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The Pivot-Point Technique

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The Pivot-Point Technique

Post by fxjedi on Thu May 14, 2009 4:14 pm

We have been experiencing heightened market volatility, created by market uncertainty. In this environment, many traders find themselves getting chopped up by the violent fluctuations and then becoming reluctant to get back in. One strategy I like to use when dealing with conditions like this is pivot-trading.

Before you calculate your pivots, begin with a daily chart to determine the short-term trend. This will suggest whether to buy on a pullback or sell on a rally. If the short-term trend on the daily chart has been down, you should be more inclined to sell a rally at a test of resistance. Major resistance for a day-trade will be found first on the 60-minute chart at a level of old support, or at a price level that represents a prior top in the market.

Whatever approach you use, remember always to practice good money management, which I think is the key to long-term success as a trader. As a rule of thumb, you should never risk more than you are trying to achieve. On a position trade, I look for a 3-to-1 risk-reward ratio. On a day- trade, I look for a 2-to-1 risk-reward ratio. I may not always achieve these ratios exactly as the trade unfolds; I may offset or reverse my position at any time if conditions change.

The pivot-point technique has been commonly used by floor traders but can be a valuable tool for any trader. The pivot point involves a mathematical calculation of the previous day’s high, low and closing price that also allows you to determine support and resistance levels for the next trading day. Therefore, with this strategy, you have your key price levels and don’t really need charts. However, I still recommend using them, as other indicators can help provide confirmation.

Calculating the Pivot Point

The pivot level is the previous day’s high, plus the low, plus the close, divided by three. Next, calculate your first support (S1) which = (2 x the pivot point) - the high. Resistance one (R1) = (2 x pivot) – the low. Support 2 (S2) = the pivot – (high – low), and Resistance 2 (R2) = the pivot + (high – low).

There are different pivot formulas people use, but this is the basic one. After you have calculated your pivot level, you would then look to enter into the market as close to that level as possible. If the market price is above the pivot, you would go long on a pullback to a price close to the pivot. You then would look for a test of R1 to take partial profits on your position, and a test of R2 to offset your entire position. Once the market goes up to R1, you would move your stop loss up to a breakeven on the remainder of your position. This is just good risk-management. When going short, you would take the opposite approach. If the market price is below the pivot level, then you look to sell as close to the pivot as possible. Use S1 as you first profit objective and S2 for the final exit point. Trail your stop accordingly, as you would do with your bullish position.

Pivot levels are also effective on a weekly basis, and tend to offer stronger support or resistance than on the daily calculations. Investors looking to take physical delivery of the underlying product may find weekly pivots effective in determining entry points.

Even when fundamentals or technicals suggest a particular bias or trend, pivot points are useful in trading both sides of the market. I use pivot-point techniques in most markets, and find it particularly suited for S&P futures as well as silver.

Pivot levels are also useful in conjunction with other trading strategies. I like using it in conjunction with the daily Moving Average Convergence Divergence (MACD). If you want to establish a long position on the pivot, you’d want to see the MACD support that by giving you a buy signal. There are other indicators you can add to further confirm your decision; I also like the Relative Strength Index (RSI).

Pivot points also can be used on a longer-term basis. You can use monthly pivots, but I don’t find them as useful as daily or weekly for day-trades and position-trades.


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Re: The Pivot-Point Technique

Post by shiny100 on Mon Jul 06, 2009 6:20 am

OK, so far so good, but what do you do with this information? Well, one technique I like to use intra day is to use the pivot point as a trend indicator. We already know that the Pivot Point for the 2nd May was 5164.10 and we will use this the next day as an intra day trend indicator.Pivot points are very useful tools that use the previous bars' highs, lows and closings to project support and resistance levels for future bars. Daily pivot points are useful for swing trading; while 4 hour pivot points are useful for intraday trading. Longer term pivot points provide an idea of where key support and resistance levels should be. Place the pivot points on your charts and see how traders appear to give pivot point levels a lot of respect.


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Re: The Pivot-Point Technique

Post by Jacq Stone on Wed Sep 07, 2011 10:16 am

The pivot point is used as a predictive indicator. If the following day's market price falls below the pivot point, it may be used as a new resistance level. Conversely, if the market price rises above the pivot point, it may act as the new support level. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

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