Pivots are a underutilized and oftentimes misunderstood trading indicator. Pivots are created at areas where the market makes an important change in direction. It is the price where sellers take control of the market in an up-move and turn the market down and the price where buyers take control of the market in a down-move and turn the market up. What’s of great importance is the sensitivity and specificity with which the Pivot Indicator creates pivots. A sensitive trading indicator tends to create too many pivots which encompass inconsequential changes in market direction. A specific trading indicator tends to create too few pivots which ignore consequential changes in market direction. Only two years of market replay data can create the optimum internal settings.In this video we are going to look at pivots. An accurate pivot is traced out from the candle-body and not from the wick (see the jpeg above). Most pivot indicators do not adhere to this rule. In addition, Japanese Candlestick Dogma does not consider a pivot to be broken until it is penetrated by 2/3 of a candlestick body. Our pivot indicator strictly adheres to this rule and terminates a pivot when this event occurs. The balance between sensitivity and specificity has been created such that pivots represent critical areas of support and resistance. They delineate the price of a financial instrument where a significant number of buys or sells are sitting.
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Trading into a pivot increases risk. Trading long into an overhead pivot acting as an area of upside resistance is dangerous because the market has already told us that this pivot represents an area where a significant number of sellers are sitting. Trading short into a pivot acting as an area of support is dangerous because the market has already told us that this pivot represents an area where a significant number of buyers are sitting. We suggest that in general that you avoid taking a trade that requires a pivot to break, before the trade becomes profitable.
When to anticipate a break of a pivot:
Unlike the areas of support and resistance created by Market Profile, each time a pivot is tested and rejects price it becomes weaker: some of the buyers or sellers sitting in this area are “spent”, weakening the support/resistance area. The third test of a pivot will oftentimes lead to a break and continuation of price to new highs or new lows.
The candlestick formation entry that can be anticipated to break a pivot:
The single most powerful entry signal is one out of Consolidation. Day traders must leverage this entry signal to their best advantage. Consolidation occurs when the power of the bears and the power of the bulls is equal: a period of low volatility. Four or more candles trap traders in both the long and short direction. When consolidation terminates, the break out occurs almost always in the direction of the trend and is powered by two forces: the addition of more buyers/sellers and the fact that the move stops out traders caught in the countertrend direction. Thus, the move out of consolidation occurs with great force and has the power to break pivots.
The Pivot-trading indicator created via an appropriate algorithm act as strong areas of support or resistance. Trading into them can be fraught with danger and lead to losing trades. Anticipate a pivot break only on a third test or on a trading entry out of consolidation.