This is Pivotal
Howdy from the Lone Star State! I'm in Texas this week teaching a Professional Trader class and having a great time. I'll be off next week for trading but then headed to London and Singapore. I'm not sure I'll even get to unpack!
Anyway, I know that traders are always looking for an edge. A way for them to decide where price may turn and therefore a point for taking profits or entering a low risk/high reward trade. While there is no magical tool or indicator that will work all the time, there are some tools that we can use to increase our probabilities for success. One of my favorite technical tools is the floor trader pivot points. The pivot points were created to give professional floor traders at exchanges a way to determine possible support and resistance without having to refer to charts. The pivot point itself is simply the previous day's high + the previous day's low + the previous day's close divided by three. This pivot point can act as a support or resistance level for price and can be applied to equities, forex, and futures charts. Wait a minute! Not so fast, don't the futures and forex trade 24 hours a day? How can we get a close price? Actually, the trade price at 5:00PM EST is used as the "closing time" for our calculations.
By using this pivot point number and some additional mathematical calculations, we can derive several additional support and resistance numbers. In fact, there are calculations for four support and resistance levels. We can use these pivot support and resistance as possible entry and target points for trading.
Most trading platforms automatically draw pivot points on your chart for you but if you are creating your trading plans the night before, you can easily add the pivots to your chart. I have created an Excel spreadsheet for calculating these pivot points and will send it to you if you request it by email at brandon@tradingacademy.com. Here is what it looks like.
Although the main use for the pivots is intraday charting, you could plug in the weekly or even the monthly high, low, and close to determine the future support and resistance for swing and position trading. One thing to remember, these pivot points should not take the place of the support and resistance you visually identify on your charts. Those turning points were caused by the emotions of investors and traders and therefore carry more weight. These people will remember how they triumphed or were hurt at those price levels. Since pivot points do not carry those same emotions with them, they only work if traders believe they work and act in the same manner when price reached those levels. Fortunately, they have gained enough popularity that they are almost a self fulfilling prophecy on many stocks and markets. So while not the holy grail, pivot points could help you determine the turning points of a stock, sector, index, currency, etc. This can be a valuable tool in your trading arsenal.
So until next time, may all your trades be green and your losses small.
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As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An OTA graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for OTA in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the OTA family late 2005, he now balances trading, teaching and a real estate career.