Lessons from the Pros

Stocks

Pivoting for Profits

Prior to the time when everyone had easy access to the markets and charts, trading was a relatively exclusive club. To be actively trading or investing you had to have a membership to an exchange or access to someone who did. If you wanted to chart the markets to make a technical decision, you would have to order a book with the prices of your securities for the past week or month and draw out the charts by hand.

Traders on the floor of the exchanges developed a calculation based on past prices that could offer them a method of determining potential support and resistance for trading the next day or week. While these levels are not as powerful or widely followed as actual supply and demand zones, the floor trader pivot points can still offer insight as to where prices are likely to move.

You may notice that I used the terms support and resistance when referring to the pivot points rather than demand and supply. These terms refer to different concepts altogether. The terms support and resistance refer to traditional technical analysis techniques and have been shown by many traders not to be as accurate as the patented supply and demand core strategy from Online Trading Academy.

Pivot Points as an Odds Enhancer

The support and resistance of pivot points can be used as an odds enhancer in conjunction with the supply and demand zones you find on your charts. The classic pivot point 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. Since the futures and Forex markets trade 24 hours a day we do not have an official daily close. In order to calculate the pivots, the close is considered to be the trade price at 5:00PM New York time (EST).

In addition to this pivot point number, there are some additional mathematical calculations that can offer a trader additional support and resistance numbers. There are calculations available for four additional support and resistance levels. Once calculated, you can use these pivot support and resistance to confirm potential entries and exits for your trading and investing.

Pivot points shown on an Amazon stock chart

Many online trading platforms automatically draw pivot points on your chart for you once trading has begun for the day. If you are planning your trading activity the evening before or early in the morning, you may want to identify the pivots before they are available from your software. There are several pivot point calculators that will either give you the pivot points or allow you to calculate them yourself. One that I like is mypivots.com. On the site there is a pivot point calculator where you can enter the numbers and receive the pivot points for any security.

Pivot point calculator

You will notice that there are midpoints identified in addition to the pivots. These midpoints could also mark potential turning points for price action.

While the core use for the pivot points is intraday charting, you could enter the weekly or even the monthly high, low and close to determine the future support and resistance levels for swing and position trading as well. Remember, these pivot points should not take the place of the supply and demand zones that you visually identify on your charts. Supply and demand zones are caused by the trading history of institutional investors and traders and should be the basis of your trading decisions.

The pivot points were used by many of the institutional traders on the floor and are still used when they are trading electronically. If these institutions take trading actions on these levels, the levels will potentially carry enough power to move market prices. Since they were primarily used in the futures pits, the pivot points tend to work best on the indexes and commodities.

Since the tool has gained popularity, they can work on individual stocks and support your demand and supply zones on those charts as well. However, the pivots will have the most success on the ETFs and indexes those ETFs follow.

Pivot points shown on a S&P 500 Index chart

So, while they are not a replacement for the core strategy, floor trader pivots are an interesting tool that can assist traders and investors in making informed decisions on where to buy and sell their securities. Whatever tools you decide to use, make sure they are a part of a written trading plan that allows you to objectively analyze the markets and consistently make decisions. That consistency is critical to being successful in the markets. Online Trading Academy’s core strategy is an excellent approach to doing this. Visit your local center to learn it today!


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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