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No matter which indicator you are comfortable in using, when investors first discover Pivot Points, most often their first impression is one of pure amazement.  Mainly due to its ability to predict what a specific time frames overhead resistance or support might be. Moreover, more times than not the High, Low or even both are right on target as the exact number for that given session. Make no mistake Pivot Point analysis is impressive. However, its real power and value does not end there. Pivot Point Analysis deals with pin pointing not only price but in a specific time period.

It is what I consider the “Right Side” of the chart indicator. It also gives you a method for identifying the trend and how to determine the typical price or fair value of a given time frame. After all, that is what the actual Pivot Point number is. If prices deviate too far from that point the outer calculation numbers can help you determine at what point a market is most likely to turn. One can also use this feature of the actual Pivot Point to develop a moving average system. But when traders combine these calculations with the visual aid of certain candle patterns, it can give you superior guidance as to when and where to enter and exit positions. Traders who want every edge in their approach for the highest probability of success will benefit from this simple but yet time tested method.

This is just one of the strategies that I wrote about in my book, A Complete Guide to Technical Trading Tactics. Remember this technique works amazingly well for futures, commodities and stocks; it also works especially in the FOREX markets.

The amazing fact is this pattern works equally well in market declines, therefore I call it a Low Close Doji set-up. When I use pivot point analysis what I want to do is see how the market behaves at or near a pivot point target number. I also include a special moving average approach which is taught in my trading course that illustrates a conditional change in the market. Once we identify that the current market price is turning direction we can establish a trading position as prices close below a Doji low, a moving average cross over occurs and prices close below both moving average values. I use a combination of a specific moving average of the pivot point combined with a simple moving average. I stay with the initial position until those particular conditions change. In bearish conditions I look for a series of events such as lower lows, lower highs and lower closing lows to indicate a bearish trend. Once the market conditions change and we have a series of opposite events occur I stay on the short side of the market.

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In the chart above we have a Low Close Doji sell signal triggered at the pivot Point, prices close below both moving average values and the moving averages cross signaling confirmation that a trend change has occurred.  The profit target is the first Pivot Point support target level. If you notice that this method signals a short well before the MACD signal and even the Stochastics %K and %D 80% line cross method. As you will notice the low is formed by a doji candle. In the beginning of this article I stated the “Doji’s form more often than not at Pivot Point Support and resistance levels”. Here is another case in point. With that said, now you see why I focus on these high frequently re-occurring patterns and teach these specific patterns in my trading course.

I went and took this observation one more step in my soon to be release  book which is slated for sale in October 2006.  I cover more on statistical occurrences when Doji’s, Stars and Hammers form in certain markets. Here is an example of the frequency of these patterns, which was independently back tested by Genesis Software. In the example below using the e-mini S&P 500 futures contract, the test results were based on the US open out cry session using a fifteen minute time period. We ran these statistics on many markets; the best part is some markets had even better results than what I am sharing with you now.  Looking at this bar chart below we see that 30% of the lows are established by a doji while 40% of the lows are made by Hammer formations. Combined that accounts for a 70% chance that the low is made by a Doji or Hammer based on a 15 minute time interval.  At tops 36% of the time they are made by Doji’s and 40% are made by shooting stars, combined it accounts for a whopping 77% statistic. 

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The methods introduced here are used to help keep the traders focused on the now, which means to watch and study the current price action. The Candle patterns give a visual confirmation on price momentum, and the Pivot Points forewarn you what the potential turning points are. When you combine the two methods you have a solid trading program.