Pivot points are prices that have been used to identify potential spots of support and resistance. Can we use information generated during the day to help us identify when we're likely to hit pivot points? For this study, I calculated the market pivot as simply the average of the previous day's high, low, and close. The first resistance level (R1) was (Pivot x 2) - Yesterday's Low. The second resistance level (R2) was Pivot + (Yesterday's High - Yesterday's Low). The support levels were the reverse: first support (S1) at (Pivot x 2) - Yesterday's High; second support (S2) at Pivot - (Yesterday's High - Yesterday's Low).
Since 2004 (N = 762 trading days), we've had 387 occasions in which today's market hit R1 and 339 occasions of hitting S1. We hit R2 151 times and hit S2 156 times. Now let's look at whether today's NYSE TICK is greater than the average TICK level for the previous 20 trading sessions. This is the Adjusted TICK measure reported daily in the Weblog.
When the TICK has been greater than its 20-day MA (N = 385), we have hit R1 on 271 of those occasions: a bit over 70% of the time. We have also hit R2 on 131 of those occasions: around a third of the time. At those times, we've hit S1 on only 89 of the days (less than 25% of the time), and we've hit S2 on only 20 occasions (less than 6%).
When the TICK has been less than its 20-day MA (N = 377), we have hit R1 on 116 occasions--a little less than a third of the time. We've hit R2 only 20 times. On those occasions, however, we've hit S1 250 times (about 70% of the time) and hit S2 136 times (a little over a third of the time).
When the Adjusted TICK was in the top quarter of its values (i.e., very much stronger than the 20 day average), we hit R1 on 159 out of 190 days. We hit S1 on only 24 of those days.
When the Adjusted TICK was in the bottom quarter of its values (i.e., very much weaker than the 20 day average), we hit R1 on only 49 out of 190 days, but we hit S1 on 153 occasions.
When TICK was very strong (weak), we hit R2 (S2) a little over half the time.
Now imagine that we add volume at the market bid and volume at the offer as a handicapping tool (a la Market Delta) and imagine that we use the pivots as price targets for exits, leaving a piece of a position on when we have signs of extreme buying or selling. Imagine using historical market patterns to identify likelihood of heavy buying or selling.
That, folks, is pretty much a summary of how I trade.
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26 comments:
Brett,
In this blog entry, you mention "TICK" and "Adjusted TICK". Are you referring to the same thing in both cases, or is the Adjusted TICK a reference to another measurement that I believe you spoke about in your book which measures the ticks for only those stocks listed on the S&P 500? Thank you for clarifying.
Hi Brett,
I also use Pivot points for setting entries, exits and taking partial profits. Even though these levels were mainly used by floor traders in the pits, I find it interesting that these levels continue to work on many occasions even with the electronic contracts.
Thanks for posting these stats. I find it amazing that R1 & S1 are reached almost 70% of the time under the conditions mentioned.
I have a few related questions:
How do the pivot levels hold to the open price of the market i.e. on bullish days has the market opened very close to R1, and near S1 on bearish days.
Also since the pivots are calculated based on the previous day volatility, the pivots will be very close to each other following a range-bound day. These will be easily be taken out by a normal day's average range.
Also which markets have you had success using Pivot levels. I find that they are more reliable on the YM and ES contracts but with NQ and ER2 they rarely hold.
Thanks,
Sam
Thanks for sharing so much of your work. Do you have any inkling of whether fades of R1/S1 will be successful based upon TICK or other data? Do you use these levels as targets only?
Hi Rick,
The Adjusted TICK is the daily cumulative one minute values of the NYSE TICK minus the 20 day average TICK. Thanks--
Brett
Hi Simple,
Great questions; thanks. As you might guess, the nearer we close to a pivot level, the greater the odds of hitting that level, all other things being equal. I have focused on the ES market for those levels.
Brett
Hi J Readling,
Yes, I do have trades mapped out when buying or selling dry up prior to hitting a pivot level. Most commonly these are trades (fades) to the day's average trading price. Thanks for the note--
Brett
Do you only trade the ES using this technique?
Hi Damien,
I mostly trade ES, but recently have also traded ER2 using the NYSE TICK data. Next step will be NQ with the NASDAQ TICK. Thanks--
Brett
Great - thanks for reply. I see this as a swing trading method - is that how you're using it or have you looked at it for day trading? Also, as long as I'm barraging you with questions - I'm guessing the stop for any position is at the opposite pivot point - so, if you're long, stop is at S1, etc. Or do you use a volatility-based stop? Finally, have you looked at different position sizing techniques (fixed fractional, etc.) - I'm thinking of looking at this in my own testing.
Hi Damien,
I do not trade mechanically, but I think you're asking great questions that could turn the pivot approach into a formal trading system. In a nutshell, I use shifts of distributions against my position as stops, not opposite pivot points. I leave a portion of the position on if the odds are good of hitting R2 or S2. And most my trades are daytrades, although I'll be posting something on a swing basis shortly. Thanx for the interest--
Brett
Hi Dr Brett,
You apply these studies to futures market. Have you use pivot points to trade stock indices or stocks itself and do they share the same success rate as futures market?
Next day pivot levels will be in tight range if prior day's trading range is also tight. On such days, do you place less emphasis on pivot points since they can be easily taken out?
Thanks for your sharing and have a good weekend
Hi Simply Options Trader,
At this juncture, I use the pivots for ES, NQ, ER2, and the corresponding ETFs: SPY, QQQQ, IWM. I have an idea for applying the method to individual stocks and other ETFs, but have not yet tried it out. I'll report on that after I've had some experience. Thanks--
Brett
Hello,
When calculating pivots are you using the high and low between 8:30am CST to 3:15pm and using the settlement price as the close?
Thanks!
Hi Dave,
Yes, I use day session data for pivots. Thanks--
Brett
Dr. Steenbarger,
Thanks for sharing your insights.
Could you comment on why you use session hours and not Globex hours? Personally I'm undecided about the EC but I'm pretty sure that the YM pivots "work" better when based on ECBOT hours rather than open outcry hours. Do you have any opinion about that?
Hi Jeff,
I generally like to estimate targets from the most recent data and have found that the pivots derived from day session test out quite well. Thanks--
Brett
Hi Brett,
Thanks for you work fist of all!
One question, the link to www.investopedia.com shows (I believe) a different formula. Is that right or wrong?
Thank you in advance,
Daniel
Hi Daniel,
Thanks for the note. There are different formulas for pivots and some people use day data; some include overnight data. I've tested out the formulas mentioned in the article with day data and those have worked well for me.
Brett
Hi, i would like to know the signifiacne of the formula of Pivot points and in what way are they critical ? From the formula, it just seems like an average of prices during the day.
Please enlighten, Dr Brett
Hi Gary,
Pivot points are simply reference points that first were used by floor traders. There's nothing magical about them at all. They're useful only in the sense that you can use them to calculate probabilities of market movements for trade ideas.
Brett
I am not very sure what you mean by calculating the probabilites of the market hitting the points.
Care to elaborate?
Noted that u use volume distribution aka close to the points to determine if they will be hit?
Hi Gary,
The distribution of the unfolding NYSE TICK during the day impacts the likelihood of hitting those pivot levels.
Brett
oooo i see , thanks for the clarification Dr Brett.
Enjoying your Blogging !!!
Was reading your book and u mentioned a scalper named David.
Would you happen to have any excellent books on scalping techniques to recommend?
Thanks!
Hi Gary,
I'm afraid I'm not aware of any books on true scalping. If readers know of any good ones, please pass along the references. Thanks!
Brett
What platform allows for volume distribution. Also what would the formula be for the tick value? It appears to be the 20 day average which today as of close would be about +53 and then subtract the last?
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