I like to establish the days pivot point (along with R1, R2, S1 and S2) before I begin any trading session.  In my mind, these are hypothetical points of support and resistance. There is a problem with pivot points, though, and it lies in the word hypothetical.  Most often, support and resistance form somewhere are these hypothetical points.  I have several theories, all anecdotal, about the pivot system validity.  They may be so effective because:

1.  There are several methods for calculating pivots and most traders use the five point system.  Pivots are almost universally used and the lines established for the day may be nothing more than a self-fulfilling prophecy.  By that I mean that so many traders use the same methodology that they buy/sell along the same lines.  Oddly enough, I believe this to be the prime reason for using pivot points.  As a chaos theory influenced trader, I have a hard time believing that natural buy/sell lines form from natural price action.  Incidentally, I have the same belief regarding Fibonacci patterns.  The bottom line is what works, not why.

or,

2.   Most professional traders and black box systems take into account previous high, low and close prices.   Professional traders are not an adventurous lot, at least the good ones aren’t.  When the price approaches a period high/low there is a tendency to bail out of a trade.  Especially if you are carrying a significant loss or gain.

There are numerous days when support and resistance forms at points far from your daily pivot calculations.   That’s fine, you simply adjust your charting to accommodate the support/resistance levels and disregard your pivot calculations for the day.  Though I usually leave the pivot calculations on the chart, as the market sometimes revisits the pivots.  This is especially true on days when there is an important announcement or news event.  The market typically overreacts then settles back into normal trading.

The point is a simple one, no matter why resistance and support form along pivots, it pays to pay attention to these points on the chart.

support and resistance

This is not an Emini chart, but a long term chart of Halliburton stock.  But the support and resistance on this chart is a fairly elegant thing to see and study.

1.  Early on you see, in Sept 1999, support established around 42.5, and was tested several times until the support line was broken.

2.  As is often the case, the support line then becomes a new resistance line that holds for quite some time.

3. The stock traded within these support/resistance parameters for the remainder of the chart.

4.  I am inclined to establish support and resistance zones, as the stock ventured, several times, above and below support for brief periods but quickly returned to the support/resistance that had been previously established.  Because a stock or the ES  breaks a resistance/support line, I am disinclined to immediately jump into a trade.   Trading is not an exact science, and you can see several attempts to break both support and resistance on this chart.

5.  Volume is not graphed on this chart, but can be very interesting and give a trader great clues as to the strength of a move around support and resistance lines.

Note:  I highly recommend reading Richard Arms classic book, “Profits in Volume” and familiarize yourself with his equivolume trading style.  Understanding the relationship between volume and price is an interesting and profitable undertaking.  Again, my trading style has evolved through a tremendous amount of reading and experimentation with a variety of trading ideas.  As it relates to fractal trading, volume is a variable that cannot be overlooked.

As I talked about yesterday, developing your trading style is an ongoing and constantly evolving process.  Whether support or resistance or pivots are natural formations or self fulfilling prophecies is something to think hard about and consider, but trading demands that you pay close attention to these points.  As your own understanding of the market evolves, you will quickly be able to look at a chart and identify these important areas of support and resistance as a natural reflex.

You can also look at support and resistance on a CCI chart, but that another post.  You might look at it, though, and see what you can ascertain without my writing.

One last point, there are days when the market moves with a high level of randomness and pays no attention to support/resistance, the CCI or anything, for that matter…those are days I am convinced I don’t know a thing.

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