Learning Pivot Points

I have discovered Pivot Points. Apparently, this has been around as a tool from the floor traders. It's a way to establish support and resistance levels of today's trading based on yesterday's high, low, and close prices. The calculations you can find anywhere on the internet, but I will put them here for you:

Resistance 3 = High + 2*(Pivot - Low)

Resistance 2 = Pivot + (R1 - S1)

Resistance 1 = 2 * Pivot - Low

Pivot Point = ( High + Close + Low )/3

Support 1 = 2 * Pivot - High

Support 2 = Pivot - (R1 - S1)

Support 3 = Low - 2*(High - Pivot)

I have found several articles about trading pivot points in Forex:
An article on TradeJuice
An article on Investopedia

Now, I am busy postulating ways to trade the pivot points. If I could stay at home, it would be easier, because this seems to be an intraday trading method, but I'm seeing if there is a way to program it. I need to make an EA (expert advisor) for Metatrader, or write a C# auto trader and interface with an API (I still haven't decided on a broker yet). However, I want to show you a few charts. People always show you how perfectly things work. But I want to show you that things don't always work. Because I believe when you know that, you have better tools to avoid them.

So, my first 2 graphs (you can click on them for a larger picture).

This is a 1 hour chart of USDCHF (Swiss Franc), showing the daily pivot points. The light blue line is the pivot point. The black and red lines are the bid/ask lines. I wanted to show the difference between what just the closes look like, versus the candles, which show the actual range. In these charts, you can't even see the support and resistance lines, because the currency never got to them. This would have been a boring trading day for pivot points. Fortunately, days like this seem to be the exception, rather than the rule. Let's take a look at some other charts. These are all from this week, so these charts are all within a 3 day span.

Let's take a look at some charts that work:

These are 1 hour charts of USDCHF from the previous day. Again, the light blue line is the pivot point. The red lines above are the resistance lines (R1 is the closest, R3 the farthest). You can't see the support lines (which would be blue). As you can see, this blew right through all 3 resistance lines. This is probably the reason that the next day it hovered around the pivot point - exhaustion. You can see that the first candle closed slightly above the pivot line. Looking at the line chart, you can see just how nicely the pivot point provided support, then it shot up. In order to catch this move, I am looking at playing a shorter time frame, such as 15min or 30min. This will allow you to get into the move before it goes too far. If you had waited until the price closed above the resistance line on the 1 hour chart, you would miss half the move - it, in fact, closes above the 2nd resistance line.

Let's take a look at another chart:

This is the GBPUSD 1 hour chart. You can see the light blue pivot point at the top of the chart (waaaay at the top of the candle). Using the line view though, you can see how almost perfectly the S1 line provides support it bounces off the line 3 times without breaking it. That's strong support. It will most likely go up from there, but if it does break through, you can bet it will fall fast. In fact, the next day it did break that support line, and made a 140 pip move. Now, looking at the candle view, you can see that several of the candles broke through the support line - but the important piece is that they never closed below it. However, on a 15 or 30 min chart, they did - but just barely. This is one reason to use thresholds and closing prices. If I were going for a high probability, low pip trade, I would have set a sell stop about 10 pips below the support line, with a take profit at maybe 15-20 pips, with a stop at or 1 pip above the support line. In this case, 15pips would have just been possible.



Let's take a look at 1 more chart:



This is the USDJPY 1 hours chart. If you look at the line chart, you will see how nicely it bounced off of the S1 line, then jetted through the pivot line, and all 3 resistance lines. These are the days that can be very profitable, but they are very difficult to program into a system that a computer can understand. It gets complex. But, if you can trade in front of your computer, this would be a great opportunity. See how the price bounces off the R1 line, then goes down to the S1 line, can't stay below it, then shoots up through all 3 resistance lines.

Forex Killer - does it kill?

If you look for anything on Forex these days, it's hard not to see an ad for Forex Killer. Anything under $100 is an easy buy for me, so I purchased it, but soon after I started looking deeper into the website.


There are a few things that bug me. First, the man you see, and the video that comes up - it's not Andreas Kirchberger. It's an actor. Does this guy look familiar? Mr. Kirchberger is German, not American.


Now, I looked at the proof of his system on his site:




It's impressive, but when I started looking into the trades, a few things jumped out at me. First, he's using a trailing stop, which is "suggested" in the documentation, but never specified as to how or what to set it to. I'm a big believer in systems, and if you're going to post results, then you need to post the entire, actual system. You CAN'T get the results he posts by just following the signals of the software - there needs to be a trailing stop. Look at the second trade. The stop loss is 1.3490, but the exit price is 1.3510. I sent an email to Mr. Kirchberger:

Mr. Kirchberger,

I have contacted support, but they gave me the general guidelines
that are outlined in the software. Can you offer me more
information? Please see my questions here and at the bottom of this
email.

What trailing stop was used to generate the statement ( http://www.forex-killer.com/statement.gif ) on the front page?

The general guidelines you give below for stop loss do not seem
to match what I see in the statement either.

[We recommend to use Stop Loss = 70-100 pips for daily trading (50-90 for hourly) and Take Profit = 120-150 for daily trading (80-100 forhourly) and 10-20 pips for small timeframe. You can also experiment with S/L and T/P.]

Thanks,
Bill
------------------------------------
Bill
I use trailing stop 10-40
depending of the timeframe.
Andy

Again, being a believer in systems, I would like more precise answers (for 30min timeframe, I use a 10pip trailing stop, 1 hour I use a 20pip TS, etc..). However, I must say, I was impressed that I heard from Mr. Kirchberger himself. He is selling something I think he believes in, and you're not out on your ass once you've bought the software.

Second, the risk he takes on is large - quite large. Look at the GBPUSD trade on 4/18/07 - a loss of 11,000 - and it didn't even hit the stop loss! He exited before that - otherwise the loss would have been twice as large. Now, he could have exited using the software, as it tells you that you can exit a position if the software gives you a no position or opposite position. But I can't be sure just looking at the statement.

Since I have a day job, I prefer a daily timeframe, at least until I can make enough money to not have to work. I traded for a week using a demo account and had 1 small winning trade and 5 losing trades. This was 3 months ago. I have decided to go back and try to figure out a better way to trade the software and see if it actually works, and what settings work.

So, for me, the jury is still out on the software. I have found a few other reviews. Apparently the newer version of the software is using neural network for it's programming, and you can run the same numbers twice and get different results. Mr. Kirchberger says they are aware of the problem and are working on it. As a programmer, I can tell you that Neural Nets will have this issue, so I'm not sure it's good for doing things like backtesting, because you won't always get the same results for the same inputs.

And on that subject, his website says "I'm talking about a proven money making method where you generate all of the cash yourself by trading your own money." How can it be proven if he has just changed his algorithm?

Now, all of that said, I still have hope for this software. I like the fact that this is mathematical, and that takes the emotion and interpretation out of it.

Here is a review that expands on some options for using it for trading:
http://www.smarttradingforprofits.com/a-review-of-the-forex-killer-forex-trading-system/