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Technical Tools For The Active Trader:
Techniques for Capturing Intraday Profits (page 2)


Pivot System Support and Resistance

Judgements made about likely market behavior which are based on momentum analysis can be even more productive if we have predetermined levels available which can act as "price templates" in interpreting the day's trading activity. The "Pivot System" is one such approach.

Floor traders and other professionals who do the actual buying and selling of futures contracts in the trading pits of the exchanges, generally employ very similar systems for valuing the price of these instruments in the absence of significant outside influences. This Pivot System of Support and Resistance determines relative valuation levels based on price activity of the prior day.

Pivot System price levels act as potential support and resistance zones throughout the day. They serve as focal points for floor professionals as they adjust their bids and offers, especially when trading activity is slow. The off-floor Active trader is able to use these same values as an aid in determining appropriate areas for trade entry, stop placement, and exits.

The formulas for calculating Pivot System Support and Resistance Levels are as follows:

DP = (H + L + C) / 3
R1 = 2 * DP - L
S1 = 2 * DP - H
R2 = DP + (R1 - S1)
S2 = DP - (R1 - S1)

DP represents the Daily Pivot. R1 and R2 identify the resistance levels above the Daily Pivot. S1 and S2 identify the support levels beneath the Daily Pivot. As an alternative to manual calculation, the Pattern Trapper offers an easy-to-use on-line calculator - Click Here!

The principle level of reference is the Daily Pivot. Generally, as we enter each trading day, we regard this level as our balance point between bullish and bearish forces. A demonstration of significant price activity above the Daily Pivot is considered to have bullish implications, while activity below is bearish. Although actual trade entry and exits are initiated by a variety of other market factors, we first look at price behavior relative to the Daily Pivot level as an aid in determining the market's general directional bias.

Charts created using TradeStation. ©TradeStation Tech-
nologies, Inc. All rights reserved. No investment or trading
advice,recommendation or opinions is being given or intended.

The day's trading activity can generally be thought of as revolving around and gravitating towards the Daily Pivot level. As price moves away from this zone and approaches either the first level of resistance (R1) or the first level of support (S1), market behavior becomes increasingly important. Any rejection of these newly attained levels increases the likelihood of a return to the Daily Pivot. On the other hand, a breach of either of these initial levels is regarded as market acceptance and a perceived change in the valuation of the instrument being traded.

Additionally, should the market extend its move even further from the Daily Pivot, penetration through each successive level of support or resistance is generally regarded as having drawn in a greater degree of participation from off-floor interests. An increase in off-floor interests represents a greater likelihood that longer-term positions are being established, resulting in greater potential for the market to trend even further. Each consecutively greater level of Pivot System support or resistance breached is generally regarded as having stirred the interest of successively longer term participants.

Once the market has made a convincing breach of a particular support or resistance level, that level is considered to have reversed its support/resistance role, and, subsequently, becomes a test point for further market activity. For example, in the chart to the right, when price action develops into an upside break of the first level of resistance (R1), the retracement move back towards that level is considered a test of its integrity. A successful test occurs when the retracement move is turned away and price moves even further to the upside - which adds even greater credibility to that level as a renewed valuation point. Additionally, any further move away from that level has the potential to force the market through successive levels of support or resistance, drawing players of even longer time-frame perspectives into the market . . . and so on, continually expanding the market's range of activity.

When properly used, Pivot System Support and Resistance Levels can become a very helpful tool for the Active trader. The approach is not only a quick way of gauging intraday valuation levels, but also offers an effective means of applying interpretative "templates" to market activity so as to better understand market behavior and spot opportunity. They help to determine when and where short-term intraday trends are likely to hesitate, and can also serve as "test points" in deciding whether the market may be more likely to either continue or reverse its current direction.

Dynamic Support & Resistance Levels for Intraday Trading

As helpful as Pivot System levels often are, a significant drawback to their use lies in the fact that they are calculated from the prior day's price action, and may not accurately reflect recent changes in market psychology. Effective intraday trading also requires a means of identifying support and resistance which can more easily adapt and more accurately represent price activity under rapidly changing market conditions. The 20 period Exponential Moving Average (20EMA) can be used to create these more "dynamic" levels of support and resistance. Unlike Pivot System S&R levels that remain constant throughout the day, the 20EMA changes in accordance with more immediate changes in price. This feature makes them a very effective tool, especially when significant shifts in market psychology occur between Pivot System levels, and after large thrusting impulse moves.

My principle intraday chart reference is the five minute timeframe with frequent note of other periods as market conditions warrant. For this reason, the 5 min. 20EMA is our most often referenced moving average. However, it is also helpful to additionally graph both the 15 min. and 30 min. 20EMAs on the same 5 minute chart. This is accomplished by plotting the following values.

5 min. 20EMA - plot a 20 period Exponential Moving Average.
15 min. 20EMA - plot a 60 period Exponential Moving Average (15/5*20)
30 min. 20EMA - plot a 120 period Exponential Moving Average (30/5*20)

It is important to recognize that the 15 and 30 minute values arrived at with this method are not exact and precise representation of the corresponding 15 and 30 minute 20EMAs, but for purposes of identifying potential support and resistance levels, you will find the technique quite useful.


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