Trading The Pivots

What are pivots?  They are High (H) and Low (L) price levels. 

One of the simplest and most effective position entry techniques I use is based on what I call multi-pivot levels.  The main advantage of this system is that it is price-based as opposed to indicator-based.  By the time most indicators generate a buy or a sell signal, the move is already well under way.  By following this price-based methodology, there are many instances where I get into a trade before the indicator-based traders, and I usually end up handing off my position just as a buy or sell signal is being generated on a stochastic or other oscillator type system.  This is also a good system if you don't have time to stare at the charts all day long, or have a penchant for chasing the market higher and lower.  Playing the pivots automatically creates trader discipline because the entries and exits are pre-determined before the trading day even starts.

Trading rules for pivot buy (reverse for short sell):

The first pivot play is done in conjunction with a price gap.  If there is a price gap down, then buy a decline into the closest pivot level.  If there isn't a playable gap, then wait until 9:45 a.m. ET to initiate the first play.

I either buy follow a base formation around the pivot or wait for the market to penetrate a pivot level, moving up at least halfway to the next pivot level, and then I set up a bid to buy the first retracement back to the first violated pivot level – this is also known as breakout/pullback play. 

I enter my trades with limit orders only.  I place orders "just in front of" the pivot.  For E-mini Dow (YM) I use 3 points.  For example, if the pivot level is 10000, then I would buy a decline to 10003 and short a rally to 9997.  Sometimes the pivot will be an odd number, such as 10003.68.  In this case I’ll round it up to the whole number 10004.  My stops and targets, then, would be "just in front of" these appropriate daily high (H) and low (L) levels. 

Once filled, I’ll place an order to close at the next pivot level.  Stop: for YM, I use a 10 points stop for a slow day and 20 points for a volatile day – I encourage traders to set his own stop base on his risk profile.

If the first target is hit, you can either take a partial profit and roll stop higher or simply take all of the money off the table.  It’s a matter of personal reference. 

If I am in a trade at the market close, and neither my stop nor target has been hit, I will close my position out "at the market" at close – future market, the regular trading session closes at 4:10 pm ET.

Often, I don't initiate any new positions after 3:30 p.m. ET, but I will manage existing positions into the close.

The markets never have a sustained move above H3 or below L3.  If we trade to those levels, I will always fade the move.

In Summary:

The pivot levels work mainly because of the greed and fear cycle that perpetuates the markets each day.  Traders who follow only indicators will buy a position when it is halfway to three-quarters the way off its pivot, and it is these traders who provide the stop losses to perpetuate the next cycle of market movement.  If you rely only on indicators for your entries, instead of using the price action of the pivots, you will get in and out of these cycles too late, and you won't make any money trading. 

What is nice about this system is that a trader doesn't have to watch it very closely once he is in a position.  I prefer to get in a position, set my parameters, and then focus on other things.  If you have an order system that automatically bracketed trades, you can place the parameters, and then go for a round of golf.  Let the parameters baby-sit the position.  This is much better as well because it takes human emotion out of the equation. 

Example: Figure 1.1

In Figure 1.1, the E-mini Dow (YM) gaped down and soon found bottom around Daily L1 @ 11128.67.  I placed in a bid at 11131.  I got fill and placed a stop at 11118 with my first target at 11182.  The market decline to below L1 and my first stop hit: -13 points.

The Dow continued to decline and I placed an order at 11126 in order to sell the next pullback. I got fill at 10:22 am and placed a stop at 11136 with a target at 11096.  My second target hit (+30 points). 

The market slowed and formed a base around L2 or 11092.  I place a buy order at 11096 in order to anticipate the next retracement.  I got fill and placed a stop at 11083 with a target at 11126.  The market crawled backed my target hit, another +30 points.

The market pulled back a bit though held firmly above L2.  Since L2 was tested and hold firmly, it’s logical to assume that we’ve seen the low of the day.  Momentum began to pick up and market broke out above L1.  I placed in an order to buy @ 11131.  I got fill and placed a stop at 11121 with a target at 11182.  My target hit – another +51 points.

The market continued to rally above the Daily Pivot so I placed an order to buy @ 11188.  I got fill and placed a stop at 11178 with a target at 11218.  Market hit as high as 11213 though my target didn’t hit so I closed at 4:10 pm @ 11210 for a gain of +22 points.

For the day, I had made (-13) +30 +30 +51 +22 = +120 points. 

Back to Future

Capital Essence and their corresponding logos are registered trademarks of Capital Essence Corp.

Copyright © 2004-2007 Capital Essence Corp.  All rights reserved.