Posted on 22 June 2010
Still not convinced that these Pivot Points have any merit, well just have a look at the following chart of last night’s price action.
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Note how price formed an Inside Bar on the daily open at point A indicating a potential reversal and then dropping directly to point B which just happens to be exactly at the S1 pivot point. This was followed by a huge run straight up to the central pivot point at point C and even here you can clearly see players taking profits.
Just by observing the price action around these Pivot Points it becomes quite obvious that there are plenty of orders taking place in these areas, clearly there are many other players using these same Pivots.
They are sometimes referred to as floor Pivots which is because they are used by many floor traders and have been for a very long time. Many of these floor traders are trading quite large volume and therefore generating some of the huge moves that we do witness in the market. The goal here is to ride on the shirt tails of these same floor traders and capture some of the moves that they are.
One of the greatest advantages that you gain by trading with pivots is you have definite areas where not only to place your entries but also where to take profits. Profit taking is one of the most challenging skills in trading and just with the use of these Pivot Points you have a clear and concise place to position your orders.
While most indicators are what we call lagging indicators because they are derived from the price action that has already happened Pivot Points are a leading indicator as they are indicating these levels long before price arrives.
Trade Well
Perry
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Posted on 22 June 2010
Here is a perfect trade example using pivot points, in the following chart you can see how the huge pin bar formed at the R3 level clearly rejecting it and indicating the potential for a reversal in price.
To mange this trade I take two positions to divide up my risk, on eighty percent of the position I set the take profit at the next pivot which in this case was the R2 pivot which was at 1.4891. On the other twenty percent of the position I set a trailing stop in anticipation of the possibility of a trend day. I have previously added this into my back testing and the results have proved to be quite good. There are many times when the market just takes off and never looks back, it is these times that a strategy like this can really capture some great profits.
You can just imagine my surprise when I awoke this morning to find that I am still in this trade due to this strategy and currently up 140 pips.
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Where will this trade go? Well your guess is as good as mine and the best strategy I have found is just let the trailing stop do its work and I get stopped out when it is touched. The market can do anything and go anywhere and there is always the possibility that we could see a second or subsequent trend day and capture a portion of it also. This is where I just have to be patient and let the trade play out.
Look closely at the following chart and take notice how price reacts to these pivot points, you will notice at every level there is profit taking and further trading opportunities if you were that way inclined. You can clearly see profit taking happening at the R1, CPP and the S1 and S3 levels.
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These pivot points are extremely powerful and if you are a day trader and you are not currently using them I would seriously recommend you place them on your charts and just see how accurate and predictive they are, you may be quite surprised.
I have been doing a lot more back-testing on this trading system and will update this info in my next post.
Trade Well
Perry
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Posted on 25 May 2010
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Two trades were taken overnight, the first is circled in the previous image where you can clearly see how price formed a near perfect twin tower pattern right on the S1 pivot point. This trade was then stopped out an hour later for a loss of 24 pips. This is profit taking happening as many other like minded traders who were previously short are taking profits at the pivot point. There is no way to distinguish the difference between this profit taking and a reversal which was what I anticipated this price action to be. This is all just a part of trading and the reason why I use stops.
The second trade for me happened two hours later and was initiated after price confirmed that it was unable to significantly penetrate the S1 pivot point. Here is a chart to help explain what I was seeing at the time.
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Price formed a spinning top just below S1 and was then followed by some solid buying as price pushed cleanly up through the pivot and closed well above it. This was still not enough to get me into a trade though, it was the following price action that got me aboard the move. It was when price retraced to the pivot and then clearly rejected it with the 2 spinning top/pin bar style candles that I entered the move. It was these buyers entering the market that finally convinced me that the odds favoured a move to the upside.
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Half of the position was taken of at the daily open for 50 pips and the stop was moved to break even. The remainder of the position was taken off at the central pivot point for 101 pips, this was a good days trading and the predicative power of the pivot points was plain to see on the day I feel. Pivots are one of the few leading indicators out there and if you do day trade and you are not using them it might be wise to put them on you charts and observe how price reacts to them, you may be pleasantly surprised.
Trade Well
Perry
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Posted on 20 May 2010
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When the first twin tower reversal pattern formed which was straddling the central pivot point and also clearly rejecting the daily open line I figured this was a good place to get short. The price action that ensued to say was volatile is an understatement, price came all the way up to the daily open with a lot of momentum and at the time I figured this trade is dead in the water.
It then dropped again rapidly to ultimately form another reversal pattern an evening star pattern, this back and forth price action went on for the next couple of hours. Price ultimately formed a pennant and eventually broke down and ran all the way to S1. What kept me in the trade was the continuing formation of reversal patterns which indicated to me that price would eventually go down, also the fact that all this was happening below the daily open was extra evidence supporting my analysis.
Note that all these areas that I am talking about being support or resistance are just that AREAS. It is not a line in the sand, I look for price action in relation to the area and take action accordingly. Price sometimes comes up short of the area and other times pushes right through before reversing, this is where discretion comes into it and a lot of practice. practice, practice, practice.
This is something I think a lot of people don’t consider when trading, I feel they think once they have a system they are good to go but I think that implementing these things still requires a lot of practice. For example just because Tiger Woods new how to play golf did not make him the best in the world. Lots and lots of practice made him the best in the world.
This is where I use ForexTester2 as it allows me to practice and hone my skills a lot more than any demo account ever will. For example the trade I just discussed here happened over an eight hour period, with ForexTester2 I can cover a couple of years of data and thousands of trades in this time, this equates to much more experience and price action analysis. Trading is like any other skill to stay in form you need to practice your skills all the time too stay on top of your game.
Trade Well
Perry
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Posted on 20 May 2010
It is amazing just how predictive these pivot points are. Check out the following charts and notice just how price reacts to these points, here you can see how price opened for the day and ran up to the central pivot point where it formed an enormous Doji and then reversed and dropped like a brick all the way back down to the previous low.
Note how price was unable to close above the central pivot point and then just collapsed back down to the most recent significant support level.
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The price action that followed was just as impressive. Look how price consolidated at the support level of 1.4240 and see how price formed a bullish engulfing pattern followed buy an inside bar. The combination of these two patterns and the support level should be enough for any trader to take a long position.
The action that followed was even more impressive, price ran up and through the central pivot only to retest the pivot level and then run straight up to S1 for a total distance traveled of 220 pips. For these levels to hold so well it tells me that there must be an awful lot of traders using these levels and I would hazard a guess that many of these traders are trading quite substantial accounts.
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My goal here is to ride on the shirt tails of these traders. I don’t have to capture the whole move only a piece of it. These levels definitely help with the decision making process when it comes to deciding whether to take a trade and also where to take profits.
Trade Well
Perry
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Posted on 19 May 2010
I just want to touch on the tools that I am using to trade the 15 min chart, this style of trading is based around support and resistance. The tools I am using are
- Pivot Points
- Horizontal support and resistance which is based on previous highs and lows
- Candlestick patterns
- Daily open
I am primarily watching how price reacts to the pivots and previous areas of support and resistance. If i identify a rejection of a level by a reversal pattern or price momentum away from the area I will initiate a trade. I simply use the next level of S and R or the next pivot point for my target.
This is a very simple trading method and is amazing just how effective it is. Over night saw some great examples of this style of trading and just how effective it can be. Notice on the chart below how price moved between these areas.
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One of the great things about this type of trading is you don’t have to sit at the screen all day. You can set up alerts from your platform to your phone that let you know when price is near any of these points. I give it 20 pips before the Pivot Point as a rule, this gives me plenty of time to get to my screen and get a handle on the price action and prepare for a possible trade.
Perry
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Posted on 16 May 2010
For any of you that are unfamiliar with the term Cable it is often used in reference to the GBP/USD pair. I found this explanation for it online:
Transatlantic cables are cables that have been laid along the ocean floor to connect North America and Europe. Before the advent of radio, the only means of communication across the Atlantic Ocean was to physically connect the continents with a transatlantic telegraph cable, which was operative in 1867. The exchange rate between the United States dollar and British pound is still colloquially known as “cable” by financial marketeers on account of the fact that the rate was originally transmitted via a transatlantic cable.
I am not sure if this is the actual reason but sounds reasonable to me so I will go with it anyway.
I recently read a book buy S&P trader Larry Levin called emotion free trading, this is only a short book and makes some really valid points about trading and some new ways for me to approach it. One of the things that really got me thinking was just how much Larry stresses taking profits, limiting risk and mange your risk and emotions.
His ideas here really got me thinking about trading the lower time frames and how I have always struggled with it and thus I trade the higher time frames instead. Larry talks about moving stop losses to break even as soon as is feasible. Now this has always been an issue for me as I see so many times price come back and retest my entry level and then go on to reach my profit target. But what Larry says is very valid, better to get stopped out than take a loss. This is extremely true as the only thing we have any control over in trading is our risk and by doing this we can mange our risk very aggressively.
When I think about it, how many great traders have stated that the best trades go your way straight away and never look back and that made me think hey if you apply this to your trading you are only targeting the best trades and that is what I have started doing.
I figure since the Cable is the main currency that I trade then I will start a new category named after it and start recording my research here. My testing that I have done on ForexTester2 to date is looking very promising. The testing that I am doing is based on trading the cable on the 15 min time frame and using Pivot Points for support and resistance. I have only covered 18 months worth of data but am happy with the results so far. This is still a lot of ground to cover as we are talking 390 days of trading so far.
This is still not enough for me to commit money to yet but my plan is to finalize my testing and then go live with the new strategy if it continues to show the same and consistent form. I have attached a chart of the equity curve to date for your perusal and as you can see the results do look very good so far.
click image for larger view
Trade Well
Perry
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