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 STOCKS & COMMODITIES describing how professional floor traders use the pivot technique. Although the pivot technique I described works in all futures markets, it responds best to markets with a wide daily trading range, such as the Standard & Poors 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.

A QUICK REVIEW
Lets 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 days 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.

JODY WILLIAMS

Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan

S2 Pivot point

Daily pivot

= (Prior days high + Prior days low + Prior days close) / 3 Resistance (1) = (2 x Daily pivot) - Prior days low Support (1) = (2 x Daily pivot) - Prior days 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. Heres 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 days 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 days high, the prior days low and the prior days 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
CQG FOR WINDOWS

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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DATA COURTESY TECHNICAL TOOLS

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:

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R2 R1

XX

XXX

XXXXXXX X XX XXXX XX
S1

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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 where the electronic trading session left off, we incorporate the electronic trading sessions closing price (settlement) into the calculation for the pivot. Instead of simply using the prior days high, low and closing prices, we now use, in addition, the electronic trading sessions closing price. The variation on the first formula of the pivot technique now becomes:
Daily pivot = (Prior days high - Prior days low + Prior days close + Electronic trading session close) / 4

three figures together and divide their sum by 3. All the formulas remain the same. I retain the support 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 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 days opening range with the prior days high, low and closing price. Add all four of these prices together and divide the sum by 4:
Daily pivot = (Prior days high + Prior days low + Prior days close + Average of opening range) / 4

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 days high, low and closing prices are important support and resistance numbers. My trading card looks like this:
R(2) H R(1) P C S(1) L S(2) Resistance 2 Previous high Resistance 1 Pivot Previous close Support 1 Previous low Support 2

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 15 minutes, but the opening range is usually established in the first two minutes. The average price of the first two-minute bar on 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.

This gives me eight levels of support and 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 days 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 days high, low and closing price at either 11:30 a.m. CST or 12:30 p.m. CST, depending on the markets. Add the
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XX

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S1 S2 Pivot point

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FIGURE 3: VARIATION 2, DAILY JUNE S&P FUTURES. Heres 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 dont need to prove anything by trading. Your only goal is to make money. Remember that what worked yesterday may not work 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 & Poors 500 pit at the Chicago Mercantile Exchange (CME)

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
S&C

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