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Tuesday, 8 July 2008

Pivot level and stock trading, Find out the Support and resistance level in your trade



Pivot level trading technique which was many years back used mostly
in Forex markets in Western countries, especially in Europe and USA. It’s still popular there, as currencies are the most heavily traded instruments in the world.

Now a Days Pivot levels are used in stock trading too.
- If a stock price remains below its Pivot level for more than 15min then consider it weak and short selling can be initiated, And if a stock price remains above it pivot level for more than 15min then consider it strong and buying can be initiated in it.
- If a stock price falls below its S1 level then short selling should be done for target as S2 level, and if a stock price moves above its R1 level then buying should be done for target R2 level.
- Stop loss for all trades will be 1% of the price of the stock in hich trading is initiated. Stop loss columns have also been published for the convenience of the trader in the table, so one doesn’t need to calculate and can trade instantly.
- Stop loss column in Red color is for short selling, and stop loss columns in green color is for buying/going long in the particular stock.

For years floor traders and market makers have done this by computing a set of pivot point support and resistance levels between which price can be expected to fluctuate. In a way, it is not so important that you know where these support and resistance levels are, but rather, that you know the floor traders or market makers know where they are.

For example, if the floor traders are gunning for money-management stops, guess what price levels they will test? Clearly, the pivot point support and resistance levels are the prices at which many stops are placed because everyone knows where these expected trading limits are.

The central pivot point (CPP) is the equilibrium point around which trading is expected to occur. The calculation for tomorrow’s CPP is simply the average of today’s high, low and close. When prices move away from the CPP there are zones of support and resistance that define the expected value area of the market. Because these zones are known, penetration and market moves beyond these support and resistance levels bring new players into the market who give further momentum to the buying or selling pressure.

PIVOT POINT CALCULATION
The pivot point for the current trading session is calculated as:


Pivot Point = (Previous High + Previous Low + Previous Close) / 3


The pivot point can then be used to determine levels of estimated support and resistance levels for the day:

Resistance Level 1 = (2 * Pivot Point) - Previous Low

Support Level 1 = (2 * Pivot Point) - Previous High

Resistance Level 2 = (Pivot Point - Support Level 1) + Resistance Level 1

Support Level 2 = Pivot Point - (Resistance Level 1 - Support Level 1)

Resistance Level 3 = (Pivot Point - Support Level 2) + Resistance Level 2

Support Level 3 = Pivot Point - (Resistance Level 2 - Support Level 2)

Trading for today will usually remain between the first support and resistance levels as the floor traders and market makers make their markets. The second resistance or support levels come into play only upon failure of the first resistance or support levels to contain price.

If either of the first levels is penetrated, off-floor traders are attracted to the market. In this event, the breakout levels reverse their functions and serve as test points for continued trading. In a bullish breakout, the first resistance level now becomes a support level and the second resistance level becomes a new resistance level. In a bearish breakout, the first support level now becomes the resistance level and the second support level is now the new support level.

It is clear that money-management stops placed within the range between the first support and resistance levels have a high probability of being hit. This is most likely the reason why almost all off-the-floor traders believe with absolute certainty that floor traders are gunning for their stops. To come to grips with this, some traders have used the "four-tick rule" by which a money-management stop is placed four ticks below the first support line or four ticks above the first resistance line.

However, in the cat-and-mouse game of trading, if the floor traders know where everyone calculates support and resistance it doesn’t take a giant mental leap to figure out they can pick off all the stops snuggled just outside these ranges as well.

The primary value of these support and resistance levels is that they enable you to know what the floor traders and market makers know. As technical trading tools, they should only be used in conjunction with other technical indicators to improve their efficiency.

In general, I evaluate stocks before the open to determine the recent momentum for the stock. I will consider a trade in that stock if the recent momentum of the stock, the current market momentum are going the same way. I like to catch the stock just after it moves through the pivot point.

In addition to determining where to place stops, I use the pivot/support/resistance to minimize getting into momentum trades at false tops & bottoms. I also use the support resistance levels to estimate what the potential profit will be, often keeping me out of trades with low potential.

Forex Day Trading
Because the forex market is a 24-hour market, there is often confusion about what time of day to use when calculating the closing price of one trading session and the opening of another. The generally accepted times used when calculating pivot points is 23:59 GMT for the close of a trading session, and 00:00 GMT for the opening of the new session.

The forex day trader can use daily data to calculate pivot points and support and resistance for the upcoming trading day. Weekly, swing forex currency traders can use weekly data to calculate pivot points and support and resistance for the upcoming trading week. Longer term forex currency traders can use monthly, yearly, or even longer time frames when calculating pivot points and support and resistance levels on their charts.



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