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Monday, December 6, 2010

How to Determine Where the Real Support and Resistance is Everyday

We often hear market analysts or experienced traders talking about an instrument or equity prices nearing a certain support or resistance level, each of which is important because it represents a point at which a major price movement is expected to occur. But how do these analysts and professional traders come up with these so-called levels? One of the most common methods is using pivot points, and here we take a look at how to calculate and interpret these technical tools.

Understanding support and resistance levels is an extremely important skill in any market, and it’s absolutely critical if you plan on trading the derivative markets. Professional floor traders are aware of an entire range of major and minor support and resistance levels before the market opens each day. They also know how to calculate new levels as the trading day progresses.

Knowing where the market may turn gives you an effective road map to guide
Most Most traders calculate support and resistance levels incorrectly, and to make their job even harder, they generally don’t know how to trade around them. Many traders will use an old high or an old low and assume they’ve found support or resistance. That just doesn’t work. Think about it for a moment. If the market always stopped at old highs we could never have an up trending market, and if the market always stopped at old lows we couldn’t have a down trending market.

These Are the Same Numbers I (And Other Pro Traders) Use Every Morning
The technique I discuss below is broken down into specific support and resistance numbers that I provide in my daily report. These are the same numbers I and many other floor traders utilize each morning. Can you imagine the “edge” this information gives you over the average trader?

Let’s face it; we all want to catch the big trending days, days when the S&P moves 15 or 20 points without looking back. Unfortunately those big trending days just don’t happen that often. Most days the market doesn’t trend very much in either direction, instead it will move between known support and resistance levels.
Knowing the location of these price levels is important, but knowing how to trade around them can be the difference between success and failure.

One of the simplest ways to do technical analysis is by using the pivot points. This method has been around for years and is described below:

A pivot point is approximately the center of today’s price range . From there, I calculate three different sets of highs and lows. These pivots are then potential support and resistance, when prices have gone outside the Value Area.

Pivot Point = (High + Low + Close) /3
#1 high pivot = Pivot Point + (Pivot Point – Low)
#1 low pivot = Pivot Point – (High – Pivot Point)
#2 high pivot = Pivot Point + 2 (Pivot Point – Low)
#2 low pivot = Pivot Point – 2 (High – Pivot Point)
#3 high pivot = High + 2 (Pivot Point – Low)
#3 low pivot = Low – 2 (High – Pivot Point)

This is Easy to Do By Hand Everyday, After the Market Closes, So You are Ready for the Next Trading Day

I have this formula in my trading softwares so I just plug in the numbers and the different sets of pivots are given to me. I do not use the pivot # for trading; I only use it to determine the “sets” of pivots. I also do not use the #1 high pivot as support, if the market opens or trades above it. I use them as “envelopes”. Lets say the market opens above the #1 high, I’ll look at the #1 low for support and the #2 high for resistance.

Take a look at the following example of the five-point system, which illustrates a projection of Microsoft's (Nasdaq:MSFT) stock movement. Note the pivot point and the support and resistance levels.
Yet another pivot point system was developed by Tom DeMark, a famous technical analyst and president of Market Studies, Inc. This system uses the following rules:

In my own experience, I have noticed that the #1 pivots work the best over time. If the market gaps over the #1 pivot high, you’ll have a #2 and #3 to work with. You can either use limit orders to buy or sell at these pivots and use a money stop, or wait for the pivot to “hold” the market. If the pivot “holds” the market, trade an engulfment, doji-star, tail or whatever you see, which is a more conservative entry.

Pivot points are yet another useful tool that can be added to any trader's toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the trader, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis. These other technical indicators can be anything from MACD crossovers to candlestick patterns - the greater the number of positive indications, the greater the chances for success.
NOTE : There is an even easier and faster (but pirate) way to calculate Daily Pivot Support for those with 188OMS trading platform. 188OMS do not provide PIVOT Tools but by using the ENVELOPE (looks a little like Bollinger Bands but only 2 lines) in technicator indicators, Daily Pivot can be manually calculated roughly by adding the 2 number of the ENVELOPE and divided by 2 >>> Presto! instant Pivot :P
However be reminded this method is not very accurate. At your own risk OK?

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