Monday, January 15, 2007

Price Targets for Short-Term Trades

My recent post explained how to measure pivot points and utilize these as intraday price targets. Response to that post was very positive, so I have begun to summarize pivot levels for the ES futures on the Weblog. If there is interest in having me post pivots for the NASDAQ and Russell futures or ETFs, just let me know.

My two most common sets of price targets are:

1) The previous day's highs, lows, and volume-weighted average price (VWAP);

2) The R1, S1, and pivot levels from the previous day's data.

Volume-weighted average price and the day's pivot are also published daily on the Weblog. The VWAP is the average trading price for the day weighted by the number of contracts trading at each price. The day's pivot is simply the average of the high, low, and closing prices.

Early in the session, I am using data such as the NYSE TICK, distribution of volume at the bid vs. offer, total volume traded relative to the usual volume at that time of day, advancing vs. declining stocks, and the relative movements of various sectors to anticipate market direction and volatility.

If direction is mixed and volatility is average or below, I will expect a range bound market and look to fade moves at the range extremes back toward the VWAP and day's pivot.

If direction is strong and volatility is average or below, I will expect a test of the previous day's high/low and a test of R1/S1.

If direction is strong and volatility is above average, I will expect a test of R2/S2.

The key is making updated assessments as the market is trading relative to direction and volatility.

Most days, I am looking for tests of the previous day's high/low and tests of R1/S1. Going back to 2004 in the S&P 500 Index (SPY; N = 762 trading days), 660 of those sessions have either surpassed the previous day's high *or* the previous day's low. In other words, about 87% of market days are *not* inside days. The 13% of days that are inside days are almost always low volume days. If we see average or greater volume for the day, the odds are overwhelming that we'll take out at least one of the previous day's extremes.

Similarly, 611 out of the 762 days--about 80%--have surpassed either R1 *or* S1. Once again, this ratio is even higher on above-average volume days. This makes R1/S1 and the previous day's high/low very reliable targets if you can get an early read on direction and volatility.

Of course, if you can identify some historical patterns associated with market direction--one of the goals of this blog--that helps even more in terms of getting on board early with a move to one of the high-odds price levels.

Note that this way of looking at markets can supplement almost any pre-existing trading approach. It is a way to focus on exits and targets, not just entries. The clearer you are about your targets, the easier it will be to ride your profitable positions.

5 comments:

John Cook said...

Brett,

Your pivot points remind me alot of the strategy Mark Fisher use's to trade crude oil and natural gas. His book might be interesting reading for you.

Cheers,

JTC

Brett Steenbarger, Ph.D. said...

Thanks, John; Fisher's book is excellent. You're right: there is definitely similarity between trading with (pivot) and S/R levels and trading by the opening range.

Brett

Anonymous said...

great stuff this weekend. thanks so much. I am sure that you and your readers are probably aware of the following:
http://www.mypivots.com/DailyNotes/dailynotes.aspx

Brett Steenbarger, Ph.D. said...

Hi Flincing,

Thanks for passing along that pivot point link--

Brett

zotium said...

Hi Brett,

Been following your great blog, stumbled upon this post and just want to share a Pivots Calculator that I created... check it out

http://www.ongster.com/pivots/