Introduction
Pivot points used to be referred to as "traders numbers" because of the
popularity of these points amongst floor traders. The theory behind them
is that markets tend to have overlap from one period to another. On most
days, the daily high or low is within the previous day's range, as with
the previous week's extremes, and previous month's extremes. In this
sense, pivot points are a counter trend indicator.
However, many traders believe that once one point is violated, the next
point will be tested, making a violation of these support and resistance
levels a clue in trend following. Though we cannot vouch for the truth
of this statement, the popularity of pivot points amongst floor traders
tends to make these points worth watching.
The popularity of these numbers can be seen on any day when the
exchanges are cleaned-up. The trading floor is literally piled high with
folded pieces of paper that contain pivot points calculated on them.
Interpretation
The uses of pivot points, or "traders numbers" varies greatly by trader.
The most common interpretation is this: The daily pivot is used as a
guide. If prices are trading above the pivot point, then the trend is
considered up. Traders may wish to take short-term positions on a
violation of the daily pivot to the upside with an initial upside
objective of the 1st resistance level. If prices stall or slow at the
1st resistance level, then aggressive traders may wish to take profits.
However, if the 1st Resistance level is violated to the upside, then the
market should go on to test the 2nd resistance level. If prices have
violated the 1st resistance level, then this level should act as support
on future pullbacks, as should the pivot point.
The converse is true for support levels. A violation of the daily pivot
to the downside indicates that the daily trend is down, with a downside
target being the 1st support level. If the market stalls, then traders
may wish to take profits on short positions, or initiate long positions
in anticipation of a retracement to the daily pivot. However, if the 1st
support level is violated, the day is said to be a strongly down
trending day, and as such should move down further to test the second
support level. As with the resistance numbers, the support numbers, once
violated, become resistance lines to trade with in the trend.
Though originally used as a means for floor trading, longer-term traders
can use pivot points of longer periods. Try plotting the weekly pivot
points on the daily chart and using it for shorter term positioning on
the daily charts. Pivot points can also be calculated using the monthly
pivot points on the daily chart, and used for longer-term positions.
Example of Pivot Points in Track 'n Trade Pro:
Calculation
There are several methods used to determine the Pivot Point. We have
included the three different formulas in Track 'n Trade Pro.
Traditional formulas:
Pivot Point = (H + L + C)/3
First Support Line = (2 * Pivot Point) - H
First Resistance Line = (2 * Pivot Point) - L
Second Support Line = Pivot Point - (H - L)
Second Resistance Line = Pivot + (H - L) Variation 1:
This method changes the formula used to derive the Pivot Point. The
changes include adding the trading day's open and calculating the
average of the four values. By doing this variation one takes into
account both opening gaps and overnight trading. The formula is:
Pivot Point = (H* + L* + C* + O**)/4
*=Yesterday
**=Today
Variation 2:
This method changes the formula used to derive the Pivot Point as well.
In this method you substitute yesterday's close with today's open.
Variation 2 also takes into account opening gaps and overnight trading.
The formula is:Pivot Point = (H* + L* + O**)/3
*=Yesterday
**=Today
Customizing
To change the settings of this indicator, open the Program Options
screen by clicking the "Program Options" button located on the main
Toolbar.
See the Program Options section for more details on changing the
settings of each indicator.
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