Forums Development Pivot Points

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  • #4205
    CSendo
    Participant

      Hello all!

       

      In this thread I want to talk about a topic that can seem basic to some, but has (in my view) a lot of potential for various reasons. I am no expert on pivots, but have found them increasingly interesting as I’ve wandered the forex desert, and therefore I’m excited to see what you all have to say about it. Express your love or hate for them, as we are all penguins and truth seekers here and I hope for a good takeway point (or points) by the end of this thread. Lets get started!

       

      First, I believe there are two types of pivots: single and doubled(I tend to make up my own names for things..). Lets take the standard (H+L+C)/3 formula for some random set of HLC values. If you take that value and use that as your pivot, I call that a single pivot. If you take something like the average range of the past 20 days, divide that by 2(we’ll call this PP), and use Open+PP and Open-PP as your values, I call this a double pivot.

       

      Some general ideas and things we may care about concerning pivots:

      1. How accurate is a pivot level?

      2. How accurate can we track one level to the next?

      3. What role does initial starting position have on a pivot?

      4. Is there any significance in consecutive hits on a pivot (consider multiple “top level” pivots being hit in a day)

      5. In the case of double pivots, what is the trade off/expectation/interaction of price hitting 1, 2 or 3 pivots?

      6. Most importantly, is there some measure (even if semi-subjective) of which pivots are better than others?

       

      other things to consider: How is a pivot suppose to be used? Does it mark an area we expect to be reached? Do you expect something to happen AFTER it is reached? Where did the standard pivot come from? Sure they came from the pit traders wanting some kind of reference to the past days data, by why THAT one? Since then there have been other additions, such as fib based pivots, MA based pivots, ETC.

       

       

      I will be back in a few hours with my first post and thoughts. A question for everyone to ponder and discuss: What do Pivots have to do with Transient bars/zones?

      #4207
      Innate
      Participant

        Pivots exist and are real IMHO. However there are too many variants and they become subjective. They only seem rational in hindsight.

        What's it all about? It's all about money.

        #4213
        CSendo
        Participant

          I want to first tackle what the most natural question for me concerning pivots. How often are they hit?

          First attached are some base line probabilities and numbers for eur/usd D1:

           

          Every pivot that I attempt, if done for this type of statistic, is tested against these numbers. One of the interesting things about pivot work that I noticed as I worked on them was how many things were significant. By that I mean numbers too close to 50%, or too far from 50% are both significant in their own right. This makes the 20-40% and the 60-80% the areas that we want to avoid, but even these can be useful sometimes! Before I reveal the formula, take a look at the numbers for a minute and think about their potential usefulness.

           

          For me, I see that for 20 pips, the probability is quite low that nother pivot is not hit. Therefore if I had some bias, I am safe to bet at least to that point. At the same time, if I randomly enter a position with a 20/20 tp/sl, I can expect to win about 50% of the time. On the other end of the spectrum, if price has already moved 60 pips in one direction, I expect it to turn around and move back down another 120 pips(60 to reach the original level, 60 to reach the other side of the pivot) about 5% of the time. I also expect price to be contained within a range of 120 pips 30% of the time. Hmm. Useful or not useful?

          The pivot formula I used here is actually very simple. Current H1 close +/- 20, 40 or 60 pips, projected for the next 24 hours. That’s it!

           

          Given the nature of volatility expanding and contracting not just over days or weeks but even months or years, sticky numbers like 20/40/60 are generally not good to use. However, a test for more recent data (perhaps 2014) will show if these numbers hold.

           

           

          Ok, maybe this is not so impressive. But if the numbers can be skewed much further, would there be a use then? If we were able to change the probably that both pivots were hit from 50% down to 20% or 10% and bring the probability that neither pivot is hit down from 30% to 10% or 5% while retaining the size, would that be any better? When numbers are attached to the close and projected in the same manner for longs and shorts, The probability to go long is roughly the same as the probability to go short. I don’t think anyone expects pivots to create a directional bias.

           

          However, the question to be asked is: When using double pivots, is there a point, if ever, that these set of probabilities become significant enough to be a good supplementary tool? Personally, my best results (the second attachment) are the best I can get for the moment, and my work and purpose for the thread will be on single pivots.

           

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          #4311
          Saver0
          Moderator

            I’m really glad that you started this thread @CSendo. Past week I did some testing on pivots with @PiratePip and made some very interesting discoveries. He wanted me to keep things private hence I won’t be sharing the indicator until he is cool with me making it public.

            I used the standard pivot calculation and I looked at H1, H4 and daily pivots. I tested scenarios similar to this:
            What is the probability of price touching S1 vs R1 when price hit PP level. Whats the probability of price going to R3 or R1 from R2, etc. Bullish/Bearish start is where the price was at relatively to the PP level. If its above, then its considered bullish start. The first set of stats are for any start. Then I categorized it into bullish/bearish start to see if there are any trends depending on the start.

            For example, PV -> S1: [1136] 48.9% | R1: [1188] 51.1%
            This means, when the price was at PV, it went to S1 1136 times and R1 1182 times and those were the percentages.

            I started with a smaller sample size like 5000 bars for H4 pivots and I saw an edge when trading R3/S3 levels since at these levels we can expect a pull back during trends. For example, imagine its an up trend and the price reaches S3, now there is a higher chance that the price will come up to S2 instead of S4 (go up). BUT, what I noticed is that once I increase the sample size, the probabilities continuously reached 50%. The results that you see is when I looked at 500k bars. What this tells me is the balanced nature of the market. If we were to make any random entry, the chance of it going up or down 20 pips is 50%. Pivots in this pure random entry point of view is just that.

            The edge is when we trade with a sense of direction. That’s when S3/R3 will have meaning. They will play as over extensions and could provide > 80% edge.

            Not to take this thread out of topic.. I have made a similar conclusion about TZs as well. That they are just random price levels. On each chart there are many pTZs that can get hit above and top. The only edge that I see is in being able to determine direction. I’m starting to see the power of the candles with this. I’m making a new series of indicators based purely on candles now  :-)

            Let me know if anybody got any questions about pivots and I would be happy to share what I know/think.

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            Focus, Patience, Determination & Order in chaos

            #4324
            Rahat Lukum
            Participant

              Saver, what’s your take on sense of direction? My experience to date tells me that if I know the direction with high probability I could play it without anything else, you get what I’m saying?  ;-)

              #4326
              CSendo
              Participant

                Hey @Saver0, thanks for the numbers. Before I get into some of the other things I’ve been working on, I do have a question about the second half of what you wrote. Echoing @Rahat Lukum, concerning “directionless bias”, don’t PTZs have a directional bias? The universal number seems to be about 82-87%. That is, if I am looking at a PTZ on eurusd 1hr h=24(that is located at the top), there is about an 80%+ probability that price will break the high in the next 24 hours. Is this a directional bias? I disagree with Rahat Lukum though in the sense that I am quite sure that this is not a trade-able edge due to need to have no stoploss, but I’m wondering more for the purposes of what you mentioned in your thread on FF. Something along the lines of independent systems or statistics that say the same thing. If there was:

                1. A PTZ “bias” (which as we all know exists, lets say the number is 85% for simplicity)

                +2. A separate system with a stoploss that is not hit (lets say 90%)

                Are these 2 enough to create an edge in the market, or prove that the market is not completely balanced? I think that the actual numbers matter, as I consider an edge the ability to make money from the market, but in theory based terms, is this enough, and if not, what is required?

                 

                As for pivots, as mentioned in the earlier post, I intend to look at single pivots, so I’d love to know what work if any that you’ve done in that area. Coincidentally, I’m working on what I consider purely candles as well :)

                #4385
                Saver0
                Moderator

                  Saver, what’s your take on sense of direction? My experience to date tells me that if I know the direction with high probability I could play it without anything else, you get what I’m saying?

                  Yes, the sense of direction I think is the MOST important aspect of being able to trade successfully no matter what method we trade. Sometimes people say, being able to read the trend. The past week I have been testing this “sense of direction” trading where I read the bull/bear power and trade based purely on that very successfully. I talk about this method in the following thread of mine http://www.penguintraders.com/forums/topic/all-about-trend-trading/

                  Look at the number of pips I raked in this week after I started applying just pure sense of direction based trading without any indicators other than candlesticks. 7.38% gain in one week (since Jan 14th low). That was when I decided to forget about all indicators and apply sound classical trading principles.

                  Echoing @Rahat Lukum, concerning “directionless bias”, don’t PTZs have a directional bias? The universal number seems to be about 82-87%. That is, if I am looking at a PTZ on eurusd 1hr h=24(that is located at the top), there is about an 80%+ probability that price will break the high in the next 24 hours. Is this a directional bias?

                  The short answer is, no, they do not have a sense of direction. It’s very dangerous to think that they do. At any moment, there are MANY PTZs on a chart for various H settings. They are above and below the current price. TZ’s are nothing but fractals, do fractals have a sense of direction? Well they can, but generally they don’t. That’s what trading PTZ is like. Take a look at the following example..

                  Pivots aren’t any different. Pivots/TZs/Murry’s math/Supply-Demand Lines/Trend lines, none of these can tell us the direction. The direction is decided by the trader, not indicators. For any random entry trigger, I am certain that the outcome will be 50%. I have spent A LOT of time, over 5000hrs the past 4yrs developing and testing everything I could imagine (and I never run out of ideas) and this is my conclusion. And now, having this sense of direction is proving to be the most successful way to trade  :yes:
                  I wish I just done this the past 4yrs.. haha

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                  #4391
                  CSendo
                  Participant

                    @Saver0 Thanks for the explanation! I have put in about 2000 hours in the past 2 years or so, so I think I am on the right track! haha. I think there is much to learn from someone who has better technical ability (coding) and hours than I do. I’m working on optimization and creating a dashboard for my current work that is based on the assumption that PTZs and pivots have something to say about direction and I hope to finish it this weekend. I’d like to go one good week trading it, and then if all goes well I will share it live on here and attempt a trade journal for it.

                    #4399
                    Saver0
                    Moderator

                      We are all learning from each other here :-)

                      Sure test it out and see. It’s always nice to get additional confirmation and I may have even made a mistake.. who knows.

                      Focus, Patience, Determination & Order in chaos

                      #4729
                      CSendo
                      Participant

                        Short update. I have found SOME evidence that pivots and PTZs provide directional bias, but I will continue to test to verify this in a live setting.

                        #4749
                        Saver0
                        Moderator

                          Short update. I have found SOME evidence that pivots and PTZs provide directional bias, but I will continue to test to verify this in a live setting.

                          That’s great news! Can’t wait to see your results!  :yahoo:

                          Focus, Patience, Determination & Order in chaos

                          #4752
                          pfx
                          Participant

                             I have spent A LOT of time, over 5000hrs the past 4yrs developing and testing everything I could imagine (and I never run out of ideas) and this is my conclusion. And now, having this sense of direction is proving to be the most successful way to trade

                            :good: Nice work saver, completely agree.

                            There is good and bad in every indicator, they work sometimes but not others etc etc. This is always evident when trying to automate any strategy, the same problems always comes up, what looks great visually never translates when applying code and for that matter when you try and manually trade it.

                            The reason is our brains naturally filter out the noise, and what makes matters worse is the more indicators you throw on a chart the more noise the brain will filter, so we end up seeing what we want to see, not what the charts are actually telling us. Also the lower the time frame the worse the problem, the more you have to look at the less you have to react when the market is moving, that’s when mistakes are made. Costly…

                            A lot can be said for picking a bias and using one or two simple indicators to time entries and exits, trading becomes far simpler.

                            Talking from an automated standpoint discovering something that can reliably give the bias is the key. I call it a context because if you have a context then the information from indicators like pivots or TZ’s have a different meaning, making it much easier to create successful auto traders. Well that’s where the journey is taking me…

                             

                            #4753
                            pfx
                            Participant

                              Short update. I have found SOME evidence that pivots and PTZs provide directional bias, but I will continue to test to verify this in a live setting.

                              Nice.  :good:

                              #4806
                              CSendo
                              Participant

                                Some discretion I think is still necessary at this stage until further indicators are made. I agree there are things that look visually great but fall short when coded into an indicator. In my opinion this is because the brain is “creating” additional indicators that when coded, are not taken into account.

                                What I am testing now is something that I worked on a while ago and focuses on swing trading (200 pip ranges). I am expecting to miss about 15-30% of possible entries, so it will take me a while to accumulate enough trades to determine if what I am doing is correct or if it needs additional tweaking. This past week I had two trades, one winner, and one short on EU that I opened late Thursday or Friday (I am expecting 1-3 trades a week so this is in the right field). Price is currently moving up off the open. The analysis is correct and price should move down, but in the event that it does it, worst case scenario I am break even.

                                At the heart, I am using two primary independent systems, PTZs and Pivots. Study of PTZ movement has given me the conclusion that market movements move in unequal distances, and this is something that a third but very minor study in pivots has shown as well. A simple eyeball of the chart will show that price does not move like this:

                                50 up, 50 down, 60 up, 50 down, 50 up, 30 down

                                but rather:

                                50 up, 20 down, 60 up, 20 down, 50 up, 30 down

                                In other words, strength in a single direction with some pull back. No one would even attempt fib retracement theory if this wasn’t an accepted phenomenon.

                                 

                                Pivots, as Saver has described and confirmed, offer equal probabilities for price to reach either price. I have done similar.

                                However, this should make one a bit curious no? How does price move in big lengths, small lengths, big lengths (in a trending environment aka single direction) while still giving 50/50 odds to hit even distances from any price point? I’ve worked by pivots to effectively act as a “cap”. A stop loss cap. In the event that I lose, I lose my cap. In the event that I win, my profit will likely be 2x or 3x the cap, since prices move in trends.

                                Just some insight into what I’m trying.

                                • This reply was modified 9 years, 5 months ago by CSendo. Reason: add. info
                                #4833
                                CSendo
                                Participant

                                  Even probabilities of uneven reward=edge for me

                                  I got out of my short at a good spot yesterday, and I’m back in long today. I’m estimating that my odds right now are about 56%. Not that great right? I use to think so but I’m much more comfortable with it now. I’m looking to break the nearest Top TZ at around 1.1442, with a stop a tad below the current low at 1.1315. (1HR chart, various h values). I am certainly trying to catch the knife here, but I think the odds are favorable.

                                  1.1400 seems to be the safe bet for today, with the stop at 1.1390. Technically either of these prices have a 50% to be hit, although PTZ is my direction provider here so I am skewed to bet long. Statistically I believe Mondays are an extreme point for the week about 60%+ of the time, so I am either in really great shape, or very bad shape. Again, making use of the unknown and limited risk with a much higher reward.

                                  #4903
                                  CSendo
                                  Participant

                                    Hmm maybe I should start a trade journal instead.

                                    Aside for the scalps in yellow, the entries for swing trading in purple have been very good. I have been very content with them. I tried an add-on last night for longs because the top looked not so good, but it turns out I was wrong. I ended up getting stopped out with a -1% loss. I was prepared to take a -2 on the trade, so I am happy with the outcome. The recently bull strength at the swing low was too strong to get a good entry, so I opted for a roughly 1:1 RR on the current open trade.

                                    For the FIRST picture and the use of pivots:

                                    1 of the yellow lines (pivot points) will be hit with 92% probability

                                    The CTZ (low) for h=25 will be somewhere along the purple horizontal line 80% of the time

                                    Price has until the end of the green box to make a new low without becoming a CTZ

                                    If price becomes transient(at the bottom), there is a 70% chance that price will make a new high above the current swing high shown in the picture (1.1450)

                                     

                                    If we take the original propositions to be true, then there is no edge here. However, you can combine multiple of these non-edges to create what looks suspiciously to me as a directional bias. Perhaps I’m getting loony  :wacko:

                                    • This reply was modified 9 years, 5 months ago by CSendo. Reason: ordering of pictures
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                                    #4947
                                    Saver0
                                    Moderator

                                      However, this should make one a bit curious no? How does price move in big lengths, small lengths, big lengths (in a trending environment aka single direction) while still giving 50/50 odds to hit even distances from any price point? I’ve worked by pivots to effectively act as a “cap”. A stop loss cap. In the event that I lose, I lose my cap. In the event that I win, my profit will likely be 2x or 3x the cap, since prices move in trends.

                                      This is very good! I have been trading in a similar fashion as well using pivots and simple trend reading and a bit of bull/bear strength analysis in key S/R levels to see to which direction the strength is. Works pretty well I think but have to really take the time to do a proper unbiased analysis because its easy for the brain to be biased and make the wrong judgement.

                                      Also it seems that no matter which currency pairs we trade, ultimately its as if we are just trading one single pair. It’s like a drop of water on a pond, since they are all tied together, move on one pair would have equal reaction on another. However, what I noticed is that, especially during news, sometimes this movement is not relatively equal perhaps hinting at the strength of one currency over the other. I haven’t had much time to test this out to back this with statistics but I think it would be worth exploring if you or someone got the time.

                                      I will give you an example.. Let’s take a look at a pretty straightforward high impact news event such as “Unemployment Claims”. Now look at all the historical data points for when this news was released. Let’s say we looked at the past 100 news releases. Measure the movement for each currency pair with USD in it. Now take the average of the very last for example the 75 news release’s movement in pips for EURUSD, GBPUSD, USDJPY, AUDUSD, etc. This way you would have 25 data points to test on. Now you know on average how this news event would have an impact across the other major currencies (no matter if its good or bad news for the USD). What you do next is measure the deviation/difference from the average movement for the 25 data points to see if the difference would indicate or hint towards a strength of one currency over the other. In theory, I think it should.

                                      For example, if the unemployment claims news say US economy is strong, we would see EURUSD drop, GBPUSD drop USDJPY go up, but what if USDJPY didn’t go up as much as the average. This indicates JPY strength. And if JPY is the strongest among the 8 majors, then we should be buying JPY when it drops again.

                                      Just a theory of course.. I might try to test it out tomorrow.. Would love to hear what you think.

                                      Focus, Patience, Determination & Order in chaos

                                      #4948
                                      Saver0
                                      Moderator

                                        Also in addition to what I said before. We don’t necessarily have to look only at news event. Pretty much any place on the chart where we see spikes, I think we should be able to use to measure the currency strengths. Because if there is a spike on EURUSD, others should have the same spike as well, all the EUR___ pairs and USD___ pairs.

                                        Focus, Patience, Determination & Order in chaos

                                        #4976
                                        CSendo
                                        Participant

                                           Also it seems that no matter which currency pairs we trade, ultimately its as if we are just trading one single pair. It’s like a drop of water on a pond, since they are all tied together, move on one pair would have equal reaction on another.

                                           

                                          I’ll have to somewhat agree on this. I know a trader who pretty much exclusively trades E/J. eurusdd seemed to primarily trade E/U. I have primarily been trading E/U. Although there are certainly some differences, which could be potentially attributed to the “strength” in each one, a lot of times it feels like it doesn’t really matter what pair I’m trading. A lot of times I’ve noticed that a setup that I’m looking at on EU is more or less the same as it is on the other pairs that I deem worth trading due to spread and volatility (UJ, EJ, GU).  So I could trade risk/4 on 4 pairs, or just risk on EU. Sometimes the trade would have worked better on another pair other times EU is spot on. So I can say that there does, from an empirical point of view, seem to be some value in it.

                                          Additionally, some people have mentioned the need for research in allied currencies and relative strength. I have thought about it a minimal amount, as I just don’t think I quite have the brains to flush it out in a good way. One of my primary “edges” is based on an idea that I knew about and believed to be true (and was taught to be true by a trader I respected) for almost two years. Yet I didn’t have the sufficient knowledge to confirm this until less than 6 months ago! I believe the same is true here to some extent. I think it has it’s space, but I don’t quite know the correct way to approach it. Even just knowing where the news events occurred and their effects in the market is something that is completely out of my league.

                                          All in all, I have thought about doing allied currencies, but I haven’t seen any research on the topic that I actually understand and can take an example from. If I see some work on it or if you want to start a thread on it I’d follow along :D

                                          #4986
                                          Saver0
                                          Moderator

                                            All in all, I have thought about doing allied currencies, but I haven’t seen any research on the topic that I actually understand and can take an example from. If I see some work on it or if you want to start a thread on it I’d follow along :D

                                            I started working on the indicator yesterday and I think I finished to put this theory into test. Feel free to join the discussion here :-)
                                            http://www.penguintraders.com/forums/topic/currency-strength/

                                            I will make a separate thread when I decide to share this indicator.

                                            Focus, Patience, Determination & Order in chaos

                                            #5069
                                            CSendo
                                            Participant

                                              Cool! I will try to come up with some more theories in the mean time. Something that I think I have lacked is screen time, which I think is not very common. With all my time glued to research, I hardly ever actually look at the chart, and well, visuals are where we get the idea of patterns from.

                                               

                                              In the meantime, EU has been somewhat.. close to historic. News and “looming moves” aside, which are not accounted for, these past couple days have been interesting. It has happened a couple times, but seeing consecutive tops and bottoms with just a single potential transient zone is quite rare. To happen three times in a row would start to be a bit crazy. I wonder if this kind of categorization, if capable of being done on a smaller time frame and scale, would allow classifying extended states a bit easier..

                                              For that reason alone( P(not 3 times in a row)) I have a long bias on EU, to at least break the current PTZ. Given how my pivots work, I can pretty much always get 1:1 RR, so as long as the logic is sound, this seems like a good bet.

                                               

                                               

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                                              #5107
                                              Saver0
                                              Moderator

                                                When the market is in a consolidation zone, I now keep it really simple. I think we have to answer only one question, are there any reasons for the price to change the previous trend? The answer doesn’t depend on any market activity, doesn’t matter what “patterns” we see on the chart, only the central banks set the direction. If they don’t say anything about the previous direction changing, then it’s as simple as that, then it has no reasons to change so it will continue in it’s previous direction. This is exactly what happened in EU so I shorted at the top because there was no reason for it to change the direction, so it simply continued downwards.

                                                I honestly feel like these charts are just confusing us and its just noise. There is one direction, either up or down, and only one reason for it to go up or down, central banks/economy. A strong economy will keep going in the same direction until some weakness starts developing. Central banks are the only ones that can make sudden announcements and instantly change a currency’s direction. I think the biggest surprise would be if US decides to cut interest rates even lower! haha  Everyone is thinking and waiting for them to increase the rates, but I think the global pressure might even make them cut it more.. who knows.. I much rather not speculate and trade until they decide where its going to go.

                                                Anyways, that’s what I came to realize over the months. As a day trader, when we trade the short cycles, we are really just trading on the randomness, this random is what kills us because in the short term, up or down are both valid directions with similar odds of hitting. It’s only the mid-large cycles that matter. This means aiming for > 100pip TP trades in EURUSD with at least 50pip SL if taking the trade from a peak.

                                                Focus, Patience, Determination & Order in chaos

                                                #5108
                                                CSendo
                                                Participant

                                                  I agree that the overall direction of the trend is certainly down, and multiple banks have short positions on EU. However while I fully expect EU to make lower lows, as a gambler I don’t want to miss out on opportunity =p. I still believe in “action points” where price can decide if it wants to change direction or continue. Finding the general inertia of the chart is different depending on your scope or tools. Everyone has their own revenue criteria and I think this is the biggest difference between traders and what they seek. Anyone could have been short EU for a long time and never have touched it since maybe 1.15 or 1.16, but in terms of revenue, would they have made more than a day trader or scalper who takes both up and down positions? Overall, I missed my target by about 12 pips so I’m really not that bummed. If offered the trade again I would certainly take it. I correctly saw the long potential forming, but missed assessed it’s reach. Personally, it’s the pursuit of finding answers to the randomness that makes trading exciting to me.

                                                   

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