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PIVOT POINTS ARE POINTS TO REMEMBER Thank you for buying my pivots program! Now you don’t need any more expensive data
feed/chart packages. Nor do you need
any fancy charts or indicators. With your purchase, you should have received this
narrative, together with an Excel spreadsheet. If either are missing, or both, please let the author know: prbain@tradingsmarts.com. Floor traders use pivot points to determine critical price, pivot
point, and resistance/support levels.
It is a relatively simple calculation that can be jotted down on the
back of a trading card for easy reference.
Off-floor traders who have the luxury of looking at monitors can adopt
this technique as well. Even if you
don’t have a PC, but can still derive the open, high, low, and close figures
from the last trading session, you can still do it. It’s interesting how we all get caught up in the notion that
everything has to be computerized. I
recently heard of a chap by the name of Dan in North Miami, Florida, who has
been trading S&P futures for the past 20 years and amassed a
fortune. He is a profitable trader to
say the least. But, the interesting
thing is, he doesn’t even use a computer.
His broke a few years ago, and he discovered he only needs to keep a
few notes. So, there you have it sports fans … you can’t use the excuse of not
having a computer as a reason for not succeeding at trading. Different
methods are used to calculate the pivot point and resistance/support
levels. I prefer the traditional
method rather than the variations. CALCULATION The
pivot point and resistance/support levels are areas at which the direction of
price movement can change. They are
calculated using data from the previous trading session. By looking at the open, high, low, and
close numbers from the last trading session, you can calculate the next
session’s pivot point as well as support and resistance levels. Hear
what one of the largest non-bank online foreign exchange market makers in
North America has to say about my pivots program: "I
like the system ... very easy to use. I have taken a look at your
program and it looks very good. I like systems such as this, which are
easy to implement and get the job done. I will definitely mention your
book and program to any clients who ask me about good trading systems." Hear
what Kiran Karnad of Bangalore, India, has to say about my pivots program: "Regarding your pivots program, this is toooo
good to be true. It is working out just fine. The good thing
about the pivots program is that, in spite of all the "external
factors" in India, the values are highly reliable." Hear
what Brent Strouse of Concord, CA, has to say: "Last
week, I took a look at your Pivots spreadsheet, and on Thursday applied it to
the Swiss Franc. It showed the pivot as 1.6735. I bought at
1.6726/31, and as you may know it rocketed to 1.7050 area. It was
great! Last night, based on the pivot numbers from Friday, I sold the
CHF at 1.7061/66 and picked up a quick 25 pips. Later in the morning, I
sold the R1 at 1.7175 with a tight stop, and it has since moved over 100
pips. This is pretty wild. I am making money, and I haven't even
gotten your book yet! I trade the four major
pairs EUR/GBP/CHF/JPY, and I am amazed at the numbers (your pivots program
generates). I wait for the price to push 5 or so pips past the number,
then I sell or buy with a fairly tight stop loss of 10 pips. Almost
immediately, there is some kind of move in the other direction. In the
last few days, it has almost been as easy as "taking candy from
children. I've used a number of
methods to trade, but none have been so accurate as the pivot numbers.
At least up to this point, it almost seems like cheating. Again, I
appreciate your help! Brent likes my pivots program so much that he is
going to stop paying for the expensive data feed/chart package he uses.
With my Pivot number method of trading, he doesn’t need to pay for those all
those fancy charts and indicators any more. The pivots program you just
purchased does all the pivot calculations for you. Like Brent says, he
is ... "amazed at the numbers the
pivots program generates ... as easy as taking candy from children ... it almost
seems like cheating ... I still can't believe how this works ... " Here’s what Brent is so excited about … Watching price action without anything to go by will leave you
directionless. You should watch
prices in relation to points-of-reference (a pivot point in combination with
support and resistance levels). It is
perhaps the only way I know of actually telling if the market is moving
closer to, or further away, from a particular point. It also helps you develop a feel for the
market once you put your position on.
Your entry price will take on new meaning as you track it in relation
to these points-of-reference. When watching price action, you will want to know three things: in
what direction, how far, and how fast.
To do this measurement, you need only observe current price in
relation to what we call the pivot point. The pivot number and associated support and resistance numbers are
calculated by using the last trading session’s open, high, low, and close to
forecast the numbers for the current session. The calculations are shown below, and they work equally as well
for commodities, currencies, markets, stocks, etc. They are used as points-of-reference to help you monitor price
action.
(Pivot points: Craig Ross, Senior Commodity Trader, Infinity Brokerage Services, Chicago) The two most important numbers are those that predict the current
session’s low and high. If the last
trading session’s close was down in relation to the open, M1 and M3 are the
numbers you would use to forecast the current session’s low and high. If the last trading session’s close was up
in relation to the open, then M2 and M4 would be the numbers you would
use. It’s interesting that Tom DeMark’s calculations for determining the
projected low and high produce the same results as above. Chapter 21 of my book has all the
details. It also explains what you do
when the last session’s close was the same as the open. And, it gives you some actual examples of
using pivots to trade the Canadian dollar.
You can purchase my book “HOW TO TRADE LIKE A PRO IN ONE HOUR”
right now by going to www.tradingsmarts.com/order.htm.
As a general rule, never buy in the top third of the range, and never
sell in the bottom third. It should
be further noted that the pivot and resistance/support points are merely
probability points against which you gauge the direction and speed of price
action. They can offer important
clues as to where prices are going, but are not cast in stone. The highs and lows, denoted as areas of significant support (S) and
resistance (R), suggest moves and continuation in the same direction as the
direction of penetration when penetrated … The Pivots Program distinguishes clear support and resistance
levels. When price approaches the
support or resistance area boundary, you take action: buy if prices are
moving lower and close to the support boundary, and sell if prices are moving
higher, and toward the resistance boundary. The strength of support and resistance at the boundaries is
usually determined by the number of times the tradable has pivoted at the
support and resistance boundaries.
The more times a tradable has reached a support or resistance
boundary, and then reversed course, the more powerful is that boundary. Pivoting simply means reaching a support
or resistance boundary, and then reversing.
Hence, the word “pivot.” Swing
traders know what this means. You should still use tight protective stops. A good area to place a protective stop is
just outside a support or resistance boundary. For example, if a tradable is nearing the upper resistance
boundary, you would establish a short position, and place your protective buy
stop just above the resistance level. If the tradable keeps moving higher and breaks out above
the resistance boundary, (stopping you out of the market), then that would be
considered an upside “breakout.” Such
a move would suggest buying, if there was good follow-through buying
strength. You would place your
protective sell stop just below the former upper resistance boundary that was
just penetrated to the upside. Where price action violates the support/pivot/resistance
numbers, and develops a bad case of the uglies, your backup plan would be to
use the stochastic oscillator. Of
course, there’s nothing wrong with using this indicator in conjunction with
the support/pivot/resistance numbers.
For a description of its use, please skip to the end of this report. In addition to understanding how the pivots program works, I would
encourage you to learn how to read bars, a free offering that comes with my
book, and study up on “Gaps”. You can
find out more about this phenomenon by going to www.tradingsmarts.com/gaps.htm. Once you develop a thorough understanding of the pivots program, know
how to read bars, and develop an appreciation for what gaps are all about,
you will be well on your way to moving up into the ranks of the top 10% elite
traders. We call them the “Big Dogs.” Other things that will help you in your journey to achieving “Top 10”
status are knowing how the commercial traders operate, and understanding the
role indicators play with your trades.
Don’t become a nervous Nellie over all this. It’s all explained in my book “HOW TO TRADE LIKE A PRO IN
ONE HOUR.” You can get
your very own copy right now by going immediately to www.tradingsmarts.com/order.htm. HOW TO USE THE PIVOTS PROGRAM This is the Excel spreadsheet that came with your purchase. It calculates the low and high, pivot
point, and resistance and support points for the current trading session,
based on the open, high, low, and close of the preceding session. All you have to do is input the open, high, low, and close (no
decimal points) and click on any open space.
And, there you have it … walaa … all pivot/resistance/support points
for the next trading session will appear before your very eyes. It is very important to track the average
range, as this information is not available anywhere else. Going into a trading session, it is
important to know this average. For Forex traders, you get the open, high, low, and close from the
nearest daily session at your trading platform. At www.FXCM.com, the one we
use, the daily session is defined as five-to-five New York time. To track the range, start the range total off at zero. Then, add the current session’s actual
range to the range total, and do so every day. At the same time, increment the # of days by one, again
starting at zero. By clicking on
empty space, the average daily range will calculate for you. Nowhere else is this average
available. It is important to know
how much a tradable “breaths” on average so that you can get your mind around
the possible range for the current session.
The Canadian dollar “breaths” 33 ticks per day, at US$10 per tick. The actual range refers to the actual range of the trading session
just past, and is calculated based on the open, high, low, and close values
you input at the top of the spreadsheet. Where it says CD H2 26/02/02 at the top of the spreadsheet, you can
change that to reflect what you are trading, and use the current date. The effective date at the bottom of the
spreadsheet should also reflect the current date. Where it says,
this information you hand record here based on the automatically calculated
projections and the actual numbers for the current session, which is the same
as saying “Tomorrow’s” projections. APPROPRIATE QUOTE FOR YOU STAR WARS FANS LUKE SKYWALKER: “I don’t believe it.” YODA: “That’s why you fail.” Translation: You must believe you can do it; if you think otherwise,
you will fail. A PRIMER ON PIVOT/RESISTANCE/SUPPORT POINTS “One man’s ceiling is
another man’s floor.” (Bob Dylan) A support level is established when a tradable stops declining. A resistance level is likewise set when a
rally stops rising. A look at market movement tells us that price fluctuates between a
level of support and a level of resistance.
Properly identifying key support and resistance levels can improve
your ability to enter, exit, and manage your trades. So, how can we determine which support and
resistance levels are the most important?
One way is to follow the traditional method of plotting the pivot
point, and its associated support and resistance levels. There is a standard way of making these
calculations, which we have already discussed. As you might expect, there are other approaches to identifying
support and resistance levels for a tradable, but a great number of them are
unreliable. These approaches include,
but are not limited to, methodologies that utilize Fibonacci numbers and
ratios, Gann concepts, moving averages, and trendlines. Those techniques all have a very static
view of the tradable. They assume
that the market will repeat past behaviour and experience, and can therefore
be viewed linearly. They also use
fixed intervals for inputs, which creates yet another dilemma. The old maxim: “A study of the past does
not tell you anything about the future.” A
tradable is not a static
phenomenon. It will not disregard
changes related to economic and industrial macro forces that influence price
movements. A tradable is a complex and dynamic phenomenon, but it is clear
that price fluctuates between levels of support and resistance. One way we can identify these levels in
advance is through the use of pivot/resistance/support points previously
mentioned. THE PSYCHOLOGY “People
are people and, if they weren't, Wall Street would be a sleepy little alley
that begins at a church and ends at a river, with little in
between.” A primer
on the psychological concept of support and resistance: support is a price
level that indicates a temporary fair value of a tradable for the
market. Prior to that level, sellers
sold the tradable because they viewed it as being overpriced. The tradable is then pushed down to a
level at which buyers step in and hold price at that new level. At
that “point”, both sellers and buyers have reached a decision regarding the
valuation of the tradable, based on their own individual methods of
valuation. If buyers perceive this
new level to be a good price for the tradable, they could conceivably add
more buying pressure at the new level, eventually forcing price higher. As to
resistance, buyers keep pushing price higher. At higher price levels, however, sellers enter the picture
looking for an opportunity to sell at inflated prices. This selling pressure, combined with
higher volume, creates what we call resistance. As
expected, this jockeying back and forth between buyers and sellers is an
attempt to determine “fair pricing.”
In and of itself, this invariably establishes price values for support
and resistance. The only way I know
of “documenting” these values is to calculate them based on the most recent
price performance in the form of open, high, low, and close values. The resulting pivot/resistance/support
points can then be used to gauge price action in the current trading session. When
you are contemplating using the pivot/resistance/support points for your
trading, keep in mind that there is a certain amount of engineering that
takes place within any given market.
This is helpful to know when you are planning your entry and exit
points. In other words, taking into
consideration the “three-day” phenomenon presented below, where are we in the
cycle? Are we
likely to encounter and up day or a down day? This is important because, based on the spreadsheet
calculations, if the market opens in the top third part of the range, you may
wish to short the market right away.
Of course, this can apply to any session you are trading. But, it is especially significant at the
end of a rally. It’s also an
important consideration if you are expecting to hold your position overnight. If you’re at the end of a rally, and you
go long the market, you may wish to exit before the close. These
are just some thoughts for you to consider.
Every market has its “rhythm”.
It ebbs and flows. Keeping
this in mind and using the pivot/resistance/support numbers to guide you with
your trades is a powerful combination.
All I am suggesting here is that you go with the “tide” and not fight
it. Even a short three-day trend is
your friend. Analogy:
A market only goes up so long before it suffers from exhaustion – perhaps
three days. It’s just like eating too
much chocolate. After a while, you
get sick of it and vow never to eat chocolate again. A couple days later you go right back at
it. Same idea with the markets. One
further point before I leave you on this … there is nothing that says you
have to trade every day. If trading
violates the projected range for the current trading session – i.e., is
either above or below it – you may wish to step aside. What might be happening is a “gap”
day. You can find out more about this
at www.tradingsmarts.com/gaps.htm. You may wish to “fade” the gap, or just
wait for the market to re-phase itself. Knowing
how to read bars will also help you understand what’s going on when price
action violates the trading range.
There is a package that comes with my book that teaches you everything
you ever wanted to know about reading bars, but were afraid to ask. Run, don’t walk, right now to get your
very own copy of my book “HOW TO TRADE LIKE A PRO IN ONE HOUR at www.tradingsmarts.com/order.htm.
THE THREE-DAY CYCLE This contrarian pattern works for day traders and position traders
alike. It maintains that the market
is “engineered” from within. The
three consecutive cycle days are: the “Buy
Day”, the “Sell Day”,
and the “Short Sale Day”. On the “Buy Day”, the market opens near or
at its low prior to a price rally.
The market is selling off as the uninformed sellers sell to the
smart-money buyers. In effect, the
market is taken down to create selling.
Often, the overnight stops will be hit and buying absorbs the
sell-off. When selling subsides, the
market is ready to rally as new buying enters the market. On the “Sell Day”, the long positions acquired on the “Buy Day” are
sold at or near the previous day’s high.
What is happening here is nothing more than smart money taking profits
where resistance exists. One would
think that the market would now decline – but first it is “engineered”
higher. On the “Short Sale Day”, the
market opens higher and rallies. But
the rally is short-lived, and soon after the market declines, closing near
its lows. The appearance of strength
has fooled the buyers. After the
three-day cycle, the buying strength has dissipated, and lower prices become
the path of least resistance. Once
again, the smart money is on the right side, selling near the highs. This pattern appears again and again - only to disappear, and then
reappear once again. It may be
consistent for four or five weeks and then disappear. It is most consistent in markets that are
not trending. THE THREE-DAY RALLY This setup is very similar to the “three-day cycle”. It involves waiting for the first higher
close following a five percent or better rout over the past couple of
days. The higher close indicates that
the selling is complete, at least for the short-term. Normally, a three-day rally will take hold
as sellers back away, and traders perceive bargains are available. STOCHASTIC This indicator is very popular with traders. It tells you where the current closing
price is in relation to the recent range of the tradable. The stochastic oscillator was designed to indicate when a market
becomes overbought or oversold within a trading range. It produces readings between zero and
100. Readings over 70 indicate an overbought tradable. This means that the tradable has run up
quickly due to an influx of buyers.
Eventually, the tradable reaches a price level high enough that
traders feel uncomfortable continuing to buy. Sellers enter the market to take profits, prices start to fall. The decline may be short-lived, and an upward trend might resume, or
the recent peak might represent a top, and much lower prices might be
ahead. In that case, a move below 30
indicates an oversold situation. The expectations of a rally after reaching
oversold levels are based on the same circumstances as the overbought, except
the conditions are reversed; it is a situation in which the tradable falls
precipitously due to an influx of sellers. All of this is viewed as the normal ebb and flow of the market as it
moves from one extreme to another.
This type of market action is well-suited for an oscillating indicator
giving guidance when the market reaches these extremes. A typical scenario might read as follows: The tradable’s peaks and
bottoms are coincident with readings of above the 70 to 80 level for the
market tops, and below the 20 to 30 level for the bottoms. If you would
like to learn how to make a full-time income trading less than part time,
please grab yourself a copy of my book … “HOW TO
TRADE LIKE A PRO IN ONE HOUR” www.tradingsmarts.com/order.htm Please feel free to
share this info-report with your business associates, friends, neighbours,
and relatives. The only proviso is
that you copy it and/or pass it on in its entirety. Thank you. We have lots of
other reports we can share with you.
If you have a question, or special interest, please let me know: prbain@tradingsmarts.com. Copyright© 2000, Peter R. Bain |