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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.

Great Stuff..

1. Never, under any circumstance add to a losing position…. ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.

11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly,” reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen… just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the “winning” new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when… and how infrequently this rule may be invoked!

Investors in the second group, the non efficient crew, then base their investment decision on these overbought or oversold conditions, which is a rational decision. of sorts.  However, this line of thinking creates some fairly irrational pricing in the capital markets.

Small investors are, generally speaking, not nearly as effective in the trading skills and buy and sell for a variety of reasons ranging from educated guesses, a hunch they may feel, or advice from a third party who may, or may not, possess any real investment expertise.

Through in the hedge funds, quants and others of the computerized trading ilk and you end up with a hodge podge of investors all chasing potential profits.  Of course, they have all approached their market buying decision through different methodologies.  Nonetheless, they are all after the same goal.

The Fed’s economic policiy has to be thrown into the mix, at this point, as they use market measures to control inflation and unemployment.  The critics of the Fed’s actions are legion, with good reason.  It would seem that often do as much harm as good…just the same they are major players in the overall market scheme.

This begs the question for the trader:  Is the Market Wrong at Times?

Well, the answer is an easy one.  The market is always right, and if you trade why you think is right versus what the market has deemed to be right you are in for an unprofitable ride.  I always have to whisper to myself:  “The market is always right, and I am always wrong.”  This is a very tough pill to swallow, especially if you know a bit about economic theory and the way things “ought” to act given a specific set of variables.  Wrong. Wrong. Wrong.

Trade the market, not the news, not economic theory, not the general consensus not anything but what you see on the chart.  The Efficient Market Theories have one tenet quite right…there is a degree of randomness in the market that cannot be ignored, and the market often wanders in a direction that departs from common knowledge or well thought out economic principle.

The market is always right, because you have to trade exactly the price action on the market.  This makes life as a market scalper much simpler, as I don’t have to make intermediate and long term prognostication on the movement of the equity markets.  No, I am generally looking at what the market might do in the next five minutes, and that is a far easier proposition than the long term.