Technical analysis is derived from mathematical formulas. Moving averages,
RSI, Stochastic’s, CCI, Fibonacci’s, price projections etc., all have a common
denominator of a mathematical formula based off price. The high, low, opening
and closing price each day, week, month all are used in developing historical
data to forecast the future, so it only makes sense to use that same data to
help narrow the range you are working with and get a pivot point to work off of
each day. This can also be done on different time intervals, such as hourly,
daily, weekly or monthly.
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Incorporating pivot point analysis into your
trading is just another tool; it is not the holy grail and is not meant to be
used as a buy or sell signal. It simply narrows the range of focus for
interpretation of the direction. Seven years ago when I started trading futures,
CME ex-floor traders introduced this formula to me and told me how the
professionals use it. These ex-floor traders were making the transition to the
screen from the floor and dealing with the e-minis, not the pit traded
contracts. So as a group we worked with data to determine Globex ranges, day
range only, and intraday pieces. I found day session data to give me the best
use and have stuck with that every since. Floor traders rely heavily on this
data and most seasoned traders have maybe heard of it and maybe use it. I like
to use the data on key indexes, ETF’s and even stocks along with my day to day
use for Futures trading.
The mathematical formula for the pivot point
needs just three pieces of information. PP=pivot point, H=high, L=low, C=closing
price. The PP=(H+L+C)/3 which again can be off daily information, Globex
session, first hour or each hour intraday, weekly, monthly prices. I am a short
term trader so I focus on daily, not including the Globex data. Which gives us
an average price of the day session combined with the closing price. Traders
focus on highs and lows and where we close, the average of the three points
gives us another level to consider as a form of support or resistance.
The pivot point level does not trade daily; some days the range gaps and goes
and never sees the pivot, which only insures that the next day it is likely to
be very key. It is very rare to see multiple days where the futures price action
does NOT play off the pivot, therefore if a day or two is missed that leads us
to look for it the following day. Missing a day a week is not uncommon; two
consecutive days is rare but can happen. A lot of gap and go days are just as
uncommon and that is generally a reason to not trade the pivot. Extremely tight
range days which follow a very broad ranged days is another reason we may not
trade the pivot. So gap and go along with narrow range digestive days usually
lead up to a day that the pivot is seen often and price trades around it.
Pivot point data can also extend out to support 1, 2, and 3 levels or Resistance
1 2,and 3 levels. I am only focusing on the pivot itself, a future article will
include the formula’s for those levels and use to find range expansion. The
pivot is the primary starting point for tools to incorporate into your trading.
As with anything new in trading you need to watch and study the use of the data
and take baby steps with it. The pivot can be viewed as a support, resistance
and pivotal area, so a magnet for price basically.
8/04 day range: High – 1297.5, Low – 1278, and the pivot was 1283.75 was pivotal
late day and the following days opening range.
8/07 day range: High –
1283.75, Low – 1277, and the pivot was 1287, the pivot was not traded, this day
followed a wider range day and was digestive.
8/08 day range: High –
1287.75, Low – 1272, and the pivot was 1281. The morning range held over the
pivot and then we fell through mid day and never looked back.
8/09 day
range: High – 1288.25, Low – 1268.25, and the pivot was 1279 support level and
then continuation off that level to go lower.
8/10 day range: High –
1277, Low – 1264.75, and the pivot was 1276, end of the day was resistance and
traded around the number and closed right at it.
8/11 day range: High –
1273.75, Low – 1265.75, and the pivot was 1272.50, from the opening bar and
throughout the first hour was very key. Then again late day to close just over
the pivot. Left the day pretty lackluster.
July’s High – 1290, Low – 1231 and close 1284.25 giving the pivot of 1268.50 for
August. August bounced off the pivot for four days, so far this month. So see a
rally ignite.
8/17 High of first hour – 1300.25, Low – 1295.50 and closing of first hour
1298.75 with a pivot of 1298.25. The first hour bounced off the pivot and until
2:30 the area wasn’t in play again. The key to pay close attention to is when
the data converges with other very KEY data. This is not a fib lesson but 78.6%
is the most important fib level and when it is the same zone as the pivot, it
can be very powerful.
In summary this is just another piece of data to
add to your toolbox. Finding the right use for your trading style and time frame
you trade on is important. Try it on key indexes you watch, futures, and even
stocks to see how it works for you. I find it to be useful information on day
data and incorporate first hour data if it converges with other key data in my
trading.
Teresa Appleton has traded equities and options for
nine years and futures for seven. She founder and CEO of Trade Logic, LLC. For
more information about Teresa and the training she offers stock, options and
futures traders,
click here.