| Those of you who
have been trading for a while will be familiar
with Pivot Points. During this lesson I want to
go over how to find a Pivot Point and also a
slightly different method of using them. First
let's look at how you calculate a Pivot Point.
Using a bar chart you will observe that each bar
has an Open, High, Low and Close. This
information represents all price activity during
that particular period.
In the case of the following example, we
shall use a daily bar. To calculate the pivot
point all you need to do is add the High, Low
and Close. Once this has been done you next
divide the total by three, e.g. the cash FTSE on
the 2nd May 02 had a High of 5192.70, a low of
5125.50, and a close of 5174.10. If you add the
three together, you get 15492.3. You then divide
that total by three to get a Pivot Point of
5164.10.
......
OK, so far so good, but what do you do with
this information? Well, one technique I like to
use intra day is to use the pivot point as a
trend indicator. We already know that the Pivot
Point for the 2nd May was 5164.10 and we will
use this the next day as an intra day trend
indicator.
If the price is above 5164.10, then I would
only be long and if it were below 5164.10, I
would only be short.
As price can fluctuate around any given point
I also add a further proviso. If I have support
close to 5164.10, I will first wait for the
price to pass through 5164.10 and support before
entering short. If I have resistance close to
5164.10, I will first wait for the price to move
through the Pivot Point and
resistance before entering long.
This method becomes even more powerful when
the Pivot Point is close to the opening price.
If, for example, the opening price is 5174.10,
the Pivot Point is 5164.10, and I eventually go
short at 5155, I can stay short the whole day as
long as it does not go above the Pivot Point.
Once in a position I normally have a very
tight stop to begin with and then will follow
the market with a trailing stop to lock in
profits.
Another way I like to add Pivot Points to my
analysis is for more long-term projections. I
will use the Pivot Point of a Yearly, Monthly
and Weekly chart. In this case it would be the
High, Low and Close of the previous Year, Month
and Week.
I like to think of the weekly Pivot Point as
the short-term trend, the monthly as the medium
term trend and the Yearly as the long-term
trend. I find this particularly useful in Spot
Forex. If I am below the yearly, monthly and
weekly Pivot Point, I know I am in a strong down
trend and I can scale into multiple positions
over time. The same holds true for long
positions.
The point is there are many ways to determine
trend. You can also use Pivot Point to find
potential Support and Resistance, which we will
cover in later lessons.
Experiment with Pivot Points and see if it
suits your trading style. At the very least it
is always handy to know where they are and it
may help you decide which side of the market you
should be trading from. |