Thursday, 19 December 2013

Pivot Points and their significance in everyday trading

Pivot point is a price level that is calculated for a stock based on its previous days open, close, high and low price. It is basically an average of these prices and helps to predict where the price will more likely be for the day, given no other factors of involvement. If the market, or if the stock itself is bearish, the prices are more likely to be below the pivot point and if the prices are bullish, they are more likely to be above the pivot point.

Pivot points have associated price levels as well, that are referred to as support and resistance levels. On a bullish day, a stock price is highly capable of reaching these support levels or even cross them, depending on the volume and the bulls. On a bearish day, to the contrary, the prices are likely to reach these resistance levels, and once a resistance level is broken, it signals bearish movement.
Support levels are S1, S2, S3 and resistance levels are at R1, R2, R3. Online pivot calculators are available that help calculate the pivot point for a particular stock based on the previous days prices.

I am providing a link below of the 5-day intra-day chart of the SPDR Gold Trust in Wikipedia, that illustrates how pivot points might be helpful in determining entry and exit points for inter-day as well as intra-day trades. (see the Trading Tool section)

If you analyse the chart more carefully, you will observe the following:
On the first day, the market is directionless, and hence the prices fluctuate more or less around the pivot point. Even though the price tries to reach the first resistance level, it is immediately pulled back, and keeps hovering near the pivot point for the rest of the day. This indicates that the support is not strong enough.
On the second day, it starts near the second support level, indicating, that it is going to remain bearish for the rest of the day.
Note on the fourth day, that even though the stock price falls very close to the pivot point, it is not able to break it and go below it or reach it, indicating a bullish trend ahead. When it crosses the first resistance level, this is further confirmed. If the point at which this happens is used in conjunction with candlestick patterns, it will be even easier to identify the entry and exit points during the five day chart referred to here.

In my next post I will try to illustrate how pivot points when used in conjunction with Fibonacci numbers can act as a helpful tool to determine entry and exit point for trades.

Monday, 16 December 2013

Fibonacci Numbers and their Significance in Trading

A lot of the times, when the market is moving at its terrific speed, we are unsure whether the price we are buying or selling at is correct, and if the price of the stock will go further up from here and vice-versa. Since we are not sure of the point of the change in trend, we often either BUY and SELL too late, or BUY and SELL too early. Fibonacci numbers help us at these points to determine what could be the highest range the stock may reach for the day and vice versa.

Fibonacci tools unlike a lot of the other tools in the market are not trailing indicators but leading indicators.

Fibonacci tools allow you to track retracements and extensions. So what exactly is a Fibonacci retracement? A Fibonacci retracement is based on the fact that Stocks will often pull back or retrace a percentage of the previous move before reversing their direction.

Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance between the two by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original move. Once these levels are identified, horizontal lines are drawn and used to identify possible resistance and support levels.Fibonacci retracements often occur at the following levels: 23.6%, 38.2%, 50%, 61.8%, 100%.

Even though Fibonacci retracements work best over a longer time-period they can be pretty useful for getting into short term trades as well, when used along with MACD and stochastic oscillators.

Here is a snapshot for LNKD chart which mainly had a downtrend yesterday. For the second wave in the day, the high is at 231.29 and the low is at 227.59 which gives an approximate retracement of 50% at 229.42 and retracement of 61.8% at 229.85%. Since this was a downtrend, the retracements were pulled down before they could reach the 61.8%, indicating a further downtrend in the day. If you notice the next high is at 229.64.

So here even though it is a single day chart, the Fibonacci retracement still helps to more or less predict at which point one should sell, to reduce their losses during a downtrend.

Now lets us look at FB which was on an uptrend yesterday.

It's first high for the day was 54.46, and the subsequent low was 53.77 which gives an approximate retracement of 54.29 at 76.4% and 54.19 at 61.8%. The next  subsequent highs were 54.16 and 54.24 which were just below the 76.4% and 61.8% mark indicating that even though it was in an uptrend, it was not strong enough to cross these marks, and hence starting on a downtrend with the next high not able to cross 54.16 again.

So here even though it is a single day chart, the Fibonacci retracement still helps to more or less predict at which point one should sell in a single day trade, to reduce their losses during a downtrend.