Pivot Point Reliability

[corei]

Is pivot point, P = (H + L + C) / 3 reliable for determining initial support/resistance level? I mean does price usually bounce up/down when it hit pivot point at first attempt?

Thx!!

 

[TheBramble]

The best way for yout to establish this is for you to calculate them, place them on your charts and monitor the performance for a while.

 

[Plaste]

I recently did some back testing to see which of the pivots (i.e. PP, R1, R2, S1, S2), today's open, yesterday's high, low, and close provided the best support or resistance for short term trading. My conclusion was that the most reliable was that day's open followed by the pivot point. Other levels gave more ambiguous results. The testing was done on ES regular trading hours and was by no means exhaustive.

 

[tarrentino]

Daily Pivot Point are generally calculated based on the previous days close ie midnight GMT or in the case of Mondays you'd use Friday's close. I have written a free pivot point calculator which you can download at FX AlgoTrader Landing Page - click on free tools on the "About Us" page.

I think looking at Daily Pivots in isolation is a somewhat blinkered approach. There are Weekly and Monthly Pivots as well which often offer powerfull support and resistance levels. They also invariably line up with other significant technicals such as price action derived S&R, Fibs and medium/long term trendlines.

When you see a confluence of events ie multiple support or resistance indications it adds significant justification for taking a position. A lot of people have no idea about where all the "hidden" levels lie when they first start trading and find sudden reversals completely bewildering. I've been there and I know what it's like to have positions go violently against you.

At the end of the day the trick is to stay out of the short time frames unless you've done a proper top down analysis and plotted all the major technical levels. There are lots of ways to make this approach easier by using smart indicators. If anyone has any questions please let me know. Glad to help

 

[NetTecture]

Thanks, Tarrentino.

Just an idea - is there any justification for the way pivots are calculated? I mean, why take THAT PARTICUALR forumula? Why not one a little other.

I mean, if you look at moving averages, stochastical indicators - they all have a theoretical justification. Fibonacchi retracements have one (fibonacchi numbers). What is the "reason" for calculating pivots like it is done?

 

[tarrentino]

Hi, I'm not sure anything has any solid theoretical justification in terms of TA. Some argue it's a self fulfilling prophecy which has about as much statistical significance as a coin toss! However, Fibs have some substance as the golden ratio on which they're based occurs frequently in nature. In answer to your question - Pivots were created on the CME by futures traders in the 70s. I guess they are simply a guide to where price may go based on where it went the previous day. To some extent Daily Pivots could be seen as mean reversion story at a microscopic level.

I wouldn't sweat it too much in terms of why. They do have significance in terms of intraday price action so you need to make sure your calculation basis is synched in with the majority of the players in the market. PA will not generally respect the pivots perfectly so you need to factor in a bit of breathing space.

Some "tutors" suggest executing trades when PA approaches S/R levels for the first time. Arguably it's better to see how the pivot reacts before you jump in. Eg.Shorts around a broken S2 pivot could cause some heartache in comparison to a short somewhere around M1/S1 after an S2 rejection (assuming a downtrending market) Similarly, a long trade at S2 in a strong downtrend can go horribly wrong unless your stops are tight which further increases the chances of being stopped out by volatility! Better to wait and see if S2 holds and then consider a long on a retest. There are no guarantess but observation and patience has merit.

PS. I did some backtesting based on a pureplay daily pivot strategy years ago. On their own they offer no particular advantage over a coin. In fact, they tested worse as I recall! In conjunction with other stuff - they're useful. My 2p worth!