Trading techniques: the best strategies by John Person – Trading with the person-Pivot
Part 3: trading with the person-Pivot
In this article, the "person Pivot Indicator" is presented in detail – a powerful tool that is based on the classic Pivot Points Analysis. Unlike the classic Pivots of floor-traders, the "person-Pivot" contains a filter element that defines automatically at which stage the market is in.
The special feature: The tool is suitable for both short-term day traders as well as for long-term trend traders.
Classical Pivots are based on a mathematical formula which determines the potential width of a trading range. As basis are data from an earlier period used, including the high, low and closing price. The formulas are as follows:
• Pivot point (P): high, low and closing price are added and divided by three. P = (H + T + S) / 3
• Resistance 1 (R1): The pivot point is multiplied by two and the low subtracted. R1 = P x 2 – T
• Resistance 2 (R2): The pivot point is added to the high and the low subtracted. R2 = P + H – T
• Support 1 (S1): The pivot point is multiplied by two and the high subtracted. S1 = P x 2 – H
• Support 2 (S2): From the pivot point, the high will be subtracted and the low added. S2 = P – H + T
Some analysts still add to their pivot calculations a third level added in order to detect extreme price swings (e.g. price shocks due to news):
• Resistance 3 = H + 2 x (P – T)
• Support 3 = T – 2 x (H – P)
There are also other variants in which the opening-price is included. That means in this case that opening price, high, low and closing prices are added together and divided by four: P = (E + H + T + S) / 4
Person-Pivots
When it comes to identify a trend or a trend reversal, Moving Averages (MAs) are a reliable tool for any trader. If you combine two or more MAs, you can consider the following: If the shorter MA is over the longer MA and the price is over these two values, the trend is upward or considered bullish. The same applies vice versa for bearish market conditions. This concept is based on the person pivots. It is clear that the trend or market conditions are bullish, the indicator R2 can be used as resistance and S1 as support. As a result, there is a prognosis for "higher highs and higher lows. As an example, the daily chart of the DAX is displayed in figure 1in US dollars, along with the monthly Person-Pivot-Analysis. Green lines indicate the support, red the resistance and blue the pivot point. The Pivot Levels are reset at the end of the month for the following month. Through higher highs and higher lows is also confirmed that we are in a bullish market (bearish at lower highs and lower lows). End December 2015, the pivot lines projected lower highs and lower lows for the next month. Even if the market had already fallen below the support in that month, it was a help, because the chart-analysis looked also bearish. Also for the month of February, lower highs and deeper lows were displayed. The formed low came here precisely on the support. End of February the forecasts for the March highs and lows were almost correct. The person-Pivots also showed correctly the bullish overall market for the month of April. This tool gives the trader, in connection with entry-triggers such as bullish High Close Doji (HCD) and the bearish Low Close Doji (LCD) (TRADERS' 06/2016; in the Store www.traders-media.de available) or other triggers, a clear advantage. The analysis is also suitable for short-term traders.
Trading with the person pivots
Let's take a look at how you can use the person pivots when trading. Since the Person-Pivot is calculated based on the closing price, traders can get an idea of whether the market is bullish or bearish, and project the high or low for the next trading day. Figure 2 shows the 60-minute chart for the Euro FX futures contract. At the end of the day we make the calculations for the following day. The general rule is: If we are in a bullish market, we are looking for buying signals. In the second part of this series we have presented the high-Close Doji pattern along with the entry-level trigger and the stop-loss. In the chart, at the end of US-trading-day at point A, the entry signal came. The following trading day had a positive performance, which lasted until the projected high on April 29. With this projected resistance level (red line) the trader received an excellent exit point. After a few hours the market consolidated and triggered another buy signal (point B). Two trading days later on 03 May, at point C, a Low Close Doji occurred which provided the opportunity for short entry. The combined Candle-analysis and Pivot-analysis works on multiple time frames. In Figure 3 you can see in the 15-minute chart, a Low Close Doji (point A). This corresponds to the highest price, which was reached in Figure 2, as a Low Close Doji has been formed in the 60-minute chart. The person pivots fell on the potential high movement, whereby a trader received the warning, to look for clearly defined sell signals at resistance (red line). The strategy also works for various asset classes. Late March and early April, as most analysts predicted falling oil-shares and energy-shares, the daily charts with the person pivots showed that the month-forecast for April in oil- and gas-production-sector-ETF (symbol: XOP) is bullish. In Figure 4 this is signaled by the red line which predicted at the beginning of April, a higher high and a higher low (green line). After just four days, a daily high close doji (point A) was formed above the Pivot (blue line), from which a low-risk trade with considerable upside potential was resulted.
Conclusion
This strategy was first released in 2005, and in view of the many changes on the markets was since then well proven. As part of a reliable set of rules, this strategy produces first-class setups and clearly defined trades. The next article will deal with, as well as other indicators – from volume- oscillators to price-based oscillators such as Stochastic and Relative Strength – which can be involved in this strategy.
John Person. John Person has worked for 36 years in the futures and options trading. In 1979 he started at the Chicago Mercantile Exchange and has since then been an independent trader, broker, analyst and managing one of the largest companies in Chicago. He was the first, who combined the Candlesticks- and Pivot- analysis. Person is author and respected speaker at events.