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Showing results for tags 'pivot points'.
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Using Pivot Points to make Better Trades Pivot Points have been used by floor traders at the major equities and futures exchanges for a long time. Traders found that the price tended to hover near the pivot level and trade in between the pivot and support and resistance levels generated by a simple calculation based on the previous day’s high low and close. One advantage of using Pivots is they are a predictive indicator as opposed to lagging. Predictive Vs Lagging Indicators The majority of technical indicators most traders use such as moving averages and RSI are lagging. Meaning they are telling us what has already happened, or at best, what is happening in real time. Few indicators are predictive; one type of predictive indicator is Pivot Point study. Pivot Points use old data to predict future price movement, and, since technical analysis is based on the idea that many people looking at the same thing will draw similar conclusions, we can use pivot points in a variety of ways to improve our trading. Pivots have been used by floor traders for many years, traders found that daily price action seemed to fluctuate more intensely around certain levels based on the previous day’s high, low and close. Traders also found that by using the pivot point and the previous day’s range, high and low, they could set support and resistance levels that price respected. There are several methods of calculation for these pivots we will explore the classic calculation method in this article in detail but we will also discuss the alternative methods. Classic Pivot Points To calculate the pivot point, take the previous day or session’s high(H), low(L) and close©, add them together and divide by 3 [(H+L+C/3 = Pivot Point (PP)] Now we can calculate the support and resistance levels based off of the pivot, Support 1 is (PP x 2)-H , Resistance 1 is (PP x 2) – L =, S2 is (PP-Range), S3 is(PP-Range) x 2 and S4 is (PP-Range) x 3. R2 is (PP+Range), R3 is (PP+Range x 2) and R4 is (PP+Range x 3). Range is High-Low. E-mini S&P500 Chart: For this example we will use the E-mini S&P 500 futures. The previous session high was 1124.25, the low was 1110.25 and the close was 1122.25 Using these values we can calculate the pivot point, which is 1118.92, Support1= 1113.57, Resistance1=1127.58, S2=1104.94, S3=1090.92 and S4=10796.92. R2=1132.92, R3=1146.92 and R4=1160.92. Looking at this chart, we see that when price fell, it fell exactly to the first level of support and bounced higher. We used the exchange hours to set our session and ignored the Globex/overnight session when calculcating our pivot points. The reason we did this is because much more volume is traded during the exchange session and the institutions that really move the price are trading during these hours. Most institutions do not trade the low liquidity overnight session unless there is a news event. So when the market opened the next day it immediately fell and found support exactly at S1. The difference between R1 and S1 was about 14 points, which is a pretty large range for this contract. In other words, it would take a major event to push the price to the next level of support or resistance (S2, R2). By using S1 as the buy entry and our pivot point as a take profit level we can use S2 as the Stop Loss level, the difference between S1 and the PP was 5.34 (5.25 rounded down, which is 21 ticks on this contract), so that was our profit potential on this setup. Conversely, we could have set a buy stop slightly higher than R1 and a sell stop right below S1, this would be more of a breakout strategy where we look for the price to move through either level with momentum and continue down to S2 or move higher to R2. Alternate Calculation Methods There are several methods to calculate pivot points, 2 alternate methods are Woodie’s and Fibonacci. For Woodie’s method instead of using the previous session’s closing price, we use the current session’s open price. The formula to calculate the pivot point is PP=(H+L+(Today’s Openx2)/4. Our Support and Resistance levels are calculated the same way as the classic method. Another method is Fibonacci, this method uses the Classic calculation to find the Pivot Point (H+L+C)/3 but uses the major fibonacci levels to calculate support and resistance levels. S1=PP-0.382 x (H-L), S2=PP-0.618 x (H-L) and S3=PP-1.0 x (H-L). R1=PP+0.382 x (H-L), R2=PP+0.618 x (H-L) and R3=PP+1.0 x (H-L) Here is a table using the same Open, High , Low and Close data to compare the different calculation methods: Combining Pivots with other tools. Pivot Points are a valuable tool for any trader, however, no single tool tells the whole story, we are looking for multiple indicators to align and confirm a move. Meaning, if the price is nearing R1, our RSI is above 90 and we have an important Fibonnacci level at or around the same price, that validates our prediction that we will encounter resistance more than relying on any 1 indicator. It is important to look at different indicators that tell a different story. For example if you are using a moving average crossover for entry confirmed by a MACD, you are basically looking at the same thing in two different ways, a MACD measures the difference between 2 moving averages so of course the signal will be confirmed! But if we mix the inidcators up by using a momentum indicator such as RSI or Stochastics, now we are looking at 2 different instruments that are giving a similar reading. Combine these indicators with support and resistance tools such as pivots and Fibonnacci, now you have 3 totally different indicators for confirmation, that means you have a much better chance of making a good trade. You may find yourself taking less trades, however this is about quality, not quanitity. In the end, trading is all about probablilty, and if you put the probability in your favor over and over again, you will increase your chances of coming out on top. Risk Disclosure: There is a substantial risk of loss in trading futures and foreign exchange. Please carefully review all risk disclosure documents before opening an account as these financial instruments are not appropriate for all investors. Jesse Richards is a Series 3 registered Commodities Futures Broker and a Principal of Fast Trading Services LLC
I want to look at the general direction of a trend over longer time frames (weeks or months). I'll be doing a linear regression of the historical price quotes to get a simple idea of what direction the stock price traveled in, and how strongly. To do that, is it better to use the daily close prices, as is customary, or maybe the weekly close price? And is there a reason to think that pivot points are more or less descriptive than using the close?
Initially used by floor traders, pivot points have become widely popular among the trading public. Pivot points are simple mathematical calculations used to determine support and resistance levels based on the close, high, and low. Depending on a traders preference, one may choose to use the midpoints, weekly, and monthly pivot levels in combination with the daily pivot levels. Pivot points can also be ranked in terms of importance: monthly coming first, weekly second, and the daily pivot in third. Similar to moving averages, the 200 period moving average will act as a stronger support/resistance than the 20 period moving average. This concept can be applied to pivot points as well. The S3 and R3 pivot points are usually a good level to fade since price will usually remain between these two levels. I will use the midpoints for the daily pivot point calculations but not for the weekly and monthly pivots. Here is the formula I use for pivot points: R3 = R2 + RANGE (same as: PP + RANGE * 2) R2 = PP + RANGE R1 = (2 * PP) - LOW PP = (HIGH + LOW + CLOSE) / 3 S1 = (2 * PP) - HIGH S2 = PP - RANGE S3 = S2 - RANGE (same as: PP - RANGE * 2) Simply divide the two pivots to find the midpoints. Example: (S1+S2)/2 = midpoint There are some rules when applying midpoints to the daily pivot calculations. In trading the Dow mini-sized futures contract, the distance between the two pivots must be over 40 points when applying the midpoint. The only exception to this rule is when the midpoints line up with the previous dayÃ¢â‚¬â„¢s high, previous dayÃ¢â‚¬â„¢s low, weekly pivot, monthly pivot, value low, value high, POC, or an unfilled gap. By using the midpoints for the daily pivot calculation, you will get 13 set of numbers between S3 and R3. Calculating the weekly and monthly pivots (without midpoints) will give you an additional 14 set of numbers. This will give you a total of 27 price levels. Advanced Pivot Point Analysis My core trading method is based on identifying key price levels using pivot point cluster zones. A cluster zone is an area in which pivot points line up within 10 points of each other. In addition to the daily, weekly, and monthly pivots I will identify the previous dayÃ¢â‚¬â„¢s high, previous dayÃ¢â‚¬â„¢s low, previous dayÃ¢â‚¬â„¢s 50% range, unfilled gap, value low, value high, and POC (point of control). This gives me a total of 33 price levels. What I am looking for is any of these pivots to line up with each other and create a cluster zone. LetÃ¢â‚¬â„¢s take a look at the chart posted below. On August 21st, we have the following: High: 11418 Low: 11342 Midpoint between daily pivot and R1: 11413 Daily Pivot: 11389 Value High: 11381 Previous days 50% range: 11365 S1: 11361 Value Low: 11349 Midpoint between S1 and S2: 11339 By looking at these few numbers, we are able to come up with 4 key cluster zones. The first zone is the cluster between the high at 11418 and midpoint at 11413. This 5 point range is a cluster zone that will act as key resistance/support. The second zone is the cluster between the daily pivot at 11389 and value high at 11381. I will take the midpoint of these two levels at 11385 to base my trading decision. The third zone is the cluster between the previous days 50% range at 11365 and the S1 pivot at 11361. This area will also act as key resistance/support. The fourth zone is the cluster between the low at 11342 and the midpoint at 11339. This will be a key support zone. Of course you will have trading days when only 1 or 2 cluster zones exist. On these days I look to get into a sniper trading mode, looking for one or two good opportunities and focusing on my entry points. Trading setups using these cluster zones goes beyond the scope of this article. I just want to introduce a different method of pivot point analysis. Learn more about this trading method on my website through multimedia presentations and charts. Good luck and best of trading.
Hello all to your expert tradestation programmers, I have another request if you are willing to assist me. I would like to see a horizontal line that represents today's pivot. Pivot is (high + low + close)/3. Since price continues to move, this horizontal line should move along with the market. Let's use ES.D as an example. On Friday at 10:30 AM EST, ES closed at 1205.25. At that time, the high of the day was 1210.25 and the low of the day was 1201.25. Therefore, a horizontal line should be drawn at (1210.25 + 1201.25 + 1205.25)/3 ~ = 1205.50. Let's say at 3:30 pm EST. ES closed at 1211. ES has made new high before 3:30 pm at 1212.25. Therefore, that line would have risen throughout the day and draw at (1212.25 + 1201.25 + 1211)/3 ~ = 1208 at 3:30 pm EST. The purpose of this indicator is to indentify the bullishness or the bearishness of the market. In fact, if it's possible, it will be super sweet to paint the horizontal line green when the price is trading above this ever changing pivot line and paint it red when the price is trading below this pivot line. Also for another trading purpose, more often than not, price tends to go up or go down to today's pivot towards the close. If this line is drawn, as a trader, I can look for this trade in the afternoon. Please advise. Thank you. Jumbo