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Walt Downs sent an excellent piece on trading to the RT forum about 2
to 3 years ago. I thought it was so good that I kept the entire thing.
A section of it had to do with Floor Trader Pivot Points, which I've
included below.
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How the Majority of Floor Traders Trade (by Walt Downs)
Did you know that most exchanges don't allow computers in the "pit" ?
How then, does the average Floor Trader know where the support and
resistance areas are, and how does he trade against them or with them
in general. The answer for most Floor Traders is the use of a somewhat
mechanical framework refereed to as the "Pivot". What follows is the
formula for calculating the "Pivot" and it's resulting areas of
support and resistance, and how Floor Traders use it to trade:
Formula for Pivot and Associated Sup/Res Levels
P = Pivot
NH = Next High
HH = Highest High
NL = Next Low
LL = Lowest Low
O = Open
H = High
L = Low
C = Close
P = (H + L + C) /3
NH = (2*P) - L
NL = (2*P) - H
LL = P - (NH - NL)
HH = (P - NL) + NH
Extended formula for recalculating the Pivot and Sup/Res levels after
trading has been
going on for a few minutes:
Recalculate Pivot by using the formula: P = (H + L + C + Today's
Open)/4 Then, recalculate the sup/res levels using the new Pivot
number, and the H,L, and C, as stated in the above formula.
How Floor Traders Trade the Pivot in General
The Pivot is the average price that the market has traded at. IF
Market in Uptrend, and Price > Pivot THEN the Floor BUYS.
Market in Downtrend and Price < Pivot THEN the Floor SELLS
Market trading in Range THEN the Floor SELLS the NH and BUYS the LL.
Market trades above HH, THEN the Floor BUYS
Market trades below LL, THEN the Floor SELLS
In making sure that you keep the "big" (For an ST Trader ) picture in
mind, it is often a good idea to calculate the Pivot numbers for 1
weekly OHLC bar as well.
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I should probably make a quick comment about something that Walt
mentioned in his piece. He talks about re-calculating the pivot
points after the open of the particular trading day is known. The only
time that I've found this handy with T-Bonds is when there has been a
gap opening of at least 12-16 ticks, or when there has been a very
rapid, large move such as sometimes occurs after Unemployment Numbers
are released. It just makes sense that after experiencing such a
"price shock" the market would need some sort of reorientation. These
parameters can easily be included in your code, but for starters, I
wouldn't worry about adding this extra level of complexity. However,
you might want to look into it when your level of proficiency
improves.
Bob Hunt
THE T-BOND DAY TRADING REPORT
e-mail: rhunt.066@xxxxxxxxxxxxxxxx
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