Key Price of Support and Resistance

Determine Key Price Support and Resistance Areas and the Importance of Confluence

This chapter is the heart and soul of the book. It will explain the methodology of pivot point analysis from “A to Z,” or should I say “R- 3.” This chapter will describe in full detail the principles behind the mathematical calculations and the rationale behind the psychological impact that drives traders to make decisions around these predicted support (S) and resistance (R) levels. I will break this chapter into separate sections to explain how pivot points can be used for short- and longer-term stock trading; how it applies to futures trading, especially when day trading stock index futures; and finally how it applies to the spot foreign exchange (forex) markets. Each investment vehicle has its own nuances, such as trading session hours, time periods in which volume flows change, contract sizes, and decimal point placement so that you know how to correctly calculate the pivot point levels. You need to know the foundation of the methodology of pivot point analysis first, so you will know how to then apply it to the specific markets of interest that you are trading.

The power in using pivot point analysis is that it works in all markets that have established ranges, based on significant volume or a large group of collective participants. After all, the current market price equals the collective action of buyers and sellers. Pivot point analysis is a robust, time- tested, and, best of all, testable form of market analysis; that is, you can back-test to see the accuracy of this trader’s tool’s predictive analysis. The really unbelievable aspect of pivot point analysis is who uses it. In fact, many traders feel compelled not to learn about it because it seems complicated. I will dispel that myth. Other traders who had read my previous book felt that since I had mentioned futures, rather than equities or forex, pivot analysis did not apply to those specific markets. The truth is that many leading educators in the field of forex and stock trading have either bought my advanced trading course or attended one of my live two-day trading seminars and now share these methods. These are the same techniques I will explain and teach in the following chapters and reveal in the accompanying CD (compact disc).

Remember I explained previously that as a trader you have the right and the obligation to understand everything there is about trading. You need to have a good understanding of game theory. Many traders today use a “black box” method, which is run by algorithm means, that triggers trades automatically. You must understand what goes into building a trading system and how it triggers the automatic reaction when a market price hits at or near a specific level. You are competing not just against fellow traders, but against institutions and major investment groups as well as savvy computer experts, who have a method for removing the emotional element from trading. So what are these levels, and why do we see major reactions or reversals from these mysterious points on the charts?.