Special Pivot Points Report

Rights reserved, Asher Landesman, CPA 1

What are Pivot Points?
Why Should You Care?
Contents
Introduction
Projected S/R Levels
Pit Pivot Points Calculation
Pivot Points in a Nutshell
Pivot Points Exercise - Develop a Trading Methodology
More About Pivot Magic Trading The Real Thing!

Introduction
The second section in virtually every "Technical Analysis of the
Markets" textbook (following the section on Trends) is a detailed
discussion of Support and Resistance. (Next normally come sections
examining such things as Patterns and Formations, and finally,
Indicators.)
Often, metaphoric models are used to elaborate on various approaches
to trading. Among them are, Gambling: "The Casino", Military: "The
Battlefield", and Business: "Money Management". When introducing
Support and Resistance (S/R), I like to use the Military model
referring to S/R as the basic "topographical grid of the trading
battlefield". Whole schools of trading are built around capitalizing on
the edge of S/R topographical awareness. The battle tends to halt, ebb,
and flow within this grid.

S/R studies take many forms. Among them:
Historical S/R
Past (historical) levels of S/R tend to reassert their influence on
current price action. Hence, the oft repeated trading axiom, "Look
left to trade right." Identifying and prioritizing Historical S/R is
an art, which until mastered will turn your charts into a confusing
mass of useless lines.
Price
It seems that people like round numbers. Whole dollar levels tend
to become trading targets. Price action tends to pause to test
them. Five dollar and ten dollar levels are even more vigorous
levels of S/R.
Moving Average (MA)
Numerous trading systems are based on this indicator. I've seen
the MA picturesquely described as a dynamic Pivot level.
Projected S/R Levels
Methods of calculating theoretical S/R abound. They come in
many flavors: time, price, static, dynamic, incremental, ratio, etc.
(For more on this subject CLICK here and follow the links
appearing under "Features".)
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Projected S/R Levels
Some calculations, like Fibonacci and Gann, yield amazingly accurate
projections. Really, there is nothing magical about this (possibly
excluding the more esoteric Gann work). Even if Fibonacci ratios
weren't something found everywhere in creation, the very fact that
everybody in the trading world is aware of them, and has expectations
at .382, .50, and .618 levels, causes mob behavior to react at these
levels. Sort of a self-fulfilling prophecy.
Pit Pivot Points are a sub-set of Support and Resistance (S/R). This
special form of Projected (S/R) form the base trading methodology
used by the locals (traders on the floor of the exchange).
The skeleton for defining expectations for today's trading is the
Historical Support/Resistance, High, Low, and Close, of yesterday's
day session. Crunching these prices in an embarrassingly simplistic,
non-proprietary formula, floor traders project the most powerful
anticipated Support/Resistance level for today's trading, called the
fulcrum or "Pivot Point".
Again using simple formulae, based on yesterday's Historical S/R,
floor traders next extrapolate how far the market is likely to move, up
or down from the Pivot Point. The first projected/anticipated level of
Resistance above the Pivot Point (fulcrum) is "R1". The next higher
calculated Resistance levels are "R2" and "R3", respectively.
Similarly, the first level of projected Support under the Pivot Point is
"S1". The next lower levels of Support are "S2", and "S3",
respectively.
During the upcoming trading session, unless the Price Action is
influenced by non-quantifiable outside forces, such as economic
reports or news, locals will trade up and down rather strictly between
these calculated points.
Off-floor traders too can make use of this information. Obviously,
knowing how these market-makers will be trading affords a substantial
edge.

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Pit Pivot Points Calculation
There exist several variations for calculating Pit Pivot Points.
Below is the most commonly accepted set of formulae:
Pivot Point Fulcrum:
Pivot =(H +L +C)/3
Pit Pivot Resistance Points
R1 =(2 * Pivot) - L
R2 =(Pivot S1) +R1
R3 =(Pivot S1) +R2
Pit Pivot Support Points
S1 =(2 * Pivot) - H
S2 =Pivot - (R1 S1)
S3 =Pivot (R2 S1)

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Pivot Points in a Nutshell
Pivot Points are calculated Price Levels that the floor traders, and
those who read the tape, like to watch during the trading session. In
general, if the day's Price Action starts above the "Pivot", it will tend
to stay above the Pivot (also called the "fulcrum" of the day's activity).
On such a day, Resistance will be met at Price Level R1. Should R1
be broken, further Resistance will be expected at R2. The story is all
reversed, of course, if the price action is below the Pivot. Support will
be met at Price Level S1. Should S1 be broken, further Support will be
expected at S2.
If, after starting the day above the Pivot, the Price crosses back
through the Pivot, the Pivot will act as a Resistance area. Pivot Points
and Levels are Support and Resistance levels, and behave exactly like
any historical Support and Resistance level.
That's Pivots in a nutshell !
From the above, it is quite obvious that Pivot Levels are quite useful as
an index/tool, for both daytrading, and for selecting and exercising
entries/exits for longer-term traders.
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Pivot Points Exercise
Develop a Trading Methodology
To make the discussion a bit less abstract, let's take a most superficial
look at some simple trading methodology employing Pivot Points.

Step A
In the previous section we presented the first General Rule of Pivot
Points, "In general, if the day's Price Action starts above the Pivot, it
will tend to stay above the Pivot.
This simple observation provides the basic rules for two of the
simplest Pivot trading systems.
System 1:
Open is above Pivot: Buy
Open is below Pivot: Sell
System 2:
Place Buy and Sell stops bracketing the Pivot. Whichever
is not filled acts as safety stop for the other.
These "systems" are very much too raw for my tastes. Too much
chance of getting whipsawed. Let's take it one step deeper. Let's
refine these simple systems just a bit more:

Step B
First Fundamental Of Pivot Trading
After the opening range (first 30 min. to one hour), if price is
above/below the Pivot, Price Action will strongly tend to remain
above/below the Pivot for the session.
(Pivot Magic Trading Course)
Although this rule bids us to wait out the Opening Range and thus
avoid much of the wildness and whipsawing, overlooking the next
Fundamental Of Pivot Trading could be disastrous:
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Step C
Second Fundamental Of Pivot Trading
If the market opens, or later trades at the extremes (R2, R3 or S2, S3),
it will exhibit a tendency to trade back toward the Pivot. Thus, the
general rule, 'Avoid buying the High or selling the Low', becomes
increasingly more stringent as price moves farther from the Pivot.
(Pivot Magic Trading Course)
Now our over-simplified system has started to define set limits,
enabling us to either buy or sell, both above or below the Pivot. We
have also very roughly begun to define the basis for determining entry,
exit, and safety stop rules.

Step D
The methods that these few additions suggest are still a long way from
satisfactorily refined for me! (The Pivot Magic Trading Reading the
Tape approach requires a high percentage of profitable trades, and
insists on much more secure risk-conservation and money
management.) Nonetheless, there are those that actually do
successfully trade Pivot Points utilizing just these few simple rules.


CLICK for more about Pivot Point Trading and Reading the Tape


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