Monday, November 2, 2009

Pivot Points Trading (The Most Basic)

Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day. This information basically contains all the data you need to use pivot points.The reason pivot points are so popular is that they are predictive as opposed to lagging.

Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

If, after starting the day above the Pivot, the Price crosses back through the Pivot, the Pivot will act as a Resistance area. Pivot Points and Support and Resistance levels behave exactly like any historical Support and Resistance level.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can. Combine these with simple channeling, retracement levels, past critical supports & resistances, SAR will enhance the success rate.
Pivot Points - Trading Methodology:
To make the discussion a bit less abstract, let's take a most superficial look at some simple trading methodology employing Pivot Points.
Step 1
"In general, if the day's Price Action starts above the Pivot, it will tend to stay above the Pivot.
This simple observation provides the basic rules for two of the simplest Pivot trading systems.
System 1:
Open is above Pivot: Buy
Open is below Pivot: Sell
System 2:
Place Buy and Sell stops bracketing the Pivot. Whichever is not filled acts as safety stop for the other.
These "systems" are very much too raw for my tastes. Too much chance of getting whipsawed. Let's take it one step deeper. Let's refine these simple systems just a bit more:
Step 2
First Fundamental Of Pivot Trading After the opening range (first 15-30 min. to one hour), if price is above/below the Pivot, Price Action will strongly tend to remain above/below the Pivot for the session.
Although this rule bids us to wait out the Opening Range and thus avoid much of the wildness and whipsawing, overlooking the next Fundamental Of Pivot Trading could be disastrous:
Step 3
If the market opens, or later trades at the extremes (R2, R3 or S2, S3), it will exhibit a tendency to trade back toward the Pivot. Thus, the general rule, 'Avoid buying the High or selling the Low', becomes increasingly more stringent as price moves farther from the Pivot.

I have picked 5 days of last week and what follows are some ideas on how you could have traded those days using pivot points.
........................26.10.09-Monday.......................
.........................27.10.09-Tuesday....................
.........................28.10.09-Wednesday.................
.........................29.10.09-Thursday.................
.........................30.10.09-Friday....................
.......Week starting 26.10(Mon) to 30.10(Fri).....
Keep those weekly, daily Pivots and fine tune them to perfection.

16 comments:

NIFTYSFUTURES said...

HI.. ILANGO..

ITS GREAT POST AND THANK YOU FOR GIVE TRADING IDEAS. I NEVER SEEN LIKE THIS EXPALNATION AND TRADING IDEA ON ANY BLOG. ONCE AGAIN I THANKS YOU.
PLEASE CONTINUE YOUR SHARING KNOWLEDGE. ITS HELFFUL TO SMALL TRADER LIKE ME.

MOHAN.K

govind said...

A very useful guidance for persons who are having difficulty in reading charts and this rule will save many, only thing required is patience and mind to skip trades where no concrete direction is shown.

MONEYVISTAS said...

Good presentation on pivot point trading,Iam sure it will help many people in their trading.

You always stand behind many people and please continue your good work.

best regards

Shirshendu Ghosh said...

Hi Llango,

It's really great post... My all premarket calls based on this theory and achieved +718 Points in Nifty Fu on this Month (OCT'09).
Once again... Great work....

Thanks & regards,
www.nifty-with-ghosh.blogspot.com

Boje said...

Sir, Its very usefull and very to follow. I use to refer vfmdirect for daily pivots, for weekly pivots any other website is there or i hve to calculate manuly..
Regards
Bojan

Kapil Chopra said...

Dear Ilango,

Another superb example of selfless service, what fantastic explanations.

As I sometimes miss out on updates due to the nature of my job,at this point, I was wondering whether this fall will really gather momentum or I should start going long in mini nifty future for December every 100 points for a medium term trade, to hedge myself I can keep on selling calls of higher range so when it turns it really does not wipe my profits out.

So I accumulate December or January Mini nifty at 4700,4650,4600,4550 and 4500 and sell calls of 4800 or 4900 to get the gains when it turns ?

What is your opinion ? Also I have 4400 put written, should I cover that, if yes, then at what point ?

Cheers

Kapil

P.s.- Any way to get your responses at kapilchopra@airtel.blackberry.com ?

GANESH said...

Dear Ilango,
Very good job you did, its very useful kind of explanation.Thanks for your continues trading technical articles. Keep it up.

Regards,
Ganesh.

prabha said...

Sir,
Will you please help us to find false breakouts..
Thank you in advance.

Ilango said...

Hi..all,

Thank you.

Hi..Moneyvistas, Shirshendu Ghosh,

Both of you are doing really well with your "applied knowledge" and it is wonderful of you to appreciate this work.

Hi..Kapil,

A short term bottom around 4585-4638 is expected for a small rally to 4825 to 4925 is possible. Part booking on the shorts is advisable and reshort @ higher levels.

Let us be patient for this weekly reversal to play out down in a big way..Last big correction was 770 points and this one will exceed that but in a structured way.

Hi..Boje,

I can give you the link for a Pivot calculator in which you can calculate any pivots by keying in the High, low & close of Previous week or day.
http://www.mypivots.com/calculators/pivot-point-calculator.aspx

Hi..Prabha,

False break outs are "false" and as the name suggests you will know about it only when it reverses without continuing in the break out direction. Just use a simple SL in such cases and there are no other methods except your own experience and intuition to discriminate them.

Best regards.

ilango

srinivaskommareddy said...

Thank you very much ilango for the post. You are realy doing a great thing by sharing the knowledge.

I have a question on the pivot points.

Are these regular classic pivots ?

There are different kinds of pivots people calculate like fibonacci pivots, camarilla pivots and classic pivots.

Which pivots are being used here, can you pl explain ?


Thanks once again.
Srinivas

srinivaskommareddy said...

Oh. i checked the pivots. They are regular classic pivots. Do you consider the the close from the EOD chart ?

Thanks,
Srinivas

vicky.. said...

dear ilango sir...
i have checked for the piviots today.its showing 5008.88
so on wednesday,long above 5009 or short below 5009???
am i right??kindly do reply.
kind regards....
vicky....

Krishna said...

Fantastic ILANGO sir,

The article is excellent

SANPOT said...

I came across this blog just now and I am amazed and deepppl
impressed with the article.I wish I had come across with
it before but better late than never.ILANGO SIR is a
genius and hope he continues to guide small investors
like us.My sincere gratitude to him and wish him a very
happy and prosperous NEW YEAR.
P.S.Pl tell me at what IST the premarket view is updated.
Dr Sanjay Pote

J.R.Julius said...

Still good players believe in Simple tools
like pivot than big tech tools/indicators.

Thanks for sharing

Ravi Pillai said...

SIR
Very simple explanation.
Very helpful.
Thanks.
Ravi

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