The Fractal Futures Trader » pivot

Day Trading: Focus on the Price Action

trader7757 — Sat, 09 Oct 2010 15:22:01 +0000

From the onset, let me explain that I use momentum oscillators and a number of moving averages in my ES e-mini trading. On the other hand, momentum oscillators and rate of change indicators are not my primary focus in trade selection. There are several reasons for this, but my best explanation lies in the fact that most oscillators and indicators are lagging indicators. In short, these tools often lead you into late trade entries and tardy trade exits.

Of course, there are a number of oscillators and indicators that claim to be leading indicators. I would dispute the validity of this claim, and most oscillators and indicators that claim to be leading indicators display dubious performance, at best.

This leaves us with a problem; most day trading is in the business of making real-time decisions and lagging indicators do not perform adequately. That being said, there are trading methodologies that can give you insight, and real-time information, as to the directional movement of the market. One caveat though, like all things that are related to the market, there are no guarantees or 100% accurate methods for predicting market movement.

During the course of my daily day trading, I focus primarily on price action as it relates to support and resistance. Throw in a bit of volume analysis, and you have a basic methodology for analyzing the market in real-time. I use my momentum oscillators and indicators to confirm or disprove my thinking about the directional movement of the market. Oscillators are, in essence, a filtering device I employ to increase the accuracy of my trading. It has become very popular in recent years to discount the importance of momentum oscillators and rate of change indicators. Further, there are several traders who treat these instruments with disdain. I think this is a mistake. Momentum oscillators and rate of change indicators perform a very valuable function in filtering out trades that I initially identify as profitable, but after some further analysis using momentum oscillators and rate of change indicators I find divergences from my price action analysis and avoid the trade.

There are number of ways to determine support and resistance on a trading chart and each method has its strengths and weaknesses in market analysis. Many day traders are firm believers in daily pivots which have been use for decades to predetermine where potential support and resistance may occur. I am not especially fond of using a pivot-based system. I find that the market will generally indicate where support and resistance occur. These areas of support and resistance are relatively easy to identify and are typically more accurate than pre-determined levels of support and resistance which are the result of calculating pivot values. Of course, there is nothing wrong with using pivots, especially if you adjust the pivots as you trade to the levels of support and resistance the markets identify.

One of the least used methods of market analysis in day trading, especially in recent times, is analyzing the behavior and placement of individual price bars. In my trading, I find that price bar analysis gives me a distinct advantage over the pure momentum oscillator and rate of change indicator traders. There are a number of texts written on price bar analysis, and going through a detailed explanation of price bar analysis is outside the scope of this short article, though I highly recommend traders study and learn how price bar analysis can give you a unique insight into potential pricing levels and directional movement in the market. To be sure, there are many traders who rely solely on price bar analysis to determine the trades they plan to initiate. For me, I like to have as many tools as possible (without overloading my brain with extraneous information) at my disposal. Momentum oscillators and rate of change indicators are the perfect filtering device for trading. When I notice a divergence in my price action analysis and momentum oscillators and rate of change indicators I avoid the trade. On the other hand, when my price analysis and oscillator analysis indicate the same directional market movement, I feel confident that I have discovered a valid and potentially profitable trade.

In summary, I highly recommend employing price action analysis and momentum oscillators and rate of change indicators into your trading style. All of these analysis techniques will help lead you to sound trading decisions and hopefully, profitable trades. While it is popular to dismiss oscillators and indicators as inadequate lagging indicators, they are very effective filtering devices and impart important and relevant information you can use in your trading decisions.

Related Blogs

Trades around the Pivot Point, R1 R2 S1 S2

trader7757 — Wed, 13 Jan 2010 19:43:19 +0000

I think the most important fact, yes I said fact, regarding pivots points is they are a prediction of future support and resistance levels. The key word in the previous sentence is “prediction” and traders should keep that in mind when trading pivot point systems. I have always been conflicted as to why pivot points (PP) become important throughout the course of the day. Most traders begin their day by plotting pivot points onto their chart. With so many people using similar formulas to plot PP it is little surprise that the market stops at the calculated support and resistance levels. Do the support levels and resistance levels occur because everyone is using a similar system or are they part of the natural function of the market?

It doesn’t matter.

As a trader I am only interested in what the market does, not why it exhibits certain tendencies. I realize that is a bit of an obtuse answer, but it is one I have learned to live with comfortably. Of course, it is often discussed among traders and each day trader has his opinion, but to trade the markets it is not necessarily important why this phenomena occurs.

On the other hand, some days the market pays absolutely no attention to pivot points and goes along its merry way without stopping at any particular point on the chart. More often than not, though, the market will stop at the pivot points, or pause , or reverse right at the plotted lines. My point is a simple one; pivots are very useful, except when they are not useful. Whether the market will adhere to the predicted support and resistance is something that you must glean from watching the price action for a bit. I typically don’t initiate my first trade of the day based on pivot points.

The formula for calculating the days support, resistance, and pivot point is as follows:

R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)

S=support levels
R=resistance levels
H=hi
L=low
C=close

As you might have surmised, the formula plots five lines on your trading chart. These lines are commonly referred to as S1, S2, PP, R1, and R2. S1 and R1 are the first lines of potential support/resistance on your chart. The pivot point is the primary line of support and/or resistance.

Most traders have their own set-up to trade pivots, and I have three that are favorites of mine. One is a break out through a resistance/support level.

Break outs often time occur when the market is in a consolidating mode and forms a horizontal channel, with the price banging off the top and bottom of the channel, especially if the channel is on a support/resistance line, as is often the case.. After this price action continues for two, maybe three cycles, I will set a sell a point below the channel and a buy a point above the channel. (I am referring to the ES contract here) Generally the price action will break out of the channel and continue in the direction of the break out and you pick up the trade as it blasts through the channel parameters. This is a pretty good strategy and can be very profitable.

Breakdowns are also a great way to use your pivots. This trade is especially good if the market has been hitting a support/resistance line and stopping. As the price action approaches the support/resistance line, I will set a buy one point below the line in hopes of picking up the trade as it pierces the line. This trade can be a bit dodgy, especially if the market has been bouncing off the lines all day because the earlier bounces were usually followed a move in the other direction. Your hope is that the move does not go through the line a bit (as it often does), pick up your trade and change directions. Again, here you can set your order lower, maybe 1.5 points below the line if you are uncomfortable.

Finally, you trade the pullbacks from R and S. Let’s say the market pierces S1 and heads straight to S2 and stops and reverses. Often times the change in direction will go straight to S1 again, retracing it’s move down in the opposite direction. Once it reaches S1 I will set a trade 1 point below S1. More often than not, the trade will hit S1 and reverse field to the short side, and if it continues upward you stayed out of the trade by virtue of setting your sell 1 point below S1. This probably my favorite pivot point trade, and comes with a higher degree of safety than most. Of course, no specific trade works every time. If I am stopped out twice on a pivot point trade, I forget pivot points for the rest of the day.

In summary, we learned that pivot points are predictors of future activity. Further, as predictors they may or may not be effective on a given day of trading. Your power of observation is key to understanding the effectiveness of a pivot point every trading day. We reviewed three basic trades that I use; the breakout, breakdown and pullback. If you learn to combine your trades with an oscillator or a tick chart, you will develop and even higher degree of activity in your trading. Remember to check yourself when trading pivot points, never trade without stop-loss orders in place.

ES Emini Day Trading: Pivot-Fed Announcements-Commentary

trader7757 — Tue, 05 Jan 2010 06:21:57 +0000

Pivot Point for 1-4-10

1140.41 R2
1134.58 R1
1123.91 Pivot Point
1118.08 S1
1107.41 S2

Fed and Fed Agency Announcements

Motor Vehicle Sales

ICSC-Goldman Store Sales
7:45 AM ET

Redbook
8:55 AM ET

Factory Orders
10:00 AM ET

Pending Home Sales Index
10:00 AM ET

4-Week Bill Auction
11:30 AM ET

The Market started off the new year in euphoric fashion. It was a nice day to trade. I started calculating the Pivots by hand again because I noticed some differences in S and R points and realized I wasn’t calculated them for 5PM. Some of the automatic pivot point calculators online go from midnight to midnight. I can’t stand the pivots from midnight to midnight, so I am back to doing it the proper way.

ES Emini Trading: Pivot-Fed Announcements-Commentary

trader7757 — Wed, 30 Dec 2009 05:54:52 +0000

Daily Pivots for day following 29-Dec-2009
	Classic	Woodie	Camarilla	DeMark
R4	1147.58	1142.67	1126.15
R3	1139.58	1134.67	1123.95
R2	1131.58	1131.58	1123.22
R1	1126.67	1126.67	1122.48	1125.13
PP	1123.58	1123.58	1123.58	1122.81
S1	1118.67	1118.67	1121.02	1117.13
S2	1115.58	1115.58	1120.28
S3	1107.58	1110.67	1119.55
S4	1099.58	1102.67	1117.35

Fed and Fed Agency Announcements

MBA Purchase Applications
7:00 AM ET

Chicago PMI
9:45 AM ET

EIA Petroleum Status Report
10:30 AM ET

7-Yr Note Auction
1:00 PM ET

Farm Prices
3:00 PM ET

Consensus Analysis

Chicago PMI

Released on 12/30/2009 9:45:00 AM For Dec, 2008

	Prior	Consensus	Consensus Range
Business Barometer Index – Level	56.1	54.9	52.8 to 57.0

Market Consensus Before Announcement
The Chicago PMI rose nearly 2 points in November to 56.1 to indicate a month-to-month increase in the pace of overall business activity in the area. New orders rose 1.4 points to a very strong 62.8, a plus-60 level that, because of its strength, will be hard to match in the coming months. Prices paid showed a mild month-to-month increase at 52.6.

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ES Emini Day Trading: Pivot-Fed Announcements-Commentary

trader7757 — Tue, 29 Dec 2009 06:41:27 +0000

Chart courtesy of AMP Trading, get a free demo account and paper trade. Call Chad at AMP Trading (800) 560-1640 for first class service. He does a great job.

ESH0
For 12/29/2009

How To Use

Symbol		R1	R2	Pivot	S1	S2
ESH0		1123.00	1123.50	1122.75	1122.25	1122.00

Fed and Fed Agency Announcements

ICSC-Goldman Store Sales
7:45 AM ET

Redbook
8:55 AM ET

S&P Case-Shiller HPI
9:00 AM ET

Consumer Confidence
10:00 AM ET

State Street Investor Confidence Index
10:00 AM ET

4-Week Bill Auction
11:30 AM ET

5-Yr Note Auction
1:00 PM ET

Consensus Analysis

Consumer Confidence

Released on 12/29/2009 10:00:00 AM For Dec, 2008

	Prior	Consensus	Consensus Range
Consumer Confidence – Level	49.5	53.0	50.0 to 55.0

Market Consensus Before Announcement
The Conference Board’s consumer confidence index in November rose slightly to 49.5 from 48.7 the prior month but still disappointing compared to the recent high of 54.5 in August. The expectations index has come down in recent months while the present situation index remains near record lows.

ES Emini Day Trading: Pivot-Fed Announcements

trader7757 — Mon, 28 Dec 2009 05:40:02 +0000

ESH0
For 12/25/2009

How To Use

Symbol		R1	R2	Pivot	S1	S2
ESH0		1124.25	1126.50	1120.25	1118.00	1114.00

Fed and Fed Agency Announcements

4-Week Bill Announcement
11:00 AM ET

3-Month Bill Auction
11:30 AM ET

6-Month Bill Auction
11:30 AM ET

2-Yr Note Auction
1:00 PM ET

Fed Balance Sheet
4:30 PM ET

Money Supply
4:30 PM ET

ES Emini Day Trading: Pivot-Fed Announcements-Commentary

trader7757 — Thu, 24 Dec 2009 15:39:22 +0000

ESH0
For 12/24/2009

How To Use

Symbol		R1	R2	Pivot	S1	S2
ESH0		1119.92	1124.33	1115.58	1111.17	1106.83

Fed and Fed Agency Announcements

Most of the CME Markets close at noon today for the Christmas Break, expect trading this morning to be light as many traders take the entire day off.

Durable Goods Orders
8:30 AM ET

Jobless Claims
8:30 AM ET

3-Month Bill Announcement
9:00 AM ET

6-Month Bill Announcement
9:00 AM ET

EIA Natural Gas Report
10:30 AM ET

NYSE Early Close – 1:00 ET

SIFMA Rec. Early Close 2:00 ET

Fed Balance Sheet
4:30 PM ET

Money Supply
4:30 PM ET

Relevant Consensus Analysis

Durable Goods Orders

Released on 12/24/2009 8:30:00 AM For November, 2009

	Prior	Consensus	Consensus Range	Actual
New Orders – M/M change	-0.6 %	0.5 %	-1.0 % to 1.5 %	0.2 %
New Orders – Yr/Yr Change	-11.9 %			-7.8 %
Ex-transportation – M/M	-1.3 %			2.0 %
Ex-transportation – Yr/Yr	-11.3 %			-6.9 %

Highlights
Boeing orders slipped in November but the rest of durables orders look good. New orders for durable goods in November rebounded 0.2 percent after a 0.6 percent decline in October. The boost in November came in below the consensus forecast for a 0.5 percent increase. Excluding the transportation component, new durables orders posted a 2.0 percent gain, following a 0.7 percent drop in October. The weakness in transportation was a huge drop in civilian aircraft orders.

The November rebound in new orders was broad-based outside of transportation. Sizeable gains were seen in communication equipment, up 4.0 percent, computers & electronics, up 3.7 percent; machinery, up 3.5 percent; and electrical equipment, up 3.2 percent. Also posting gains were primary metals and fabricated metals.

Transportation fell 5.5 percent after slipping 0.2 percent in October. Within transportation, nondefense aircraft dropped 32.6 percent in November; defense aircraft fell 3.2 percent; and motor vehicles slipped 0.2 percent.

The outlook for capital goods spending is improving at the core level-although it may be foreign spending more than domestic investment. However, headline new orders for nondefense capital goods fell 1.9 percent in November after an increase of 0.8 percent the previous month. The weakness was in the volatile aircraft component. Excluding aircraft, new orders for nondefense capital goods rebounded 2.9 percent after a 2.0 percent dip in October. These numbers reflect orders from both foreign and U.S. businesses.

Year-on-year, overall new orders for durable goods improved to minus 7.8 percent in November from minus 11.7 percent the month before. Excluding transportation, new durables orders increased to minus 6.9 percent from down 10.5 percent in October.

Overall, today’s durables report shows manufacturing still on a gradual uptrend. Growth in this sector is leading the economy but at a moderate pace.

Equities might be disappointed in the shortfall from expectation other than jobless claims fell more sharply than projected. Equities will likely rise on that report. However, Treasury yields were marginally lower on the two releases.

Jobless Claims

Released on 12/24/2009 8:30:00 AM For wk12/19, 2009

	Prior	Consensus	Consensus Range	Actual
New Claims – Level	480 K	470 K	450 K to 475 K	452 K

Highlights
The brightest spot on the economic calendar continues to be initial jobless claims which fell a very substantial 28,000 in the Dec. 19 week to 452,000 — a dip that the Labor Department describes as a part of “long-term trend” of improvement. The four-week average continues to come down, now at 465,250 for a 2,750 decrease. Continuing claims also continue to come down, 127,000 lower in the Dec. 12 week to 5.076 million. Trends for both initial and continuing claims show sizable improvement from November in what will raise talk of a possible gain for December payrolls.

ES Emini Day Trading: Pivot-Fed Announcements-Commentary

trader7757 — Wed, 23 Dec 2009 03:58:16 +0000

Chart courtesy of AMP Trading, get a free demo account and paper trade. Call Chad at AMP Trading (800) 560-1640 for first class service. He does a great job.

ESH0
For 12/23/2009

How To Use

Symbol		R1	R2	Pivot	S1	S2
ESH0		1115.50	1122.75	1106.00	1098.75	1089.25

Fed and Fed Agency Announcements

MBA Purchase Applications
7:00 AM ET

Personal Income and Outlays
8:30 AM ET

Consumer Sentiment
9:55 AM ET

New Home Sales
10:00 AM ET

EIA Petroleum Status Report
10:30 AM ET

2-Yr Note Announcement
11:00 AM ET

5-Yr Note Announcement
11:00 AM ET

7-Yr Note Announcement
11:00 AM ET

Consensus Reports

Personal Income and Outlays

Released on 12/23/2009 8:30:00 AM For November, 2009

	Prior	Consensus	Consensus Range
Personal Income – M/M change	0.2 %	0.5 %	0.3 % to 0.7 %
Consumer Spending – M/M change	0.7 %	0.6 %	0.4 % to 0.9 %
Core PCE price index – M/M change	0.2 %	0.1 %	0.0 % to 0.1 %

Market Consensus Before Announcement
Personal income in October edged up 0.2 percent, matching a 0.2 percent rise in September. The important wages and salaries component, however, was flat after a 0.1 percent dip in September. Personal consumption expenditures jumped 0.7 percent after a 0.6 percent drop in September. The rebound reflected a comeback in auto sales after the post-clunkers drop off in September. Headline PCE price inflation rose to 0.3 percent from a 0.1 percent rise in September. Core PCE inflation edged up to 0.2 percent in October from 0.1 percent the month before. Looking ahead, we should get some improvement in personal income-or rather at least in wages & salaries as aggregate payroll earnings rebounded 0.7 percent in November. PCEs growth should be healthy as retails sales excluding autos were up 1.2 percent for November and unit new motor vehicles sales advanced 4.5 percent. PCE inflation numbers should be mixed, closely tracking November’s CPI headline and core inflation numbers of up 0.4 percent and flat, respectively.

Consumer Sentiment

Released on 12/23/2009 9:55:00 AM For December, 2009

	Prior	Consensus	Consensus Range
Sentiment Index – Level	73.4	73.5	72.0 to 74.0

Market Consensus Before Announcement
The Reuter’s/University of Michigan’s Consumer sentiment index for mid-month December jumped to 73.4 from 67.4 for the November final estimate. The latest gain was led by a spurt in the current economic conditions index-to 79.1 from 68.8 in November. The expectations index improved, but only slightly-to 69.7 from 66.5 the prior month. Inflation expectations for one year out dipped 6 tenths to 2.1 percent and for five years out declined 4 tenths to 2.6 percent

New Home Sales

Released on 12/23/2009 10:00:00 AM For November, 2009

	Prior	Consensus	Consensus Range
New Home Sales – Level – SAAR	430 K	440 K	415 K to 460 K

Market Consensus Before Announcement
New home sales jumped 6.2 percent in October to a much higher-than-expected annual rate of 430,000. Supply was very low, the result of improving sales. Only 239,000 new homes were on the market in October in what was the lowest number going all the way back to 1971. Supply at the current sales rate fell to 6.7 months, compared to September’s 7.4 months and compared with 11.1 months a year ago.