Five Top Trading Tips for Active Traders (Part 4)

08/14/2008 12:00 am EST

Focus: STRATEGIES

John Person

Founder and President, John Person, Inc.

This is the fourth article in a series on Trader Tips. In this section we want to go over the power behind using one of the best leading price indicators called Pivot Point analysis. In my second book titled, Candlesticks and Pivot Point Trading Triggers, I show how to integrate certain candle patterns with the power of Pivot support and resistance levels.

In this article I want to compare pivots with Fibonacci analysis. Pivots are based on a mathematical formula. We use the following formula to derive two projected resistance levels and two project support levels. 

Here is the Pivot Point mathematical formula where:

P= Pivot Point C= Close          H= High L= Low.               

  1. P = (H+L+C)/3 = Pivot Point
  2. (Px2)-L = Resistance
  3. P+H-L = Resistance 2
  4. (Px2)-H = Support
  5. P-H+L = Support 2

As you can see it is a detailed formula. So let me try to simplify and describe how to use these calculations. Consider the Pivot Point as the average of the previous sessions trading range combined with the closing price. The numbers of support and resistance that are calculated indicate the potential ranges for the next time frame based on the past weight of the markets strength or weakness derived from the calculations of the high, low and distance from the close of those points. Since most technical analysis is derived from mathematical calculations, the common denominators that are used are the high, low, close and the open. This is what is used for plotting a bar chart. More notarized techniques like Moving Averages, Stochastics, and MACD like we touched on in the last section are all calculated using mathematics based on those points of interest. 

Looking at the chart below (3) at point "A" marked on the chart we have the monthly predicted pivot resistance R-1 and the monthly predicted pivot support S-2 targeting the month of Augusts potential high and or low. The reason why there is a question mark on the chart is this is the seasonal time period where gold posts bottoms, as the 33 year seasonal graph at the bottom shows. We now have more information as to when and at what potential price gold may form a bottom.

In addition, I have overlaid a Fibonacci ruler tool showing the more common retracement levels, .38%, .50% and .618% from the low in August last year to the peak made in March of this year. Notice the .50% Fibonacci retracement level is near $858.00. The Pivot point support target is at $847.70. Pivot point analysis was based on last months action and theory suggests that we could see a low at or near $847.70 this month.

The reason I prefer Pivot Point analysis over Fibonacci is mainly Fibonacci is not time sensitive in its prediction, meaning a retracement has no time boundaries. In pivot analysis we use last months high, low and close data to determine this months price targets. In trading we have all heard the phrase "past performance is not indicative of future results", therefore it is very important to discover both a profit and loss exit strategy. This will be our topic for the fifth and final traders tip segment.

(Chart 3)

More tomorrow in part 5.

By John Person of www.NationalFutures.com

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