Tuesday, 17 March 2009

What is Pivot Point?

What is Pivot Point?
One of the simplest and most effective position entry techniques I use is based on what I call the multi-pivot point levels. The pivot point is a setup that can be used on a variety of markets, though I typically use the pivot point on the Mini-Sized Dow (YM), Emini S&P (ES), Emini Nasdaq (NQ), and Emini Russell (ER) futures contracts, as well as some individual stocks. The pivot point can also be used on the corresponding stock index ETF via the DIA, SPY, QQQQ and IWM.

Pivot Point Advantage
The main advantage of this the pivot point is that it is price-based as opposed to indicator-based. By the time most indicators generate a buy or a sell signal, the pivot point move is already well under way. By following this price-based methodology, I will get into a trade before the indicator-based traders, and I usually end up handing off my position soon after a buy or sell signal is being generated on a stochastic or other oscillator type system. The pivot point is especially true on choppy days. Just as the Johnny-come-latelys are jumping in, I'm handing off my position. On choppy days, it's the indicator-based traders that get taken out back and shot. Pivot points are set up to naturally take advantage of their mistakes.

The pivot point is also a good system for traders who don't have time to stare at the charts all day long, or for traders who have a bad habit in chasing the market higher and lower. Playing the pivot point automatically creates trader discipline because the entries and exits are pre-determined before the trading day even starts.

Pivot Point Tool
The other thing I like about the pivot point is that they can be used as a tool to quickly determine what kind of trading day it's going to be. On a trending day, markets will move to a pivot level, consolidate for 15-20 minutes, and then continue to march in the direction of the trend. On these days I wait for the move through the pivot point level, and then buy the first pullback to that level. On choppy days, however, the markets will move up to a pivot point level, hang around for a short time, and then drift back in the direction from whence they came. Many traders get "chopped up" during these types of trading days, losing money and making their brokers rich in the process. The pivot point are naturally set up to be faded on these days, and are one of the few profitable ways to trade the low volume, narrow range chop.

There are two very easy ways to tell if the market is going trending or chopping. The first is to look at how the markets react to the pivot point levels once they reach them. The second is to setup a 5 minute chart of the emini S&Ps and see what kind of volume is coming into the market after 10:00 a.m. Eastern. If the volume is over 10,000 contracts on each bar, then the market has power and volatility behind it. These types of days usually have wide ranges and strong trends. However, if the volume after 10:00 a.m. Eastern is consistently below 10,000 contracts on a 5 minute chart, then there is little power to move the beast, and the end result will be a slow, choppy day. On the first type of day, I wait for the markets to move through pivot point levels and then I set up an order to get in on the first retracement. On the choppy days, I place open buy and sell orders against the pivots and have standing orders to fade these moves throughout the day. There is nothing to watch on these types of days, so I generally let my orders do the work for me.