Pivot Points for CQG - Overview

Transcription

1 Pvot Ponts for CQG - Overvew By Bran Bell Introducton Pvot ponts are a well-known technque used by floor traders to calculate ntraday support and resstance levels. Ths technque has been around for decades, yet s stll n use today. Pvot Ponts for CQG (PP) allows CQG for Wndows users to dsplay the support and resstance levels used by floor traders, hghlghtng crtcal areas for the day s tradng before the sesson even opens. The pvot ponts technque works well on hghly lqud nstruments that have a large daly range. The stock ndex futures are probably the best, but ths technque can also be used on foregn currency futures and even on equtes. Precous metals are another canddate. Concept Usng a few smple formulas, ntraday support and resstance levels can be calculated before the day s tradng begns. The most mportant level s the daly pvot, or pvot pont (PP). [Note that the pvot pont s not related to the swng pvot, whch s a hgh bar or low bar.] There are four other support and resstance levels that are calculated, usng the daly pvot as a startng pont. There are two support levels, desgnated S1and S2, and two resstance levels, R1 and R2. There are three major varatons on how to calculate the pvot pont levels. The formulas for the tradtonal method are: PP = ( H + L + C) / 3 S1 = (2* PP) H R1 = (2* PP) L S2 = PP ( H L) R2 = PP + ( H L) The hgh, low, and close values used are yesterday s values. The frst varaton can be used to compensate for overnght tradng and openng gaps. It weghts the PP level wth today s openng prce. The PP formula for the frst varaton s: PP = H + L + C + O ) / 4. ( today All of the other formulas are the same as n the tradtonal method. The second varaton also compensates for overnght tradng and openng gaps. It does ths by substtutng today s open for yesterday s close. The PP formula now becomes: PP = H + L + O ) / 3. ( today In my research, I have found that I prefer the frst varaton, but you should experment and see what works best n the markets that you trade. Fgure 1 Pvot Ponts for CQG. Pvot Ponts for CQG allows you to select whch calculaton method you wsh to use. You can also use dfferent methods on dfferent nstruments, f you wsh. Usng Pvot Ponts for CQG There are two basc technques for daytradng usng the daly pvot pont and the assocated support and resstance levels that are descrbed n the references. A search of the Internet wll yeld a lot of good nformaton on how to trade pvot ponts, and there have been at least three artcles n Techncal Analyss of Stocks & Commodtes over the last few years.

2 I have used these levels for longer-term (several days) trend detecton and have been pleased wth the results. My deas for dong ths are based on J. Gopalakrshnan s recent artcle n the aforementoned magazne. [1]. Daytradng wth Pvot Ponts for CQG Varaton 1 There are two basc technques for daytradng wth Pvot Ponts for CQG. The frst s best used by daytraders usng very short-term charts (1-5 mnutes), and has been descrbed n [1] and [2]. In ths technque, the man dea s to get long above the daly pvot pont and get short below t. More precsely, though, enter long when the pvot s volated n a bull move and enter short when the pvot s volated n a bear move. Use other technques to flter these sgnals. The use of a smple tool lke a smple movng average oscllator to flter for bullsh and bearsh market moves can be very effectve. After enterng, set a stop-loss just below the daly pvot. When the market moves n your drecton, aggressvely move your stop up to breakeven, then use a tralng stop. As wth most technques, t s essental to lmt losses when usng ths technque. When long, R1 s your frst proft objectve. When the market reaches ths level, you have a Fgure 2 Enter long on a bull move volaton of the daly pvot. You can take profts at the resstance levels or set a sell-stop order just below t n an attempt to let your profts run. choce. You can ether take profts at ths level, or you can pull your stop up to just below ths level. If there were a lot of strength n the market, you would obvously want to choose the second alternatve. When a market volates resstance, that level generally becomes support. If the market exceeds R1 and you ddn t take your profts at that level, you can now place your stop just below R1, snce we now expect R1 to become support. You could also smply keep movng your tralng stop untl t gets flled. If you reman n the trade and the market has contnued upward, R2 s your second proft objectve. When the market reaches ths level, you have the same choce as before ether take your profts or pull your stop up to just below R2. Fgure 2 llustrates an example of ths type of trade. In ths case the market found strong resstance at R1 and faled to move hgher. If you had taken ths trade and selected to move your stop up to just below R1 nstead of takng profts, you stll would have made a nce lttle proft. The chart shown here s a 2-mnute bar chart of the S&P futures. The use of hgher-resoluton bar charts can lead to better entres and exts, but t can also lead to more whpsaws (dependng on your entry and ext technques). My research ndcates that ths technque can be effectve when used wth charts that range anywhere from 1 to 5 mnute bars. Personally, I feel that ths technque s probably better used on the shorterterm charts 1, 2, and possbly 3-mnute charts. The frst volaton of the day s consdered the most mportant. Each succeedng volaton s more and more ndcatve of a market that s wanderng n the area of the daly pvot, and ths s not the rght type of market to trade wth ths technque. Fgure 3 shows another example of how helpful the pvot ponts levels can be. Ths 5-mnute chart s the December 2000 S&P futures on September 11, At 0915 (Chcago tme), the market shot up through the daly pvot level (PP). If you were usng ths technque you would have gotten long on ths bar, wth your ntal stop just below PP. Custom Tradng Solutons Pvot Ponts for CQG User Manual 2

3 Fgure 3 Daytradng wth Pvot Ponts for CQG. In the very next bar you got a chance to take some quck profts. You could ether take the profts, or move your stop up to just below R1. Whenever you have a trade where there s more than one logcal proft objectve, t can be a good strategy to take a quck proft on part of the poston, whle keepng the other part of the poston n case the second objectve s reached. [3] Just a few bars later, n the 0940 bar, the market breached R2. Assumng you kept part or all of the poston after R1 was volated, you could ether lqudate the poston mmedately when R2 s volated, or you could move the stop up to just below R2. In ether case, you re out wth a nce proft of about 10 S&P ponts before lunch! The market turned around after ths, movng down steadly untl 1315, when t broke convncngly, fndng support at PP for about 15 mnutes. Then t broke through PP n a convncng fashon at If you were nclned to trade ths second volaton, you could have entered short at ths pont, agan lqudatng part of the poston at S1 and the other part at S2, nearly equalng your proft of the mornng. Now of course all days aren t lke ths tradng just sn t that easy! I selected ths example for educatonal purposes, but t does show the potental n usng these support and resstance levels for daytradng. In hs recent artcle, J. Gopalakrshnan descrbes how he flters days based on the trend to determne whether he wants to trade long or short that day. Pvot Ponts for CQG ncludes condtons that allow the user to perform the same flterng. The technque he descrbes s ths. Calculate the 3-day average (the daly average, n hs parlance) and the 5-day average (the weekly average) of the daly pvot levels (PP). If today s PP s greater than both of the averages, then the short-term trend s up and he wll trade long only. On the other hand, f today s PP s less than both averages, he wll trade short only. Fgure 4 shows the CTS_PPUpDouble (green) and CTS_PPDownDouble (red) condtons used to color bars on a daly chart. These condtons combne the 3-day and 5-day averages used by Mr. Gopalakrshnan. These condtons have parameters that allow you to change the movng average perods and the pvot ponts calculaton method. Fgure 4 CTS_PPUpDouble and CTS_PPDownDouble condtons. Custom Tradng Solutons Pvot Ponts for CQG User Manual 3

4 Fgure 5 CTS_PPUp and CTS_PPDown condtons appled to 5-mnute chart. Fgure 6 A good example of how R1 and S1 can be used to fade the market. As shown n Fgure 5, these condtons can also be appled to ntraday charts. The calculatons are performed on daly bars, so each ntraday bar wthn a day wll be colored the same. Pvot Ponts for CQG also ncludes condtons that test for the PP level to be above or below a sngle movng average. Daytradng wth Pvot Ponts for CQG Varaton 2 Ths technque s based on the theory that, n absence of any outsde news or other nfluence, the market s controlled by the locals, and that ther zone of control s between S1 and R1. Thus f the day s tradng s lstless and there sn t much actvty, S1 and R1 can be used as entry ponts to fade the market. The theory addtonally states that f the market convncngly volates ether S1 or R1, ths should brng n actvty from off the floor and there s then a short-term ntraday trend n affect, n the drecton of the volaton. If prces should contnue n the same drecton and volate S2 or R2, ths should brng n more off-floor actvty, pqung the nterest of longerterm traders and sgnalng the begnnng of a longer-term trend (longer-term n ths case meanng longer than a sngle day). Fgure 6 shows a good example of how these trades can be made. Assume that there s no sgnfcant news and volume s relatvely lght. When the market fnds resstance at R1, enter a short trade, wth a stop just above R2 or a recent hgh. Use a tralng stop as the market moves down n your favor. Take profts and reverse the poston when the market fnds support at S1, wth a stop just below S2 or a recent low. Wth a few enhancements, ths technque s the bass of Wlder s Reacton Trend System, whch I wll descrbe next. Summary Pvot Ponts for CQG allows CQG users to see the support and resstance levels that have been used by floor traders for decades. Daytraders can actvely use these levels n ther tradng. Even poston traders can derve beneft from these levels by trackng the movement of the daly pvot n relaton to ts movng average. Custom Tradng Solutons Pvot Ponts for CQG User Manual 4

5 Common Parameters Pvot Ponts for CQG Reference The followng parameters are common to all Pvot Ponts for CQG studes and condtons: PPType: The method used n calculatng the daly pvot: HLC The tradtonal method s used. The daly pvot s PP ( H + L C ) / 1 3. = HLCO The frst varaton s used. The daly pvot s PP H + L + C + O ) / 4 = ( HLO The second varaton s used. The daly pvot s PP H + L + O ) / 3 = ( 1 1. ContType: Due to the mxng of tme frames, the contnuaton type of the chart must be specfed. Ths parameter s used as follows: None No contnuaton. Use ths opton on all non-contnuaton charts. Standard Standard contnuaton. Use ths opton on all standard-contnuaton charts:,dc, 5C,,30C, etc. Actve Actve contnuaton. Use ths opton on all actve-contnuaton charts:,adc, A5C,,A30C, etc. Study: CTS_PP The Studes Summary: Dsplays the Pvot Ponts for CQG study. Abbrevaton: CTS_PP Number of curves: 5 CTS_DP: The daly pvot (DP). CTS_R1: The frst resstance level. CTS_S1: The frst support level. CTS_R2: The second resstance level. CTS_S2: The second support level. Number of parameters: 2 ContType: The contnuaton type of the chart. See Common Parameters. The calculaton of the daly pvot and the support and resstance levels depends on daly data. Unfortunately, t s not possble for the study to know whether t has been appled to a contnuaton chart or not. Ths s the reason for the ContType parameter. For most users ths wll not be a problem, snce most do not mx contnuaton and non-contnuaton charts. For those users who do, however, I recommend settng up personal pages that are dedcated to non-contnuaton, standard contnuaton, and actve contnuaton charts. Then you can place the Pvot Ponts study on the chart, set the ContType parameter to the approprate value, and save the page. Then whenever you return to the page, the study wll be setup properly. Custom Tradng Solutons Pvot Ponts for CQG User Manual 5

6 Condton: CTS_PPDown The Condtons Summary: True when the daly pvot (PP) s less than ts movng average. Number of parameters: 3 ContType: The contnuaton type of the chart. See Common Parameters. Perod: The perod of the movng average. Ths condton s true when the daly pvot (PP) s less than ts movng average, ndcatng a short-term downtrend s n affect. Condton: CTS_PPDownDouble Summary: True when the daly pvot (PP) s less than both of two movng averages. Number of parameters: 4 ContType: The contnuaton type of the chart. See Common Parameters. Perod1: The perod of the frst movng average. Perod2: The perod of the second movng average. Ths condton s true when the daly pvot (PP) s less than both of two movng averages, ndcatng a short-term downtrend s n affect. Use ths condton to replcate the strategy descrbed by J. Gopalakrshnan [1]. By settng Perod1 = 3 and Perod2 = 5, ths condton wll be true on days when short trades are allowable. Condton: CTS_PPUp Summary: True when the daly pvot (PP) s greater than ts movng average. Number of parameters: 3 ContType: The contnuaton type of the chart. See Common Parameters. Perod: The perod of the movng average. Ths condton s true when the daly pvot (PP) s greater than ts movng average, ndcatng a shortterm uptrend s n affect. Condton: CTS_PPUpDouble Summary: True when the daly pvot (PP) s greater than both of two movng averages. Number of parameters: 4 ContType: The contnuaton type of the chart. See Common Parameters. Perod1: The perod of the frst movng average. Perod2: The perod of the second movng average. Custom Tradng Solutons Pvot Ponts for CQG User Manual 6

7 Ths condton s true when the daly pvot (PP) s greater than both of two movng averages, ndcatng a short-term uptrend s n affect. Use ths condton to replcate the strategy descrbed by J. Gopalakrshnan [1]. By settng Perod1 = 3 and Perod2 = 5, ths condton wll be true on days when long trades are allowable. 1 Gopalakrshnan, Jayanth. Pvot Ponts, Techncal Analyss of Stocks & Commodtes, Vol. 18, No. 2, February 2000, pp Greenspan, Wllam I. The Pvot Pont for Tradng, Techncal Analyss of Stocks & Commodtes, Vol. 12, No. 8, pp Eng, Wllam F. Tradng Rules Strateges for Success. Dearborn Fnancal Publshng, Inc., Custom Tradng Solutons Pvot Ponts for CQG User Manual 7