Candlestick and pivot point trading triggers setups for stock forex and futures markets 2007 phần 5 pot

Lining Up the Numbers When the market goes through the projected daily target numbers, I then use the next time periods for a better gauge or reliability as to the next price objective. That is where the significance of the weekly and the monthly numbers comes into play. Back in the late 1990s when I owned a brokerage firm, I developed a method to help me line up the pivot point levels as shown in Figure 5.8; I had all my brokers use these numbers, and many still do to this day. The table of information was for the trading session of 1/18/2006. My method categorizes the pivot point levels to the various market con- ditions, such as neutral (Target Key) bullish, and bearish. I like to know what the prior time period’s range and close were for fast access, so I in- cluded that in as well. Since the pivot point is important, I include that on the sheet, as shown in the last column on the right. The third column from the right states Market Direction. That is a moving average of the actual pivot point. If the pivot point and the close or settlement price are below the mar- ket direction number, then the market condition is deemed to be in a bear- ish mode; and it helps me to line up the R-1 and S-1 numbers as the projected target range for that next session. If you look down the far-left 134 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5.7 c05.qxd 9/25/06 8:24 AM Page 134 135 FIGURE 5.8 Used with permission of www.nationalfutures.com. c05.qxd 9/25/06 8:24 AM Page 135 136 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5.9 Bonds trade the predicted pivot range. Used with permission of esignal.com. column to where you see “Bonds,” you will see that the market direction number classified the market condition as bullish due to the location of the previous settlement and that the pivot point was above the pivot point mov- ing average. The numbers targeted the high in bonds to be 115 10 ⁄ 32 (R-2) and the low to be 114 16 ⁄ 32 (S-1). The pivot point was 114 23 ⁄ 32. Since the market closed at 114 28 ⁄ 32, there was a strong chance to see 115 10 ⁄ 32, as well as a low of 114 16 ⁄ 32. Figure 5.9 shows the exact trading session activity on a 15-minute candle chart. If you are a candle chart aficionado, you will have spotted that the high was formed by a shooting star pattern and that the low was made by a bullish engulfing pattern. While the market broke out above the targeted resistance, it certainly did not stay there long. Notice how the price penetrated the low but reversed off the projected low as well. We will use this chart later in the book as we share statistical in- formation on which candle patterns have high frequency of forming tops and bottoms. At this point, just heighten your awareness that there was a doji after the star at top and a doji near the bottom. This chart also has another component—a moving average method that we will discuss a variation of as well. By using the true value of the c05.qxd 9/25/06 8:24 AM Page 136 market, which I refer to as the pivot point, we can help determine the mar- ket condition and the projected price ranges as well as potential turning points as market conditions change from bullish (uptrend) to bearish (downtrend). Pivots Combined with Candles The CBOT mini-Dow is one of several great day trading futures products for selecting trades that connect with pivot and candle patterns as Figure 5.10 shows. Notice how prices do penetrate briefly above the pivot targeted high by forming the shooting star candle. See the market’s reaction as the price declines over 70 Dow points (each point is $5 on the mini-Dow). That is a $350.00 move in less than 75 minutes per contract. Since most futures firms carry a $500.00 day trade margin per contract that translates into a healthy return. Now that we know how to line up the numbers, we need to wait for a setup or signal to trigger a short position. The shooting star, the moving average crossover, and the dark candles all confirmed a technical signal to sell. Pivot Points 137 FIGURE 5.10 Used with permission of esignal.com. c05.qxd 9/25/06 8:24 AM Page 137 The graph in Figure 5.11 represents the e-mini–S&P 500 Stock Index Futures on November 10, 2005; the targeted range was determined to be S- 1 and R-2, a bullish market condition. The actual low of the day was formed by a hammer candle pattern (keep notes of what candle patterns form near tops and bottoms, as we will be discussing this in detail in later chapters). A buy signal is triggered with the sequence of higher highs and higher lows but, more important, higher closing highs, as well. The moving average crossover also helps trigger a long buy signal. The market rallies right up within a tick or two of the R-2 number. As a day trader, it is great to have a predetermined exit strategy. In this case, pivot point analysis accommo- dated you in that respect. Other times, you will need to rely on your timing to exit a trade; for example, as a day trader, once the market is near the close of the business day, you should be offsetting your position. In the ex- ample in Figure 5.11, you had a timing and a price element working for you to help target an exit on what was a beautiful trade. The trigger to go long was after the crossover of the moving average one candle after 11:30, as prices established a higher closing high. This trade would have resulted in a stellar 12.50-point gain from the FIGURE 5.11 Bonds trade the predicted pivot range. Used with permission of esignal.com. 138 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c05.qxd 9/25/06 8:24 AM Page 138 Pivot Points 139 entry of 1221.50 up to the exit, which was 1233. The exit was triggered on the first lower closing low and was confirmed by a close back under the moving averages. On a day trading margin per contract in the e-mini–S&P of $1,000 (brokerage firms vary on day trading margins), you picked up 625.00 per position. The next chart I want to show you in Figure 5.12 is an example of how a market, when targeted to be in a bullish mode, interacts with the series of pivot support and resistance numbers. If there is a bullish bias, then S-1 up to R-2 will be the potential range. Therefore, we are looking to take buy sig- nals at support and have a profit objective in mind near R-2. This is a 15- minute candle chart using the mini–Russell Stock Index futures. Notice that as the market trades near the pivot support of S-1, prices consolidate for almost two hours before triggering the buy signal as a higher closing high and a crossover of the moving averages confirm the trigger to go long at 657.50. Prices penetrate the R-1 level and come close to the projected S-2 level. As the trading session ends, you still have no reason to exit the position from a technical standpoint except that as a day trader, your time is your exit point. This trade was good for nearly a 9.50-point run, or $950 per contract. FIGURE 5.12 Used with permission of esignal.com. c05.qxd 9/25/06 8:24 AM Page 139 Let’s look at a spot forex market in Figure 5.13. We are looking at the yen versus the U.S. dollar. The targeted resistance was the R-2; and as you can see, the top was formed by an evening doji star formation, based on a five-minute candle chart. Combining the knowledge of how to determine the right pivot level with practicing the discipline to wait for a signal will certainly help you target and select better trading opportunities. As you can see in this chart, on a $100,000 lot size, you would have realized over a 100-point gain in less than two and a half hours. That translates to $1,000 per lot or contract. Special note: Big moves do occur in forex during the U.S. nighttime. This trade signal hit at 20:00 hours, or 7 P . M . (ET). So depending on your trading capital and time constraints during regular market hours, the po- tential opportunities that abound in the spot currency markets may be suit- able for you to take advantage of. 140 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5.13 Used with permission of esignal.com. c05.qxd 9/25/06 8:24 AM Page 140 THE IMPORTANCE OF CONFLUENCE Time is an essential element in trading. There are many instances when traders are correct in their predictions for a top or a bottom in a market; but they are off in their timing, which results in a loss. Many analysts were calling for a top or for the bubble to burst in the stock market in 1999. In that situation, not demonstrating patience to wait would have resulted in dramatic loss of profit potential or worse, actual losses due to selling short stock too early. How about economists’ predictions of a housing bubble back in 2003 and their expectations for a decline in real estate prices? By July 2006 we had started to see prices go back down but not to the severity as was predicted and certainly not at the time that was expected by economists. I can go on and on with examples when prog- nostications were correct, but timing was really wrong, resulting in a fi- nancial loss. Time and Price As I stated earlier, pivot point analysis relies on both time and price specifics in its calculations to project future support and resistance levels. By incorporating price data for various time frames, such as daily, weekly, and monthly, the more price areas that coincide with the different time pe- riods, the greater is the likelihood that these price clusters will repel the market’s advance in an uptrend or cause prices to reverse in a downtrend. This clustering, or confluence, from more than one time period that con- vergences with another is an awesome event and can translate into a very lucrative setup. The time frames of numbers that target a specific price level is termed confluence; in other words, the more corroborating numbers that target a general area, the greater is the significance of that specific tar- geted price level. Pivot calculations work to pinpoint almost exact times and prices for trades in various markets and can be used to validate other analysis. Remember this phrase: “There is always strength in numbers!” The more pivot numbers that line up, the greater is the potential for a reac- tion off those levels. This knowledge, combined with identifying the shift in momentum by identifying and acting on strong triggers, increases the prob- ability of a successful trade. As an example, Figure 5.14 shows the daily, weekly, and monthly pivot point numbers drawn across the chart; this gives a trader a heads up that the market may reach an unsustainable extreme or oversold market condi- tion. Just by looking at the graph, you can see that the market has been in a prolonged downtrend. Generally, the market may stop its descent at a Pivot Points 141 c05.qxd 9/25/06 8:24 AM Page 141 confluence support zone; then you would want to wait for a shift in mo- mentum to trade a potential price reversal. When the market starts to give clues as to a bottom, you can determine a low-risk entry, as a bottom has been defined. What would not be known is how high the market’s reaction will be off this target level of support. This is where the candle chart section will play an important role in helping to determine the strength of the trend’s reversal. In Figure 5.15, we have a weekly stock chart on Alcoa. Here we see a confluence of two higher-degree time periods, such as the weekly and monthly support numbers. What is uncanny is that the weekly pivot S-1 tar- get low number was 22.33, with the actual low coming in at 22.28, just pen- nies below the pivot support number. The monthly number lined up a little higher than that at 22.99, which is a slightly wider margin of error. Remem- ber, when I am trading, I am not looking to catch a falling knife by antici- pating a bottom, even though in this example you could have placed a buy order at the weekly number; and as the price moved through your buy order, you may have been filled—and that was a great buy. However, the better course of action, and the more reliable method to trade off this con- fluence area, was to wait for a confirmed buy signal, such as the high close doji signal (we go over that in Chapter 7). Notice the moving average crossover and that prices confirm a conditional change in the market by closing above the open and closing above both moving average compo- nents. The true buy signal was generated at 24.20, and the risk would be using a stop below the low at 22.28. 142 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5.14 c05.qxd 9/25/06 8:24 AM Page 142 Volatility Is Good As long as there is trading volume—liquidity so you can enter and exit po- sitions and price movement, otherwise known as volatility—pivot point analysis will work in any market for position traders and short-term day traders. No matter what your choice is for a trading investment vehicle, it makes no sense that you would not want to incorporate this methodology into your trading style. Let’s examine the chart in Figure 5.16, which is a daily look at a spot forex euro currency versus the U.S. dollar. The monthly S-2 target low was 116.90, the weekly S-1 lined up in close proximity at 116.58, and the actual low was 116.41. Looking at the market’s reaction three days after the low, we see a bullish engulfing pattern. The confluence of pivot support numbers gave one of the best and only predictive support targets. Therefore, it should be noted that the longer-term numbers should be watched carefully for clues not only for trading opportunities to enter positions but also as a warning that the current trend could be exhausted and potentially reverse. At the very least, you may not have wanted to es- Pivot Points 143 FIGURE 5.15 RealTick graphics used with permission of Townsend Analytics, LTD. c05.qxd 9/25/06 8:24 AM Page 143 [...]... min- Pivot Point Moving Average System 169 utes and greater, and in any high-volume market It is an excellent shortterm trading method for highly liquid markets such as forex, for certain futures markets, and for stocks that have ample trading volume One variation of what I use in my trading library with the Genesis Software and teach in our Trading Triggers University is the one-period pivot point. .. number, add three pivot points from the same session, and divide the sum by three The purpose of using the pivot point in the moving average calculation is that the pivot point will show the continuance of the trend 162 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS Market Direction = Pivot + Pivot + Pivot 3 As stated previously, the market direction number, which is a three-period pivot point moving average,... 1293.00 1 251 .50 1291. 75 Daily—1/10/2006 1296. 75 1289. 25 1296.00 152 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS close) from three different time periods are different values So the coincidental factor really highlights the importance of pivot point confluences In Figure 5. 23, the confluence of pivot points in the CBOT 30-year bonds shows a setup similar in resistance levels to both the S&P and the Dow... changed and there was overhead pivot point resistance Looking at Figure 5. 22, we see how the pivot points from the three time frames (daily, weekly, and monthly) target the high near the 1300 level The actual high was 1301 In Table 5. 3, you can see that the three sets of data (high, low, and TABLE 5. 3 Pivot Point Confluences for S&P Prior Period High Low Close Monthly—December 12 85. 00 1 251 . 25 1 254 . 75 Weekly—1/06/2006... reveals whose hands “control” the market Except for the yen, all currencies are quoted as the currency versus the U.S dollar The yen futures are quoted as the opposite—as the spot forex markets So spot forex would quote the yen as 117. 35; the futures quote would be 857 2 What this means is that when the CFTC report shows a net short position, traders are in a long position in the spot yen forex markets against... on the futures, or selling the exchange traded fund (ETF) diamonds  150 TABLE 5. 2 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS Pivot Point Confluences for Dow Prior Period High Low Close Monthly—December 11007 10728 10744 Weekly—1/06/2006 11014 10720 10998 Daily—1/10/2006 11 058 10990 11 052 In fact, let’s look at the actual chart pattern on that day to see what occurred In Figure 5. 21, the date and time... tremendous price move from the FIGURE 5. 19 RealTick graphics used with permission of Townsend Analytics, LTD 148 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS low of 108.76 on September 5, 20 05, until the high was made on December 5, 20 05, at 121.40 Let’s review before we go further If you recall in Chapter 1, I stated that forex traders can borrow information from the futures industry One such piece of... gold continued its ascent by making a high at 56 8 .50 in the February futures contract The market had made a sharp rally, but the confluence of resistance numbers held the market back, as shown in the 15- minute chart in Figure 5. 24 In this chart, you will see the bearish engulfing pattern form as the 154 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5. 24 Used with permission of esignal.com market... time period of the sessions covered in the calculation and that it gives equal weight to each day’s price In Chapters 4 and 5, we covered the pivot point formulas and the significance of pivot points as support and resistance As you will recall, the pivot point calculation provides the mean (average) for the session’s trading range, or high, low, and close: (H + L + C)/3 This moving average section discusses... traders and institutions Even in the Commodity Futures Trading Commision 147 Pivot Points TABLE 5. 1 Japanese Yen Spot Forex Prior Period High Low Close Monthly—November Weekly—12/02/20 05 Daily—12/02/20 05 119. 95 121.24 121.24 116.37 118.33 120.19 119.80 120 .59 120 .59 (CFTC) COT report, there are three classifications of traders: reportable, commercials, and non-reportable The number three is a highly . 134 1 35 FIGURE 5. 8 Used with permission of www.nationalfutures.com. c 05. qxd 9/ 25/ 06 8:24 AM Page 1 35 136 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5. 9 Bonds trade the predicted pivot. earlier long position, as the confluence of pivot point resistance levels and the 150 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS TABLE 5. 2 Pivot Point Confluences for Dow Prior Period High Low Close Monthly—December. in the spot currency markets may be suit- able for you to take advantage of. 140 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 5. 13 Used with permission of esignal.com. c 05. qxd 9/ 25/ 06 8:24