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Power Up Your Pivot Points
05/31/2011 11:12 am EST
Pivot points are proven-effective leading indicators of price action, and John Person, author of several books on the subject, tells how he applies them for even greater accuracy.
Traders are using pivot points to decide areas of support and resistance, but what are pivot points and how should you use them in the best manner?
Our guest today is John Person, an expert in that area. So John, first of all, let’s define what a pivot point is.
Absolutely. First off, pivot points are based off a mathematical formula. They’ve been around—a little bit of history—from my understanding and research, a man by the name of Henry Wheeler Chase developed the formula back in the early 30’s.
Through the ages, it was sort of a lost indicator, so to speak. Then Larry Williams re-popularized them. He wrote about them in a page or so in his book How I Made a Million Dollars Trading Commodities back in, I believe, 1979.
When I got out of the industry in 1980, I worked with George Lane for two years, and I learned how to use an indicator that he developed: Stochastic.
But migrating to the floor, everyone on the floor at the Chicago Board of Trade had these secret numbers, and they were based off this mathematical formula which was derived by the actual pivot point, which is from taking the sum of the high/low/close, averaging it out, dividing by three, and then from there, there’s a further math calculation that gives us a targeted future resistance level one, (and) a targeted future resistance two.
So you get two resistance levels and as well, you get two support levels. It was one of the best leading price indicators because it contained and it was derived from prices, as well as time.
So from the prior time period, most people use pivots for the end of day, so they would be able to see what hidden support and resistance values would be for the next day. It was kind of like a way to plan the trade and then when prices came to those support levels, if you were bullish, you’d be buying near those pre-determined or pre-calculated support levels.
What I came to discover back in about 1985 is instead of using them on daily basis—because I was doing a lot of work as I was taught, start from the left and into the right. In other words, start with your higher-degree time frame and then go down to your lower-degree time frames. So start with your monthly, your weekly, your daily, and so we would look at—in trading bond futures at the time—looking at moving averages and the trend for monthly, weekly, and daily.
Then I came up with the conclusion to start using those pivots to see how they would work for higher-degree time frames.
As my trading evolved, I just noticed by the use and probably spending 40,000 hours studying charts and doing technical analysis, that when we were bullish, the market never got down to that second support level, and generally, we would go up to that second resistance.
So I came up with a Person’s Pivots indicator, which is based off a moving average value, which helps filter out A) the market condition, it’s current condition; and then under that condition, it just gives me what I perceive to be the potential range in that condition.
So for example Tim, if we’re bullish, it’ll lay on the chart, the support target (S1) and then the resistance (R2) and then of course the pivot or the typical price in the middle.
So if the market’s truly bullish, if it breaks the S1, then probably conditions have changed. Maybe an economic report has occurred, poor earnings; something has altered the condition or trend of the market, and that’s one way.
So using persons pivots, A) Helps me define what the condition of the market is, and under that condition, defines what the potential range or high and low of the next time frame will be.
Alright John, you’ve written about some of these and you’re an author; you’ve got books about these. If somebody wants to investigate this more, what should they do?
Sure, I’ve written three books on trading, Combining Candles with Pivot Point Analysis. My second book, titled Candlestick and Pivot Point Trading Triggers, really defined a few trading systems, methodologies, exact entry and exit points. The books were all published by John Wiley & Sons.
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