What a Professional Floor Trader Taught Me About Trading Pivots
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
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
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