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.
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.
This action might not be possible to undo. Are you sure you want to continue?