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Pivot Point TradingFloor traders aren't able to use computers while trading in the exchange pits. The only things they are allowed to take into the pit are pens, notepads, and calculators to record the price levels and do some calculations. So, the floor traders use pivots to give them some indication of where areas of support and resistance might occur. Floor traders make such large trades, along with others using pivots, that it does have an influence on price action. NASDAQ stocks are all traded electronically, but securities and products from NYSE, AMEX, CBOT, CME, and NYMEX are traded on the floors so pivots are still being used by the floor traders. In the Forex markets, which are electronically traded, pivots are successfully used by traders. So, even though the NASDAQ may be electronically traded, it can still be influenced by pivots. Using the previous days high, low, and close, you can calculate a series of points that can be critical support and resistance levels. These points are known as pivot levels. All stocks have an open, high, low, and close, and this is all you need to create and use this simple trading strategy. They are widely used because they are not lagging like most indicators, but they are predictive. Meaning, using the data from the previous period, you can predict the turning point for todays trading. This works because so many people use this system, that the market often reacts at these points. Once you know the previous days high, low, and close just use these simple calculations to find your points. Pivot Point = ( High + Close + Low )/3 Or to make things easier, just use this calculator.
When the stock opens above the pivot, it signals that the stock is likely to be bullish and we should be looking for long trades. If the stock opens below the pivot, the movement is likely to be bearish, and you should be looking for a short trade. The Pivot many times act as a magnet. When price moves away from the pivot, toward the R1, R2, S1, or S2, it usually is drawn back toward the pivot. This doesn't always happen, sometimes the price breaks through these points, but knowing that it is likely to react to these points can be a great advantage.Trades can be made when price bounces off support and resistance, or when price breaks through these points. Three time frames are commonly used: monthly, weekly and daily. Monthly and weekly pivots are used by swing traders, while the daily pivots are used by day traders. Day traders also need to keep an eye on monthly and weekly pivots for areas of support and resistance. In the blog I will post monthly, weekly, and daily pivots for a few stocks and indices. Click here to go to
Stocks-n-Options Blog.
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