This is one of the best and must trading tool for any trader, may it be an Amateur or a Professional Trader. Pivoting system is based on the theory that Stock Prices move in Ranges, each Stock Price has a support, a mid and a resistance level. This means that the stock prices move in a specific range. At support level, the buyers have more control than the Sellers. At resistance levels the sellers has more control than the buyers. In such a situation, when the buyers overpower sellers at the resistance levels, the Resistance level is broken; the same happens in the support levels, support level is broken when sellers overpower buyers.
The classic live example of this Trading Method is a Legendary Stock Trader named Jesse Livermore, a.k.a. Larry Livingston of early 1900s and Nicolas Darvas of "How I Made 2 Million Dollars in Stock Market" fame in early 1950s. Nicolas refers this trading method as Box Trading Methods with Two Support and Two Resistance Levels to a Stock Price.
The major advantage of using this Trading Method is the way Pivoting System is constructed. This is a Leading Calculator rather than a lagging indicator. You use today's EOD (End of Day) Data for tomorrow's trading. Another important factor to consider is that this system is use from floor traders to online traders, literally everybody in the stock market. This gives us a better opportunity to trade using these levels as stock price usually respond at these levels.
How to Calculate Pivot Levels
Before I go into the Simple Arithmetic Calculations of Pivoting System, Let me give you a warning. "Do not use this system as a Standalone Trading System".
Before Calculating the Pivot, Support and Resistance Values, you need to have the following Data of any Stock. It is recommended to take today's EOD Data for tomorrow's trading.
H = Today's Highest Price
L = Today's Lowest Price
C = Today's Closing Price or Last Price
Now, first we need to calculate the Pivot (this is the Mid Point at which both Buyers and Sellers have equal control)
The Pivot Point is the average of all three prices. See the formula below:
Pivot = (H + L + C) / 3
Now using this Pivot Point we can calculate the 3 Support and 3 Resistance Levels. See the formulas below:
Support 1 = 2 x Pivot Point – High
Resistance 1 = 2 x Pivot Point – Low
Now, we have to base next 2 levels on Support 1 and Resistance 1 levels. See the formulas below:
Support 2 = Pivot Point – (Resistance 1 – Support 1)
Resistance 2 = Pivot Point + (Resistance 1 – Support 1)
Now, we have to use different formula for Next 2 levels. See the formulas below:
Support 3 = High + 2 x (Pivot Point – Low)
Resistance 3 = Low – 2 x (High – Pivot Point)
This gives us totally 7 Price Levels. One Pivot Level, 3 Support Levels and 3 Resistance Levels;
How to Trade using
Pivots
While trading using the Pivoting Levels, you have three important levels. The Pivot Point, Resistance 1 and Support 1, these three marks the trend or trading bias for the day.
If the stock price opens above the Pivoting Level, you get a minor Long Trade Signal (Risky to enter at this level). If the stock price opens below the Pivoting Level, you get a minor Short Trade Signal (Risky to enter at this level). When the stock price opens above Pivot Point and breaks the Resistance 1 Price level, you get a Strong Long Trade Signal (Recommended Entry Point) with Strict Stop Loss at Pivot Point. If the Stock Price opens below Pivot Point and breaks Support 1 Price Level, you get a Strong Short Trade Signal (Recommended Shorting Point) with Strict Stop Loss at Pivot Point.
The point to be noted here is, when the Price breaks either Support 1 or Resistance 1 levels, it can turnaround immediately, look for the trend reversals, if the stock price stays above the Resistance 1 or Support 1, enter the Trade. You can use Support 2, Support 3 and Resistance 2, Resistance 3 for exits. This is because at these upper levels, the stock price would usually be at overbought or oversold levels (Confirm with William's %R (will be discussed in future)), these levels should be used as Exit levels rather than entry levels.
Let us take an example for using this method for trading. Let's say that the stock opens above Pivot Point and moves between Pivot Point and Resistance 1 for some time. Then it breaks Resistance 1 and stays there for a while and moves towards Resistance 2. Here we need to enter the Trade slightly above Resistance 1. Then Place an immediate Sell Order at Resistance 2 with Stop Loss as Pivot Point. When the Stock price is about to reach the Resistance 2, Change or modify your Sell Order to Resistance 3 and Stop Loss to Resistance 1. In case, the stock price is about to reach the Resistance 3, either you can book profits (always recommended) or move the Stop Loss to Resistance 2 (Locking the minimum profits) and move the Sell Price slightly above the Resistance 3. The same strategy applies to Short Trade as well.
Note, when the stock price is trading in positive levels (Long Trades), and market is in negative levels (Short Trades), do not trade such stock, this can be due to some unusual news/rumors or the Stock is in Trading Range (Flat), trading such stock are always risky.
Today, we have learnt one of the best and most efficient trading methods. I hope you enjoyed it.
Thank you for joining this Technical Analysis Discussion
Happy Weekend!
Day Trading Analyst
