Are pivots useful ? a statistical response

fortuna · Oct 5, 2003

Since August 1999, one of the supports & resistances calculated by the Pivot method (I get 5 figures: s2,s1, pivot, r1,r2), have matched @ 0.10% in absolute term FROM THE low or high of the day for 19.8% of these datas.

This has been done on CAC40 datas

For SPX datas, statistics is up to36.3%

fOR ndx DATAS, WE HAVE 19.4%

tHAT IS INTERESTING BUT DISMISS THE REAL VALUE OF THESE INDICATORS

easyrider · Oct 5, 2003

That is very interesting. I wonder why this is the first time I have seen this come up. Appreciate the input.

snooptrader · Oct 5, 2003

Quote from easyrider:

That is very interesting. I wonder why this is the first time I have seen this come up. Appreciate the input.
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Am I the only one who does not understand the original post?

inandlong · Oct 5, 2003

I'm unsure what is meant by the term "absolute" in the context of this thread. And using the numbers on an index is nowhere near the same as using the numbers on an index future.

Most importantly, as with most if not all means of determining intraday levels of support and resistance, the numbers are to be used as guidelines from which to trade, not rules. That said, all one needs to do is watch trading activity as price approaches one of these numbers to realize that the numbers definitely play a role.

The majority of trading in a day is by floor traders or "locals" as they are called. These locals constantly take prices up and down between short term levels of support and resistance. Trading for the day will persist between these relatively narrow range unless "outside" buyers and sellers are attracted to the price changes that occur.

If the narrow range of support or resistance established by the floor traders can be wrestled from them, then off floor short term traders will be attracted and enter the market, as buyers if short term resistance is overcome or as sellers if short term support is violated. These breakout points then usually reverse their function and serve as test points, i.e. previous resistance becomes support and previous support becomes resistance.

Now the active range of trading expands as the off floor traders enter the fray. Now new levels of support and resistance are likely to be established. If these new levels of support and resistance can be successfully breached, then longer term traders, position traders, with an intermediate or long term commitment to the market will be attracted to join the market.

If one knew the range parameters of support and resistance used by floor traders one would have a handle on the significant areas where off floor and possibly position traders may take over the market direction from the rotating locals.

Well the locals calculate from the previous day's range the pivotal or inflexion price and the areas of support and resistance. The calculations are very simple and the results invariably have an influence on the market activity of the day. In fact, if no other information that relates to the market becomes available then the locals' parameters may dominate the day. There are several closely related formulae for calculating the following day's pivot support and resistance levels.

So unless significant market news has been made available between yesterday's close and today's opening you can expect locals to take prices to test the near term support and resistance and the pivot price. Should, for any reason, these near term support and resistance areas fail then the second such area will likely be tested. If these second levels of support or resistance areas fail, because of market influencing news, the off floor or, more particularly, intermediate term positional players will likely enter the market and make the market trend further on the day.

So these floor trader derived pivot, support and resistance levels are areas to be aware of and respect. They are both levels of danger and levels of opportunity for the following reasons:

Stop orders to enter at these points are readily whipsawed by locals 'floor sweeping the stops' as they rotate up and down the anticipated range
If support or resistance is forthcoming it offers a low risk entry point with a close Stop loss point identified
Failure of support and resistance offers a low risk entry point with a close Stop loss point identified in what is likely to be a trend emerging from the 'local' noise of the market

Even if you are not a day trader, knowing the key pivot, support and resistance points can help the short term off floor and intermediate positional trader to identify potential entry points and stop loss levels for your trade if your other criteria have determined the direction in which you should be trading.

Make it a daily ritual, calculate the pivot point and the areas of support and resistance levels after the close each day for the markets. Study the next day's price action in the context of those pivot, support and resistance levels so that you get familiar with the dynamics of the market.
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Provided by eminitrader.com, the above explanation excellently describes the role the numbers play. The bottom line is, understanding the role the numbers play intraday will help your intraday profitability.

easyrider · Oct 5, 2003

I just find it interesting that there hasnt been extensive backtesting of these numbers come up here as it seems it would be fairly easy to do. If somebody knows of any studies along this line please let us know. I have read lots of explanations of the influence of the numbers but have not found they helped me very much in trading. The pivots I find do help are previous swing hi/los, opening and closing price, etc.

fortuna · Oct 5, 2003

I consider the 5 resistance/supports figures calculated by pivot method to be a significative signals if they are around -/+ 0.10% of the low/high OF THE DAY.

For instance , on the 1st october, pivot method gave a first resistance for the cac40 @ 3192.12 (r1). The high for the day was 3191.01, or less than 0.10% (ie 3.2 points) . This day is considered as a valid day.

I find this study quite useful as on a daily basis, you now know that around 20% of the time, high and lows are respecting pivot numbers. That is an interestinbg result.

fortuna · Oct 5, 2003

Now I am checking with intraday data for the last 3 months what is the impact of pivot lines .

Soon on a movie theater near you

fortuna · Oct 5, 2003

Quote from inandlong:

I'm unsure what is meant by the term "absolute" in the context of this thread. And using the numbers on an index is nowhere near the same as using the numbers on an index future.

You would advise to calculate pivot based on future prices. I like the cash index because there is less noise
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AMT4SWA · Oct 5, 2003

Are you sure you received the information about pivots from www.eminitrader.com ? I could not find any such website, and I would like if you could give the proper website name.....they had a great explanation of the S/R levels IMO.

Thanx!

Chris

Burtakus · Oct 5, 2003

I am familiar with pivot points, but are they applicable to FOREX. There aren't "floor traders" per se, and the market is 24 hours. Has anyone used pivot points with any success in FOREX.

Thanks