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Pivot Points

Pivot Points refer to points of significant change. As a trader you had several pivotal moments in your trading history. It may be the day you learned that what goes up, also goes down. The one trade that was so green and you were high above the sky, but still got sold with loss several months later. It may be the day you realized that no lunch is for free and that beating the market actually requires work. You need to stay ahead of the game. These moments stand out to you as moments of change. They teach you not to be so greedy, to take profit, to simply stop trading or focus on funds instead.


In technical analysis Pivot Points are the points that signal a significant change. This does not necessarily mean that price direction changes from going up to going down, it may very well be major shifts in volume, RSI or other technical indicators. In our system we refer pivot points as short term tops and bottoms. These are defined using zigzag patterns and signal possible good buy and sell opportunities. You can use pivot points as your only trading strategy, the down side is the loss occurring before and after pivot points are identified.  There simply has to be a bottom, before a bottom can be identified. The typical signal delay is 2 time units. If we look statistically it usually means that about 33-66% of the possible profit is lost as you get in or out too late. The reason for 33-66% range is due to a repetitive pattern called ⅓ or ⅔.

In a less rising trend it may be 3 days up and 2 days down.  This same rule applies in many cases and can be seen in typical re-bounce stocks (stocks that fall very hard), that instantly react and regain ⅓ of the fall.

 

If life was easy, you could buy and sell on pivot point signals and still make good profit. But that is also just another way of losing your money. There is no point in buying on pivot bottom if the average gain between pivot bottom and top is 1%, knowing you will lose % in both beginning and end of trade due to signal delay. You will need substantial amount of cash to make profit on 0.33-0.66% considering you have to pay trading fees and also have a certain degree of risk involved. And this is the second key… Risk! If you go for stocks that usually have very high gap between pivot bottoms and tops the risk is as equally high. The secret is to be patient and make sure you identify stocks that have as predictable pattern as possible. Usually predictable simply means that its pattern is repetitive and you can more or less see it by looking at the chart.

 

 

In this Apple chart pivot points are marked with red or green circles. A quick check indicates a trading range roughly around 3-7%. Last top was identified just around $153.8, so a bottom should be somewhere around $142-$149. The interesting thing is that this indicates a bottom above the previous bottom ($142.19) and therefore, it is a small signal for a possible shift. Looking at the volume fall within the same period (end of chart) gives strength to this indication. The main rules are that in a falling trend the bottoms should always be lower, and in a rising trend the tops should always be higher. Any deviation from these signals means possible changes and weaken any signal whatsoever. In this case (Apple) the signal from pivot top (red circle) is still valid and there is a higher chance for the stock to fall ($142-149 range), than to surge.

 

Pivot signals are also one of the main identifiers of formations. In our chart we use smoothed volume so there is a slight delay, but good pivot points are followed up by volume changes. In theory this makes sense: news hit the market and there is a “pivotal” change in the stock. Or that the stock reaches the level where the traders go from positive to negative and you get a small sell off (lots of stocks changing hands or the opposite, that there suddenly is a complete dry up). So how to trade on pivot points? First of all, you would need to set your criterias using you trading strategy. If you have decide to go for high risk, trading on pivot points in Apple will not make you rich. So you will look for stocks with high volatility. After identifying such stocks you will look for the ones that have a certain degree of predictability. Your next step is to evaluate time of your buy and set your stop loss. I would recommend the stop loss to be set no lower than the pivot bottom. If the stock falls lower, - the signal is invalid.

 

So what is the lesson about Pivot Points?

  1. Pivot Points can be used for trading.

  2. Look for repetitive patterns. This reduces the overall risk.

  3. Good Pivot Points are followed by a change in volume.

  4. In falling trends, pivot bottoms should continue to be lower. Any change to this is an indicator for a possible shift. The same logic applies to rising trends.

 

 

 

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