Using Pivots

Discussion in 'Technical Analysis' started by Lefty62151, Jun 11, 2005.

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  1. Its Saturday and because I have a life, I am going to put a few comments together and then go "live it".

    First, Pivots are a tool that can be used to trade profitably. I use them every day. Like any trading tool, you cannot rely on them in isolation. You have to put them in perspective. Before you use any trading tool you should understand how it works. To me this is "common sense".

    I have posted what I believe is a historically correct "exlaination" of pivots as used by floor traders (traders in commodity pits). The following post is taken from the thread titled "exlain pivots" :D

    "Always very entertaining to read all the opinions people have about pivots. I figure it would be nice to have at least one example on record that is historically correct. Here it is;

    Its true that pivots are an invention of floor traders (hence the name "floor pivots"). These folks wanted a way to forecast the current day's RANGE based on the previous days action. The system they developed started with a "daily pivot". This daily pivot is obtained by adding the previous day's high, low and close and dividing by 3. The "daily pivot" is simply the numeric representation of where the average trader bought or sold yesterday.

    Remember that floor traders could not bring computers or other electronic items onto the floor, so this had to be a system that could be figured and "adjusted" on the fly. After they got the daily pivot, traders would figure the "next high" and the "next low" (we know them as R1 and S1 respectively). The way you got these figures was as follows:

    For the "next high".....2 times the "daily pivot" minus the low
    for the "next low"......2 times the "daily pivot" minus the high

    Then they would calculate the "highest high" (R2)
    and "lowest low" (S2) as follows:

    For the highest high....."daily pivot" point minus the "next low" plus the "next high".

    For the lowest low......."daily pivot" point minus the sum of the "next high" minus the "next low"

    This is how it was done more than a dozen years ago and for god knows how long before that.

    Quite a few traders used it (and still do) looking to be long above the "daily pivot" and short below it. Specifically, if the market was in an up trend and price was above the "daily pivot", the best trade was to be long and vice versa. In a neutral market, traders would sell the "next high" and buy the "lowest low".

    This is the original form for pivots.

    After a while, floor traders started to fool around with the formula and change things to reflect a changing market. Some would add the open to the "daily pivot" calculation and divide by 4. There are many variations on the original daily pivots system. I have used pivots for years with very good success.

    There you go, pivots "exlained"."

    Hope that helps
    Good luck,
  2. Now if we take the standard "daily pivot" equations and modify them, substituting yesterday's open for the close, the attached chart is what we would get.

    Reveiwing that chart, you can see that just making that single change produces a big difference in the position of the "daily pivot" and both R1 and S1. Notice how the pivots line up with the price action off the open (modified R1) and how that pivot puts a floor in for traders to lean on. Where the modified pivot is, look at how price penetrates that line then comes back to test it (see the doji candle where failure occurs) then price fails down through the standard S1 pivot line to test the modified S1. At that point, you have a failure to take out the modified S1 followed by a move back up to test the standard pivot.

    I don't use this modification:p

    What I am suggesting is that a good trader could decide to modify traditional pivots in a number of ways, and make money using them.


    <img src= width=800>
    (click on attachment to enlarge image)
  3. OK here is a chart showing the original Daily Pivot system modified by subtituting today's open for yesterdays close

    Again you can see how the modified system puts in a floor under the open. This time the "floor" under the open is the M1 (the midpoint between the Modified Daily Pivot and R1 which is out of sight above the chart.

    Once again, a good trader could have made money using this modification (substituting today's open for yesterday's close).

    <img src= width=800>
  4. Thanks Easyrider for your comment. I am going to stop here for the moment. I simply wanted to get people thinking about how pivots can be used.

    I am not going to give my own edge away on this site, but I am willing to point a finger in the "right"direction. In my opinion, people who want to make it in this business have to start to think about how the tools of trading are used, and how they could be used to make a buck.

    You all have a good day

  5. Here is another chart:

    This time, I have put a line that bisects the opening bar. This is a technique used by John Clayburg, and also by Jon Lukeman. No idea who "invented" this idea, but it works quite well.

    Dr. Clayburg calls this a "Directional Day Finder" or "DDF". He suggests that price will often respect this line just as if it was a pivot. Lukeman suggests that a trader can use it to trade the open, buying above the line, selling below.

    My advice to retail traders is to learn to trade the open using whatever tool(s) work for you. I suggest using pivots (modified or standard) and/or any device that allows you to "lean" on a price in order to have enough confidence to put on a trade. As with the other charts, you can see how the DDF line puts a "floor" under the open. An experienced scalper might have taken the long trade on the open. A less experienced trader would have waited for the failure and taken the short trade below the DDF. Good professionals would be taking both.


    <img src= width=800>
  6. Here is the same chart using 3 min bars. I don't scalp that way, but the setup is there. A good scalper would have been on that one. The short trade after the failure is just as obvious.
  7. d9d


    that might be the clearest explanation of pivots I've ever seen.

    also, the accompanying charts were excellent....depicting your points very well.

  8. ok ... I will add my 2 cents

    I sometimes use TD pivots and ACD pivots

  9. Here is a chart for today with my proprietary pivots in place along with standard pivots. Today is a "classic day". On the open, the locals look to find a resting order above or below the market to fade. Today they found a significant institutional order waiting just below 1200. In addition there was significant action in the cash indices.

    Look at how price acts as it approaches a pivot. In the same way a person has to generate momentum to jump over a fence, price has to generate momentum to take out a pivot or price level. The wide range bars through the pivots are evidence of this momentum.

    The "DDF line" is a line that bisects the opening bar. It often has the same effect as a pivot. Thanks to Dr. John Clayburg and to Jon Lukeman for this very effective idea.
    #10     Jun 13, 2005
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