| I think the most important fact, yes I said fact, regarding | | | | break out through a resistance/support level. |
| pivots points is they are a prediction of future support | | | | Break outs often time occur when the market is in a |
| and resistance levels. The key word in the previous | | | | consolidating mode and forms a horizontal channel, |
| sentence is "prediction" and traders should keep that in | | | | with the price banging off the top and bottom of the |
| mind when trading pivot point systems. I have always | | | | channel, especially if the channel is on a support |
| been conflicted as to why pivot points (PP) become | | | | resistance line, as is often the case.. After this price |
| important throughout the course of the day. Most | | | | action continues for two, maybe three cycles, I will set |
| traders begin their day by plotting pivot points onto their | | | | a sell a point below the channel and a buy a point |
| chart. With so many people using similar formulas to | | | | above the channel. (I am referring to the ES contract |
| plot PP it is little surprise that the market stops at the | | | | here) Generally the price action will break out of the |
| calculated support and resistance levels. Do the | | | | channel and continue in the direction of the break out |
| support levels and resistance levels occur because | | | | and you pick up the trade as it blasts through the |
| everyone is using a similar system or are they part of | | | | channel parameters. This is a pretty good strategy and |
| the natural function of the market? | | | | can be very profitable. |
| It doesn't matter. | | | | Breakdowns are also a great way to use your pivots. |
| As a trader I am only interested in what the market | | | | This trade is especially good if the market has been |
| does, not why it exhibits certain tendencies. I realize | | | | hitting a support/resistance line and stopping. As the |
| that is a bit of an obtuse answer, but it is one I have | | | | price action approaches the support/resistance line, I |
| learned to live with comfortably. Of course, it is often | | | | will set a buy one point below the line in hopes of |
| discussed among traders and each day trader has his | | | | picking up the trade as it pierces the line. This trade |
| opinion, but to trade the markets it is not necessarily | | | | can be a bit dodgy, especially if the market has been |
| important why this phenomena occurs. | | | | bouncing off the lines all day because the earlier |
| On the other hand, some days the market pays | | | | bounces were usually followed a move in the other |
| absolutely no attention to pivot points and goes along | | | | direction. Your hope is that the move does not go |
| its merry way without stopping at any particular point | | | | through the line a bit (as it often does), pick up your |
| on the chart. More often than not, though, the market | | | | trade and change directions. Again, here you can set |
| will stop at the pivot points, or pause, or reverse right | | | | your order lower, maybe 1.5 points below the line if you |
| at the plotted lines. My point is a simple one; pivots are | | | | are uncomfortable. |
| very useful, except when they are not useful. Whether | | | | Finally, you trade the pullbacks from R and S. Let's say |
| the market will adhere to the predicted support and | | | | the market pierces S1 and heads straight to S2 and |
| resistance is something that you must glean from | | | | stops and reverses. Often times the change in |
| watching the price action for a bit. I typically don't initiate | | | | direction will go straight to S1 again, retracing it's move |
| my first trade of the day based on pivot points. | | | | down in the opposite direction. Once it reaches S1 I will |
| The formula for calculating the days support, | | | | set a trade 1 point below S1. More often than not, the |
| resistance, and pivot point is as follows: | | | | trade will hit S1 and reverse field to the short side, and |
| R2 = P + (H - L) = P + (R1 - S1) | | | | if it continues upward you stayed out of the trade by |
| R1 = (P x 2) - L | | | | virtue of setting your sell 1 point below S1. This |
| P = (H + L + C) / 3 | | | | probably my favorite pivot point trade, and comes with |
| S1 = (P x 2) - H | | | | a higher degree of safety than most. Of course, no |
| S2 = P - (H - L) = P - (R1 - S1) | | | | specific trade works every time. If I am stopped out |
| S=support levels | | | | twice on a pivot point trade, I forget pivot points for the |
| R=resistance levels | | | | rest of the day. |
| H=hi | | | | In summary, we learned that pivot points are predictors |
| L=low | | | | of future activity. Further, as predictors they may or |
| C=close | | | | may not be effective on a given day of trading. Your |
| As you might have surmised, the formula plots five | | | | power of observation is key to understanding the |
| lines on your trading chart. These lines are commonly | | | | effectiveness of a pivot point every trading day. We |
| referred to as S1, S2, PP, R1, and R2. S1 and R1 are | | | | reviewed three basic trades that I use; the breakout, |
| the first lines of potential support/resistance on your | | | | breakdown and pullback. If you learn to combine your |
| chart. The pivot point is the primary line of support and | | | | trades with an oscillator or a tick chart, you will develop |
| or resistance. | | | | and even higher degree of activity in your trading. |
| Most traders have their own set-up to trade pivots, | | | | Remember to check yourself when trading pivot |
| and I have three that are favorites of mine. One is a | | | | points, never trade without stop-loss orders in place. |