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.

Lies, damn lies! or, Choosing a broker

So, let me tell you the number one thing about Forex - liquidity my ass!

All of the websites tout the "trillion dollar a day liquidity" of the forex market. Sure, when you're on a real exchange, or have an institutional account with a bank. However, most forex brokers play the other side of your trade. So, in order for them to win, you have to lose. Sounds like a conflict of interest, right? You see, all they do is get a quote machine and pass the numbers down to the software they give you. Things like the Metatrader servers (the server side to the client Metatrader) give the broker the ability to set things like spreads, and change prices. So, your money doesn't drift off into the ether of the "forex market" - no, it stays within the confines of their servers and bank account. This is what's known as a "market maker". Now, market makers are part of just about every market - the stock market, for example. These are the companies that buy and sell shares on the market. They create the "liquidity" by being on the other side of the trade. They make their money in the "spread" - or the difference between the bid and ask. However, the stock market makers are highly regulated. The forex market is currently the wild wild west. There are 2 agencies governing these brokers - the CFTC (commodities and futures trading commission) and the NFA (national futures association). However, this is a voluntary association to join. So, forex brokers are under no regulation at this time - mainly because it's sort of an "international" business - since you are dealing with foreign currencies. Now, they also say "no commissions!" Well, this is crap too - they make plenty of money on the "spread". This is the difference between the bid (what people will buy for) and ask (what people will sell for). Brokers can make these whatever they want. It's a built in pain for a trader - they "take" 2,4, sometimes 10 pips - so that if you want to make a profit, you first have to at least cover this spread.

So, what to do? RESEARCH! The first thing to do when considering a broker is to google them for a review - see if there's anything ugly out there. Next, go to the NFA and use their search tool to look up the company. See if there are any actions against them. Also, importantly, look at the "listed principals" (the owners, ceo, etc.). Research these people as well to see if there are any cases against them. Trust me, this will give you peace of mind. I started my Forex adventure with a company called Forex Liquidity. Within 2 months, there was action against them, and their assets (including MY money) are currently frozen. It will be months (maybe 1 or 2 years) before I see my money (or some portion thereof). The customers are low on the totem pole. You can see details here. I don't know if I'll see that money again. I'm glad I didn't move a bunch in there, but it still hurts.

Now, there are other brokers out there called "ECNs" - these are better, if they truly are. ECNs are "electronic communication networks" - but what they try to say is "we just pass your order along". And it will go into a bigger liquidity pool, where there may be several market makers or even other traders waiting to take the other side of your trade. These brokers sometimes charge a commission, or they can also take the spread. These brokers are generally more fair, but I have yet to find one that has decent software for charting and automated trading.

There are some options out there, but do your homework! DO NOT go with a broker who is not registered with the NFA, unless they are a big bank. And watch out - things are never what they seem. Deutsch Bank (huge german bank) got into the action - I thought, "hallelujah!" - until I found out all they did was partner with FXCM. Yes, dbFX is FXCM with DB logos.

Oanda is decent, but they are a market maker. However, they hedge all of their trades (they take a position opposite yours), so this would effectively net to zero (but they still get the spread).

Inaugaral Post

I decided to give blogging a try, because I have searched the world over for the Holy Grail of trading. Of course, it doesn't exist. I have read many books, bought systems, downloaded pdfs, and I still don't feel like I'm ready to trade.

Mostly is because I want to have a system that works. I have decided to try the Forex, because it's open 24/5. But there are many things I have learned about Forex, which is why I started this blog. I wish someone had told me these things, as it would have saved me headache and worry. I hope someone will find this useful.

I am a programmer by trade, so having a mechanical system really appeals to me. I haven't found software for backtesting that does what I want, and is reliable... so I have, on ocassion, written my own (although very specific for a strategy).

As I write this blog, while I have been reading and making little trades for about 9 years, I have yet to make any real money. I'm talking about not having to worry about a job kind of money. That's my goal. I have a 7 month old son that I want to spend more time with.