Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan INDICATORS
Three Turns On The Pivot Point This floor trader updates his previous article on the pivot point technique with additional insight on how he uses the method for day trading S&P futures.
by William Greenspan everal years ago, I wrote an article for S TOCKS & COMMODITIES describing how professional floor traders use the pivot technique. Although the pivot technique I described works in all futu res markets, it responds best to markets with a wide daily trading range, such as the Standard & Poor’s 500 index, Treasury bonds, soybeans, wheat and corn. Since then, I have received many queries on how to incorporate the data from the afterhours electronic trading sessions into the pivot technique. I tried to ignore the significance of the electronic trading sessions because of the relatively low volume of contracts that are traded in such sessions compared with the regular day session. It has become apparent that this data should be incorporated into the pivot technique and that, under the right circumstances, it enhances the accuracy of this trading tool. I will also introduce other variations of the pivot technique and how to implement them into the pivot calculations.
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A QUICK REVIEW Let’s review the pivot technique, and how its original five formulas are calculated. An active day trader will calculate the daily pivot points from data compiled at the end of a day’s trading session. He will use these figures the following day as part of his daily trading plan. The basic idea behind the trading pivot techCopyright (c) Technical Analysis Inc.
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Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan
nique is to go long when the market violates the daily pivot in an upward (bullish) move and to go short when the market violates the daily pivot in a downward (bearish) move. The other four formulas of the pivot technique provide two support levels in the market below the daily pivot and two resistance levels in the market above the daily pivot. The five formulas of the pivot technique are: Daily pivot
= (Prior day’s high + Prior day’s low + Prior day’s close) / 3 Resistance (1) = (2 x Daily pivot) - Prior day’s low Support (1) = (2 x Daily pivot) - Prior day’s high Resistance (2) = (Daily pivot - Support (1)) + Resistance (1) Support (2) = Daily pivot - (Resistance (1) Support(1))
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FIGURE 1: PIVOT TECHNIQUE. Here’s the pivot technique for the daily June S&P futures.
Figure 1 presents the pivot technique for the daily June S&P futures. Markets trade back and forth through their daily trading range. A rising market is stopped by sustained sellers and a falling market is stopped by sustained buying. This is what resistance and support are all about. The ultimate level of resistance in any market is its daily high. This is the area of the market where the sellers find the most value. All the buyers at that level are satisfied. Conversely, the ultimate level of support in any market is its daily low. The market is supported so much at that level that any contracts offered for sale are bought. The buyers find this level to be the best “value area.” History shows that support and resistance levels are broken regularly. Once that happens, those levels are less significant because under every support level is a cluster of sell stop-loss orders and above every resistance level is a cluster of buy stop-loss orders. Once these stop-loss orders are elected, they will usually move the market to a new level so these orders can all be filled. When this happens, you must analyze the market again to ascertain the new levels of support and resistance.
wrinkle for the pivot technique. Regardless of the trading medium, prices will reflect any new information that becomes available. Political tensions, foreign and domestic economic reports or other market-sensitive news will drive prices in the electronic trading session (Figure 2). Since trading continues throughout the night until just prior to the open of the next day’s session, prices often pick up right where the electronic trading session left off. The original pivot point is an average, or arithmetic mean, of three important prices: the prior day’s high, the prior day’s low and the prior day’s closing price. (For our discussion, the closing price is synonymous with the settlement price.) What we want from the electronic trading session is an
Unemployment report
Globex trading
VARIATION 1 Now that the markets have evolved from the previous three- to seven-hour trading sessions to 24-hour trading centers, and the electronic trading session is becoming more popular and liquid, this has created a
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FIGURE 2: JUNE S&P FUTURES. The top chart shows the pit trading activity for May 2, the Globex trading between May 2 and 3, followed by the pit trading for May 3. The spike up in prices during the Globex trading was a reaction to the unemployment report. The bottom chart is just the pit trading activity for May 2 and 3.
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Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan
indicator that we can incorporate into the pivot formula to enhance its accuracy for the upcoming day trading session. Since the day trading session will seemingly open w here the electronic trading session left off, we incorporate the electronic trading session’s closing price (settlement) into the calculation for the pivot. Instead of simply using the prior day’s high, low and closing prices, we now use, in addition, the electronic trading session’s closing price. The variation on the first formula of the pivot technique now becomes: Daily pivot = (Prior day’s high - Prior day’s low + Prior day’s close + Electronic trading session close) / 4
All other formula calculations are the same. Figure 3 shows variation 1 for the daily June S&P futures used in Figure 1.
VARIATION 2 Another modification of the pivot technique is to include the average price of the current day’s opening range with the prior day’s high, low and closing price. Ad d all four of these prices together and divide the sum by 4:
three figures together and divide their sum by 3. All the formulas remain the same. I retain the sup port and resistance numbers that I generated for the morning session. I focus my primary attention on the new support and resistance figures because they reflect more recent price data. The new formulas are as follows: Daily pivot = (11:30 a.m. CST high + 11:30 a.m. CST low + 11:30 a.m. CST close) / 3
All other formulas remain the same. When I get ready to go to the trading floor, I list on a trading card in descending sorted order by price the support and resistance numbers generated from the pivot technique. I also use the components of the daily pivot in my listing because the previous day’s high, low and closing prices are important support and resistance numbers. My trading card looks like this:
Daily pivot = (Prior day’s high + Prior day’s low + Prior day’s close + Average of opening range) / 4
The opening range is the range of prices that traded to fill all orders that existed before the opening. The open can be as short as 90 seconds or as long as 1 5 minutes, but the opening range is usually established in the first two minutes. The average price of the first two-minute bar o n a chart is a good way to establish the average opening range price. If the market has moved substantially overnight, or if news is released or a related market makes a sudden move (the way Treasury bonds often do while the S&P 500 is waiting to open) during the brief time the market is closed between the electronic trading session closes and the day trading session opens, you will want to make some quick adjustments and recalculate your daily pivot, support and resistance.
R(2) H R(1)
Resistance 2 Previous high Resistance 1
P C S(1)
Pivot Previous close Support 1
L S(2)
Previous low Support 2
This gives me eight levels of support a nd resistance, not just the five generated by the pivot technique.
TO SUM IT UP Always trade with stop-loss orders. Contrary to what some new gurus are promoting, unless you have an infinite cache of money, you always need to have a way out of your position. Small losses will keep you trading. Remember, the market
VARIATION 3 Another modification to the pivot technique, which was suggested by one of my students, is to split the day trading session into two unequal parts. We use the numbers generated from the previous day’s session (with variations, of course) for the first half of the day session. For markets that open at 7:20 a.m. CST, we recalculate the formulas at 11:30 a.m. CST. For markets that open at 8:30 a.m. CST, we recalculate the formulas at 12:30 p.m. CST. For markets that trade four hours a day or less, we do not split the trading session. The pivot is recalculated by taking the first half of the day’s high, low and closing price at either 11:30 a.m. C ST or 12:30 p.m. CST, depending on the markets. Add the
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FIGURE 3: VARIATION 2, DAILY JUNE S&P FUTURES. Here’s variation 2 for the daily June S&P futures used in Figure 1.
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Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan
can be very unforgiving of mistakes. You don’t need to prove anything by trading. Your only goal is to make money. Remember that what worked yesterday may not w ork tomorrow. Markets change with time, and an astute trader will change with his markets. The only constant in the market is that markets will fluctuate. The market is never wrong — only your opinion of it. William I. Greenspan is a local trader in the Standard & Poor’s 500 pit at the Chicago Mercantile Exchange (C ME )
and the founder of Commodity Boot Camp, an intensive training program for traders.
RELATED READING Greenspan, William [1994]. “The pivot point for trading,” Technical Analysis of STOCKS & COMMODITIES, Volume 12: August. _____ [1994]. “Using stops to your advantage,” Technical Analysis of STOCKS & COMMODITIES, Volume 12: March. †See Traders’ Glossary for definition
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