Stocks & Commodities V.

14:7 (294-297): Three Turns On The Pivot Point by William Greenspan

INDICATORS

Three
Turns On
The Pivot
Point
This floor trader updates his previous article
on the pivot point technique with additional
insight on how he uses the method for day
trading S&P futures.

by William Greenspan
everal years ago, I wrote an ar-

S ticle for STOCKS & COMMODI-

TIES describing how professional
floor traders use the pivot tech-
nique. Although the pivot tech-
nique I described works in all futures markets,
it responds best to markets with a wide daily
trading range, such as the Standard & Poor’s
500 index, Treasury bonds, soybeans, wheat
and corn.
Since then, I have received many queries on
how to incorporate the data from the after-
hours electronic trading sessions into the pivot
technique. I tried to ignore the significance of
the electronic trading sessions because of the
relatively low volume of contracts that are
traded in such sessions compared with the
regular day session. It has become apparent
that this data should be incorporated into the
pivot technique and that, under the right cir-
cumstances, it enhances the accuracy of this
trading tool. I will also introduce other varia-
tions of the pivot technique and how to imple-
ment them into the pivot calculations.

A QUICK REVIEW
Let’s review the pivot technique, and how its
original five formulas are calculated. An ac-
tive day trader will calculate the daily pivot
JODY WILLIAMS

points from data compiled at the end of a day’s

trading session. He will use these figures the
following day as part of his daily trading plan.
The basic idea behind the trading pivot tech-
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan

nique is to go long when the market violates

the daily pivot in an upward (bullish) move 680 680
675 675
and to go short when the market violates the 670 670
daily pivot in a downward (bearish) move. 665 R2 665
The other four formulas of the pivot technique 660
XXXX R1
XXXXXXX
660
655
X 655

XXXX XX
provide two support levels in the market be-
XX
650 650
low the daily pivot and two resistance levels 645
XX 645

in the market above the daily pivot. The five

640
635 XXX S1
640
635
formulas of the pivot technique are: 630 630

DATA COURTESY TECHNICAL TOOLS

625 S2 625
620 Pivot point 620
Daily pivot = (Prior day’s high + Prior day’s 615 615
low + Prior day’s close) / 3 610 610
Resistance (1) = (2 x Daily pivot) - Prior day’s 605 605
low 600 600
4/1/96 4/9/96 4/16/96 4/24/96 5/1/96 5/8/96
Support (1) = (2 x Daily pivot) - Prior day’s
high
Resistance (2) = (Daily pivot - Support (1)) + FIGURE 1: PIVOT TECHNIQUE. Here’s the pivot technique for the daily June S&P futures.
Resistance (1)
Support (2) = Daily pivot - (Resistance (1) -
Support(1))

Figure 1 presents the pivot technique for the daily June S&P
futures.
Markets trade back and forth through their daily trading
range. A rising market is stopped by sustained sellers and a
falling market is stopped by sustained buying. This is what
resistance and support are all about. The ultimate level of
resistance in any market is its daily high. This is the area of
the market where the sellers find the most value. All the
buyers at that level are satisfied.
Conversely, the ultimate level of support in any market is
its daily low. The market is supported so much at that level
that any contracts offered for sale are bought. The buyers find
this level to be the best “value area.” History shows that
support and resistance levels are broken
regularly. Once that happens, those levels
are less significant because under every sup-
port level is a cluster of sell stop-loss orders
and above every resistance level is a cluster
of buy stop-loss orders. Once these stop-loss
orders are elected, they will usually move
the market to a new level so these orders can
all be filled. When this happens, you must
analyze the market again to ascertain the
new levels of support and resistance.
wrinkle for the pivot technique. Regardless of the trading
medium, prices will reflect any new information that be-
comes available. Political tensions, foreign and domestic
economic reports or other market-sensitive news will drive
prices in the electronic trading session (Figure 2). Since
trading continues throughout the night until just prior to the open
of the next day’s session, prices often pick up right where the
electronic trading session left off.
The original pivot point is an average, or arithmetic mean,
of three important prices: the prior day’s high, the prior day’s
low and the prior day’s closing price. (For our discussion, the
closing price is synonymous with the settlement price.)
What we want from the electronic trading session is an
Unemployment
report
Globex trading

VARIATION 1
Now that the markets
have evolved from the
CQG FOR WINDOWS

previous three- to
seven-hour trading
sessions to 24-hour
trading centers, and FIGURE 2: JUNE S&P FUTURES. The top chart shows the pit trading activity for May 2, the Globex trading
the electronic trading session is becoming between May 2 and 3, followed by the pit trading for May 3. The spike up in prices during the Globex trading
more popular and liquid, this has created a was a reaction to the unemployment report. The bottom chart is just the pit trading activity for May 2 and 3.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan

indicator that we can incorporate into the pivot formula to three figures together and divide their sum by 3. All the
enhance its accuracy for the upcoming day trading session. formulas remain the same. I retain the support and resistance
Since the day trading session will seemingly open where the numbers that I generated for the morning session. I focus my
electronic trading session left off, we incorporate the elec- primary attention on the new support and resistance figures
tronic trading session’s closing price (settlement) into the because they reflect more recent price data. The new formu-
calculation for the pivot. Instead of simply using the prior las are as follows:
day’s high, low and closing prices, we now use, in addition,
the electronic trading session’s closing price. The variation Daily pivot = (11:30 a.m. CST high +
on the first formula of the pivot technique now becomes: 11:30 a.m. CST low +
11:30 a.m. CST close) / 3
Daily pivot = (Prior day’s high - Prior day’s low + Prior day’s
close + Electronic trading session close) / 4 All other formulas remain the same.
When I get ready to go to the trading floor, I list on a trading
All other formula calculations are the same. Figure 3 shows card in descending sorted order by price the support and
variation 1 for the daily June S&P futures used in Figure 1. resistance numbers generated from the pivot technique. I also
use the components of the daily pivot in my listing because
VARIATION 2 the previous day’s high, low and closing prices are important
Another modification of the pivot technique is to include the support and resistance numbers. My trading card looks like
average price of the current day’s opening range with the this:
prior day’s high, low and closing price. Add all four of these
R(2) Resistance 2
prices together and divide the sum by 4:
H Previous high
Daily pivot = (Prior day’s high + Prior day’s low + Prior day’s R(1) Resistance 1
close + Average of opening range) / 4 P Pivot
C Previous close
The opening range is the range of prices that traded to fill all S(1) Support 1
orders that existed before the opening. The open can be as L Previous low
S(2) Support 2
short as 90 seconds or as long as 15 minutes, but the opening
range is usually established in the first two minutes. The
average price of the first two-minute bar on a chart is a good
way to establish the average opening range price. This gives me eight levels of support and resistance, not just
If the market has moved substantially overnight, or if news the five generated by the pivot technique.
is released or a related market makes a sudden move (the way
Treasury bonds often do while the S&P 500 is waiting to TO SUM IT UP
open) during the brief time the market is closed between the Always trade with stop-loss orders. Contrary to what some
electronic trading session closes and the day trading session new gurus are promoting, unless you have an infinite cache
opens, you will want to make some quick adjustments and of money, you always need to have a way out of your position.
recalculate your daily pivot, support and resistance. Small losses will keep you trading. Remember, the market

VARIATION 3
Another modification to the pivot technique, 680 680
which was suggested by one of my students, 675 675
is to split the day trading session into two 670 670
665 R2 665

XXXX
unequal parts. We use the numbers generated 660
XXXX 660

XXXX
R1
from the previous day’s session (with varia- 655 655

XX X X X
XXX
650 650
tions, of course) for the first half of the day 645 X X 645

XXX
session. For markets that open at 7:20 a.m. 640 640
CST, we recalculate the formulas at 11:30 635 S1 635
630 630
a.m. CST. For markets that open at 8:30 a.m. 625 S2 625
CST, we recalculate the formulas at 12:30 620 Pivot point 620
615 615
p.m. CST. For markets that trade four hours
610 610
a day or less, we do not split the trading 605 605
session. 600 600
4/1/96 4/9/96 4/16/96 4/24/96 5/1/96 5/8/96
The pivot is recalculated by taking the
first half of the day’s high, low and closing
price at either 11:30 a.m. CST or 12:30 p.m. FIGURE 3: VARIATION 2, DAILY JUNE S&P FUTURES. Here’s variation 2 for the daily June S&P futures used
in Figure 1.
CST, depending on the markets. Add the

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Stocks & Commodities V. 14:7 (294-297): Three Turns On The Pivot Point by William Greenspan

can be very unforgiving of mistakes. You don’t need to prove
anything by trading. Your only goal is to make money.
Remember that what worked yesterday may not work tomor-
row. Markets change with time, and an astute trader will
change with his markets. The only constant in the market is
that markets will fluctuate. The market is never wrong —
only your opinion of it.
William I. Greenspan is a local trader in the Standard &
Poor’s 500 pit at the Chicago Mercantile Exchange (CME)
and the founder of Commodity Boot Camp, an intensive
training program for traders.
RELATED READING
Greenspan, William [1994]. “The pivot point for trading,”
Technical Analysis of STOCKS & COMMODITIES, Volume
12: August.
_____ [1994]. “Using stops to your advantage,” Technical
Analysis of STOCKS & COMMODITIES, Volume 12: March.
†See Traders’ Glossary for definition S&C

Copyright (c) Technical Analysis Inc.