The Pivot Point Forex Trading System

The 'Pivot point trading system' is a method of predicting the movement of a financial instrument such as currency, and is used by day traders and other market speculators.The pivot points are mathematically determined points of price support and resistance and the pivot point strategy applies trend hypotheses to the pivot points to predict future price movement. 

For example, if a currency's closing price of 1.762 is below a price average of 1.765, and the previous days close was also 1.765, today's closing price has dropped below the pivot points where support is established around the prices moving average. For a trader, this drop through the pivot point would signal a potential entry point to 'sell short' i.e. bet on the price going down.

The usefulness of the Pivot Point System

The pivot point system is useful because it gives individuals an idea of how to better allocate financial assets. The method brings a mathematically derived sense of order, to a possible free flowing series of price movement. In other words it assists in identifying patterns and price movements so the trader is better equipped to take advantage of those patterns. In the case of the pivot point system those patterns are drops and rises below and above the pivot point, support levels and resistance levels.

How the pivot points are used

When all the pivot points are determined a day trader will watch the price movement of a price throughout the day, when a suitable entry or exit point is indicated by the pivot point system, the trader may then decided to take a financial position by buying or selling. While the pivot point method is primarily a short-term method, it may in some case be applied long term if the analyst so chooses. In such an instance, an analyst may replace the previous days average price with a moving average.

The stronger indicator in a pivot point system is the primary pivot point such as the previous days price average in short term analysis, and the moving average in long term analysis. When a price breaks above this point, market sentiment is indicated as 'bullish' suggesting a buy may be in order. The reverse is the case for drops below the main pivot point. The resistance and support levels either confirm or dis-confirm the primary pivot points indication by following the movement trend or not i.e. if the resistance level is also broken in addition to the pivot point market sentiment is 'bullish' and if the support level as well as the pivot point are broken downward, sentiment is 'bearish''. All these indicators can be presented on charts and graphs pre-calculated by software programs for a more efficient use of pivot point system.

Calculating the Pivot Point

The main information used in this trading analysis is the 1) average price 2) support level, 3) resistance level. Once the trader knows what these indicators are (s)he may then proceed to either enter or exit a financial position in a particular stock, commodity, currency etc. as prices move through, above and below these price levels. There are several ways to calculate pivot points depending on what one wants the pivot point to measure. Below are two methods for calculating the pivot point:

Method A: Simple Average Price Method

• Calculate previous days average price by adding the high, low and close prices and then dividing by three.

•When the next days price moves above or below this level a pivot point has be established.

Method B: 'Five Point Pivot Point'

This method is called the five point pivot point method because it uses five points rather than one average price in method A. In this method the five points are the pivot point, first level of resistance, the first level of support, the second level of resistance and the second level of support.

1. The Pivot point: Using method A above will yield the pivot point calculation.

2. Resistance point 1: To calculate resistance point 1, multiply the pivot point by 2 then subtract the previous day's low.

3. Support point 1: To Determine the first support level multiply the pivot point by 2 but subtract the previous days high instead of subtracting the previous day's low.

4. Resistance point 2: Subtract the result of #3 from the result of # 2 then add the result
to #1.

5. Support point 2: Subtract the result of #3 from the result of #2, but then subtract the result of #1 instead of adding it.

These five steps gives one the five pivot points with which the trader on analyst uses to determine perceived suitable entry and exit points.

Summary

The pivot point trading system is one of many techniques used in what is called the 'technical analysis' of financial instruments. The primary purpose of the pivot point trading system is to determine whether or not a pre-determined price level has been passed through or dropped below. Several techniques of price movement interpretation have been developed around the pivot point method such as pivot point reversals and complex pivot points that are formed over a few days. 

However, these differing interpretations center around the primary idea there is a pivot point which through which prices either moved behind, past or in tandem with. The pivot point trading system is used in foreign exchange analysis but may also be applied to stock and other financial instrument's price movements. The pivot point trading system is one of many technical analysis tools available to day traders and may or may not indicate the actual future movement of a price. However, by using the pivot point trading system, a day trader is better equipped and prepared to estimate future price movements.

Sources:

1. http://www.squidoo.com/pivotpointforextrading/
2. http://ezinearticles.com/?Using-Pivot-Points-For-Greater-Profits&id=126794
3. http://www.investopedia.com/articles/technical/04/041404.asp
4. http://www.incrediblecharts.com/technical/pivot_point_reversal.htm
5. http://www.thebulltrader.com/612/strategies-for-trading-stock-pivot-points/

Technical Analysis of Sensex using Oscillators and Elliott Wave Theory

SENSEX is a shortened term given to the 'Bombay Stock Exchange Sensitive 30 Index'. The index is a broad based, weighted average composition of the share price of 30 large capitalization companies within the exchange. This index is considered one of the Bombay Stock Exchange's key metrics of market performance and has been in existence since 1986.

Since exchange indexes measure performance of stock baskets, analyzing SENSEX using technical methods can assist with trading tactics and strategy. Two such technical measures are oscillators and the Elliot wave theory. The remainder of this article will discuss how these two methods of technical analysis can be applied to SENSEX.

Oscillator technical analysis

Simply put, oscillators measure buying and selling opportunities at the high and low ends of market pricing. Several oscillators exist including 1) the Stochastic Oscillator, 2) Percentage Price Oscillator and 3) the Money Flow Index (investopedia.com), however other commonly used and referred to oscillators also exist. Each oscillator indicates different values based on varying underlying conditions for which a security price may be more apt to move in a certain direction.

To illustrate the above point, the Money Flow Index (MFI) measures volume of capital moving into a security. When the MFI value moves higher, it means the increase in capital inflow is rising, however, if the value is too high, it means the capital inflow has been taking place for a while and a price trend reversal may occur.

Elliot Wave Theory analysis

The essential basics of Elliot Wave Theory is that it makes use of 1) stock price movement graphical 'waves' and 2) impulsive or corrective trend analysis of those waves. What this means is that when the zigzag pattern of stock price movements on a graph are illustrated, a pre-determined wave theory i.e. Elliot Wave Theory is applied to the patterns.

These patterns are simply two consecutive patterns of zig zag waves of 5 then 3 movements or 3 then 5 movements. Specifically, if the price trend moves downward with 1 down movement followed by an up then down movement, and is subsequently followed by the same pattern in the other direction, i.e. up, then the Elliot Wave principle applies. After the down or up sequence, the Elliot Wave Theory indicates the probability of the trend continuing as previously is higher than had the trend not existed.

Applying oscillator and Elliot Wave Theory to Sensex

The next step in applying both oscillators and the Elliot Wave Principle involves obtaining the price chart for the SENSEX for a given period of time. These charts can be obtained from financial websites and the Bombay Stock Exchange website itself. Once a chart and price history values are obtained, the oscillators for the preferred point of time can be calculated and the Elliot Wave patterns can be looked for. Some financial websites search for wave patterns and/or calculate oscillators for the investor, trader or analyst to save them time in identifying, calculating and applying the oscillator formulas and wave trends.

Should the need to calculate the oscillators arise, the individual oscillator formula should be acquired then utilized for the correct value. Similarly, for the Elliot Wave theory, the wave patterns should be manually looked for and identified individually rather than via a technical analysis software or financial website feature. Several financial websites and/or technical analysis websites exist that either provide or specialize in technical analysis tool and software.

1. http://www.stockta.com
2. http://www.stockcharts.com
3. http://www.investorprofit.com
4. http://finance.yahoo.com
5. http://www.google.com/finance

Summary

The SENSEX is a metric that indicates performance of companies within the Bombay Stock Exchange. This index is similar to the Dow Jones Industrial Average in the U.S. however is comprised of 30 large Indian corporations weighted in the index by their equity capitalization values.

In studying the SENSEX, both oscillators and the Elliot Wave Theory can be applied for the purpose of technical trend analysis. Both these indicators are used to forecast future price movements either up or down based on previous trends in securities pricing.

To apply oscillator tools and the Elliot Wave Theory to the SENSEX involves obtaining a time period for which price trends can be illustrated and searching for and/or calculating the oscillator values at the time of interest and/or the wave pattern positioning for the same.

If the oscillator value is above a certain point, it may be a downward trend could occur and if the Elliot Wave pattern sequence is evident, the possibility of the security's market price following this pattern either up or down is forecasted.

Neither oscillators or the Elliot Wave Theory are absolute indicators meaning there is room for error and the technical analysis is not 100 percent accurate. Rather, oscillators and waves can be used to estimate price trends and movements based on pre-derived mathematical and/or statistical relationships and patterns.

Sources:

1. http://www.bseindia.com/about/abindices/bse30.asp
2. http://www.bloomberg.com/apps/quote?ticker=SENSEX:IND
3. http://www.investopedia.com/terms/o/oscillator.asp
4. http://www.elliottwave.com/introduction/wave_theory.aspx

What is the Moving Average Bounce Trading System

The moving average bounce trading system is a pattern in stock price movement similar to a ball bouncing off a moving floor. For example, just like the average height of a female may be 5' 8" a stock price also acquires an average over time. During a typical trading day, the price of the stock may move above or below this average stock price.

The moving average bounce trading system is a system of analyzing financial instruments based on a bouncing pattern produced by a stock price's movement around its moving average. Specifically, the pattern starts by moving away from the moving average, then back toward it and then away again, hence the 'bounce' term.

Why the moving average bounce is meaningful to day traders

The moving average bounce indicates that a stock price or other financial instrument may have reached a new price floor because the bounce is technically the second divergence away from the moving average line. This means the chances of the price moving below the moving average may be lower and a trader hopes this is the case.

Spotting a Moving Average Bounce

Stock price graphs and software applications often chart the course of historical stock price movement and also perform statistical calculations used in analyzing stock price movement. One such calculation is the moving average and can be viewed on stock charts and graphs in the form of a line visibly overlayed on the stock price line. This enables the day trader to compare the stock price to the moving average and spot the bounce.

Timing a moving average bounce

Moving average bounces can occur anytime in a financial instruments trading cycle. In day trading, a moving average bounce is used in a short-term period meaning the period in which the bounce occurs can be minutes. Nevertheless, the actual moving average that is used can be a long term moving average but this is not absolutely necessary and depends on the technique and patterns used in stock trading.

Calculating the moving average

If one has no choice but to calculate a moving average manually the equation is fairly simple. Select a time period such as 30, 60, or 90 days and take three time periods for each of those days. Find the price of the stock for each time period, add them and then divide them by 3 to get an average daily price. Then do this for each of the 30, 60 or 90 days, add them and divide that number by the number of days. The moving average will then have been calculated for the 90th day. In mathematical steps, an example calculation proceeds as follows:

1. Morning price + Midday price + Afternoon price/3
2. Repeat for desired number of days Ex. 30 days
3. Add each days average price and divide by 30

There are several ways to calculate a moving average, and the method one chooses depends on the accuracy one desires and/or the software one uses. Three methods of moving average are simple moving average, 'typical price' moving average and the exponential moving average. The above example uses the typical price method and is an average using a number of averages while the simple average method is just an average.

The exponential moving average gives greater importance to recent prices and is thus a 'weighted' moving average. The formula for this moving average incorporates an exponent with each new days moving average for such weighting purposes and is calculated as follows:
Exponential Moving Average=Stock Close price * Exponent) + (prior days moving average or exponential moving average * (1-Exponent) Where the exponent is calculated by dividing 2 by the number of days in the moving average +1.

The exponent is the key to calculating the moving average using this method and it is calculated by dividing the number 2 by the number of days in the moving average calculation + 1. This must be done for each of the days as in the typical price moving average method above. However, the first day in the calculation which is actually the second day because a previous day must exist for the equation to work properly, will have a larger exponent than the most recent days allowing it to be mathematically weighted.

Conclusion

The moving average bounce is what day traders call a 'technical indicator' meaning it is used in the technical analysis of a financial instrument's price movement. The purpose of the moving average bounce is to signal a possible buying or entry point for the trader. The confidence given to this technique is due to the fact that the bounce is the second rather than the first movement away from the moving average line indicating a possible price floor and predictable movement in the price of the stock.

The actual movement of the stock price may or may not move the direction the trader intends through using the moving average bounce system. However, the bounce system also gives the trader more reason to think the stock price will move in the direction (s)he wishes. Moving average bounces can be observed using technical analysis software, various stock price charts and/or calculated manually. The moving average bounce system may also be used along side one or more other technical indicators.

Sources:

1. http://daytrading.about.com/od/tradingsystems/ss/MovingAverageBo.htm
2. http://www.swing-trade-stocks.com/moving-averages.html
3. http://tinyurl.com/2c9qsl
4. http://www.pandacash.com/technical-analysis/moving-average/exponential.htm
5. http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_index_cci