Even the dictionary has 5 separate definitions of the word, pivot. In trading, Pivots and Gaps have differing meaning in varying concepts: The main "pivot" and its sisters and brothers, meaning the 6 numbers contain 7 components. Of the 5 meanings, the "center" is a good concept to liken the floor trader pivot.
Commodity and stock instruments oscillate during the trading day traveling up and down from open to close. The distance from open to close could be very broad: thus, a wide range, signified by a wide range candle [bar]. Or, the distance [price movement] may be normal or regular and last but not least, price movement may be narrow. In either instance, the center of the distance traveled between open and close, regardless of where it opens and where it closes, is the center, or middle point. From that point, the pivot, traders have learned... from 165 years of experience and analysis, to make something of it!
Why is the pivot so important? Because, b4 1990, charting was a highly restricted practice and was mostly focused on yearly, monthly, weekly and daily data. Floor traders, those folks who made the machine work, had no access to charts or any other sophisticated analysis tools. They had 3 assets, their brains, voice, hands [signal] and a little 3" X 5" pad to be used with a 3" #2 pencil. The only analysis the could handle was information they could write on their little pad. All that would fit were their orders together with the daily numbers: OHLC, pivot with 3 levels of support and 3 levels of resistance. Even today, with all of the sophisticated, electronic analysis indicators... well over a hundred to choose from and anyone who tries to simultaneously apply more than 3 to 5 gets seriously tangled up in their panties, the floor trader numbers:
R1 R1 R3PP S1 S2 S3, are the most essential numbers to know along with OHLC: open, high, low, close!
When you have learned enough to know that all you need pictorially is one hour candles [bars] and numerically, 11 numbers, you will be a successful trader. Just remember: every price reverts to the mean! Every price stalls or corrects at each of the 11 numbers. Just so you know, you must remember not only the daily numbers but the weekly numbers. It doesn't hurt to know the monthlies too!
The concerns ofU.S.merchantsto ensure that there were buyers and sellers forcommoditieshave resulted intoforward contractsto sell and buy commodities. Still,credit riskremained a serious problem. The CBOT took shape to provide a centralized location, where buyers and sellers can meet to negotiate and formalize forward contracts.
In addition to the pivot series discussed above, do not become confused by the pivot highs and pivot lows. These are high and low points in trading over the course of the trading day and; however, while very different, they do relate to the other numbers mentioned above . . . because, the numbers attract pivot highs and pivot lows like fly paper. Learn to focus on all of it simultaneously in the heat of trading AND you will be come a star. Ignore it, and you will fail!
It is time to pivot the numbers to guide your trading
life!
In T07, we discussed the pivot series. In this section we go to the root of the concept, the actual numbers, the formula that makes it tick. Again, we refer you to www.InvestoPedia.com where you may delve into the arithmetic. This is here for all you engineers and mathematicians who have been previously living in the phone booth thinking you got educated in college or your career. Your future is in the financial markets; however, learn well, very well, before you climb off the simulator and move into your bank account.
Below are a few excerpts of the InvestoPedia reference above:
Pivot pointswere originally developed by floor traders in the equity and commodity exchanges. They are calculated based on the high, low and closing prices of previous trading sessions, and are used by traders to predict supportandresistance levels in the current or upcoming session. These support and resistance levels can be used by traders to determine entry and exit points - both for stop losses and profit taking.
Pivots work in any market on any commodity instrument. Here is the basic formula:
Pivot Point = (Previous High + Previous
Low + Previous Close) / 3
The pivot point can then be used to determine levels of estimated support and resistance for the day or week:
Support Level 1 = (2 * Pivot Point) - Previous High
Resistance Level 2 = (Pivot Point - Support Level 1) + Resistance Level 1
Support Level 2 = Pivot Point - (Resistance Level 1 - Support Level 1)
Resistance Level 3 = (Pivot Point - Support Level 2) + Resistance Level2
Support Level 3 = Pivot Point - (Resistance Level 2 - Support Level 2)
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