http://www.sixer.com has an excerpt from their website about Pivot points, Support & resistance. In that article it says that "the floor traders calculate from the previous day's range the pivotal or inflexion price and the areas of support and resistance." Why would the floor traders calculate these numbers for themselves? To what end? I'm (re-)posting the article for your convenience: Pivots, Resistance and Support As prices continually rotate to enhance trading, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels. The active range of trading expands as the off floor traders enter the fray. If more longer established support and resistance can be successfully breached during the new short term trend that emerges, with the activity of the off floor traders, then longer term traders, position traders, with an intermediate or long term intention of their market commitment 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 floor traders parameters may dominate the day. The calculation for the new day are calculated from the High (H), low (L) and close (C) of the previous day. Pivot point = P = (H + L + C)/3 First area of resistance = R1 = 2P - L First area of support = S1 = 2P - H Second area of resistance = R2 = (P -S1) + R1 Second area of support = S2 = P - (R1 - S1) 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 support or resistance areas fail, because of market influencing news or observations, the off floor or, more particularly, intermediate term positional players will likely enter the market and make the market trend. So these floor trader pivot points are areas to be aware of and respect. They are both dangerous and areas of opportunity. Stop orders to enter at these points are readily whipsawed by 'floor sweeping' by the locals as they rotate up and down the perceived range. On the other hand, if you find support or resistance was forthcoming as appropriate it offers a low risk entry point with a close Stop loss point identified. On the other hand, failure of anticipated support and resistance, as appropriate, 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 after the close each day for the markets you are interested in. Study the next day's price action in the context of those pivot points so that you get familiar with the dynamics of the market.
MGB, One reason floor traders calculate these levels is that they know where a lot of people have set their stops, and will move the stock through those levels to shake out some of those orders. Another reason would be to anticipate where there would be heavier buying or selling. The formula I use is slightly different but very similar, and I use these numbers to figure my key breakpoints each day for stocks I watch. If a stock breaks through its upper breakpoint, that's a buy signal. If it breaks down through its lower breakpoint, it's a sell or short signal.
MGB - That's an old technique that was used by floor traders in the futures pits and originated a long time ago before computers were ubiquitous. All the futures traders I've met have gone high tech and abandoned the old stuff a long time ago in favor of more sophisticated computer analytics. Same for most heavy duty stock and option trading companies. As is often the case, by the time floor trader techniques and "secrets" become widely published to the retail trading community, they're using newer techniques.
In that case, it's back to the basics. Knowing and understanding support and resistance. From there, almost everything else follows. MGB
When a stock breaks it's "Pivotal Point" do you wait for it to go a 1/16 or 1/8 through it before entering the trade, or is that the entry point ? What kind of stoploss would be used, would it be the opposite "Pivotal Point" ? Thanks
It seems to me that the only important Support/Resistance levels are those that one can easily spot by looking at a 5 minute, multi-day, intraday chart, say 10 days. You can easily see at which points the stock was supported and where it was kept down by resistance. In most cases, you can even look back further to see that current support levels are actually previous resistance, and vice versa. Like Tony Oz said in "The Stock Trader", "...most complex patterns and indicators which will derive from certain mathematical calculations of price behaviours will try to confirm the obvious pattern." That said, I don't see the point of making any complicated calculations of support/resistance levels.