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Trading Strategy
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Using pivot points as a trading strategy
has been around for a long time and was originally used by floor
traders. This was a nice simple way for floor traders to have some
idea of where the market was heading during the course of the day
with only a few simple calculations.
The pivot point is the level at which the market direction changes
for the day. Using some simple arithmetic and the previous days
high, low and close, a series of points are derived. These points
can be critical support and resistance levels.
The pivot level and levels calculated from that are collectively
known as pivot levels.Every day the market you are following has an open, high, low and a
close for the day (some markets like forex are 24 hours but
generally use 5pm EST as the open and close). This information
basically contains all the data you need to calculate the pivot
levels.
The reason pivot point trading is so popular is that pivot points
are predictive as opposed to lagging. You use the information of the
previous day to calculate potential turning points for the day you
are about to trade (present day).Because so many traders follow pivot points you will often find that
the market reacts at these levels. This give you an opportunity to
trade. |
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Before I go into how you calculate pivot points, I just want to
point out that I have put an online calculator and a really neat
desktop version that you can download for free HERE |
more..
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If you would rather work the pivot points out by yourself, the
formula I use is below:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
As you can see from the above formula, just by having the previous
days high, low and close you eventually finish up with 7 points, 3
resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day
is for long trades as long as price remains above the pivot point.
If the market opens below the pivot point then the bias for the day
is for short trades as long as the market remains below the pivot
point.
The three most important pivot points are R1, S1 and the actual
pivot point.
The general idea behind trading pivot points is to look for a
reversal or break of R1 or S1. By the time the market reaches R2,R3
or S2,S3 the market will already be overbought or oversold and these
levels should be used for exits rather than entries.
A perfect set up would be for the market to open above the pivot
level and then stall slightly at R1 then go on to R2. You would
enter on a break of R1 with a target of R2 and if the market was
really strong close half at R2 and target R3 with the remainder of
your position.
This all looks pretty straight forward.
Unfortunately life is not that simple and we have to deal with each
trading day the best way we can. I have picked a day at random from
last week and what follows are some ideas on how you could have
traded that day using pivot points. |
On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High - 1.2297
Low - 1.2213
Close - 1.2249 |
This gave us:
Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125 |
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