and it is a useful tool for understanding what the trend is. Furthermore there were parallel lines that could be drawn along with the median line, which create a price channel. He made the median line techniques part of the trading course he taught through the Foundation For Economic Stabilization. This is when the author of this article became a member of FFES and spent considerable time with Professor Andrews, learning the techniques his father taught him along with the Babson and Median Line methods. Dr. Andrews was easily able to market his trading course because once a year he gave the 5K into 50K demonstration.
Every Monday, course members received the course newsletter in their mail box with a script to read to their broker. This typically turned 5K into 50K over a period of a few months trading futures. The explanation of what lines and rules that were used for each trade were detailed in the weekly course letter. Often charts accompanied it. The idea was for the students to learn by doing. The Professor knew that he could keep his students interest in learning the techniques by helping having them see the success. Often a technique that was discussed was the use of what is now referred to as the Andrews Pitchfork.
Getting Started with Pitchforks
When examining a recent chart, three probable pivot points are selected and one possible pivot point is selected. Two median lines, each with their respective parallel lines are drawn. By drawing the lines the trader is able to quickly answer the questions:
1) What was the prior trend? (As noted by the red median line from the probable pivot points),
2) In the probable trend, did price make it to the median line? and
3) What is the possible next trend? (Using two probable pivots and one possible pivot.)
As you can see each median line in chart #1 they are accompanied by two parallel lines, which help the trader see the channel of the trend. The three lines together are often referred to as the Andrews Pitchfork. Dr. Andrews referred to them as the ML (median line) and MLH (median line parallel lines).
Selecting the Pivot Points
The initial step in using the ML and MLH lines is selecting the four pivots for drawing the lines. The pivot points are swing points which are highs and lows and are referred to as probable pivots and one possible pivot. Chart #1 shows the median line drawn from the high in August. The first point selected is labeled point A. The next swing points are labeled points B and C. Points B and C define the width of the Andrews Pitchfork channel. The median line is calculated by drawing a line from point A through the midpoint of a line between points B and C. This line midpoint is also the 50% of value point between pivots B and C. Knowing this gives traders the ability to draw median lines with software that only has trend lines and Fibonacci points in their choice of studies.
The drawing the possible median line using point D, was suggested by my friend Dr. Alan Andrews. It answers the question: If prices reversed at the last possible pivot point, what will the new trend be? This can be seen in Chart #1. In Chart #2 the next set of four pivot points is used to draw the next set of lines.
Finding Support, Resistance and Reversal points
As you can see in Chart #2, prices charged up and weaved around the up sloping median line for months. After they made the highs they stayed inside the upper parallel line, of the next median line and parallel set, using one possible and two probable pivots, when prices tested the highs, you were able to go short. On the same day there was an ORE sell signal in the Nasdaq and a week and several days earlier there was a sell signal with the Andrews methods in the Dow.
With specific exceptions, prices will typically stay inside the median line parallels lines. But as my friend Alan Andrews told me, there is a lot more to it than that. Andrews stressed placing buy and sell orders near where the pivots are, rather than waiting weeks or months, until they pass through the parallel lines.
This is accomplished by finding “Ore” points, as posted https://ireport.cnn.com/docs/DOC-1047298 and as seen in chart #3. It is also accomplished by finding specific types of Andrews Babson Reversal Points, or by finding Andrews divergence.
Andrews Divergence is determined by measuring the distance between a median line that was not made and where a small pivot occurred. In order to determine divergence, there are typically two or more pivots used to determine it.
The theory behind it is very straight forward. As prices go in the direction of the trend they are going towards the median line. Upon each attempt to make it to the median line a pivot is made. If these pivots are clearly diverging, in terms of distance, from the median line, then a reversal is taking place. This divergence is very easy to measure, when using Andrews’s market geometry.
In the example, in the correction in the price of Google in chart #4 it can clearly be seen.
After prices went down and made a pivot labeled “A”, a line is drawn to determine the distance that prices missed the median line by. Prices thereafter, went up and tested the MLH (median line parallel) two times, prior to going down to point B and making another pivot. As you can imagine short term traders like these lines because of the ability to predict short term moves they provide.
After prices were unable to make it to the median line the second time, the distance between the pivot and the median line is measured in line “B “. Note that even though prices were lower in price at the second point there is a significant difference in the length between lines A and B. This results in what is referred to as Andrews Divergence. When this divergence is taking place a reversal is in progress.
Then it can be taken to the next level. By taking the distance of line B and placing it past the next median line, the astute trader can estimate the distance of the next move which in this case is up.
As can be seen in the google chart #5, as prices went up from $550 to well over $750 they made the median line and went beyond it, by the distance expected. Prices went past the median line the distance that was projected when they did not make it to the median line, near the $550 value. Dr. Andrews taught that when prices did not make it to the median line they make up for it on the next move in the opposite direction.
In chart #5, line B was used to forecast the distance that price would go up past the median line. After price went up to make the pivot in the forecasted area near the point estimated by line B, they reversed. Then they went down to the area of the lower parallel, near $650 where support is was found, at this point prices reversed and made another low pivot, prior to heading much higher.
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Even though price patterns are repetitive, they do vary. Andrews Divergence points are one of the easy to use tools that are used to find one of the various types of reversal points. Others that use relevant in different situations are found in the Advanced Andrews Course, which comes with over 25 videos and a manual. All are available at www.Andrewscourse.com. All readers of this article are invited to join the free yahoo discussion group by clicking upon the new link on the website.
The most complete compilation of the writings of Andrews, including the ORE technique is found in the 800+ page Expanded Andrews course, which includes over 25 additional videos.