How to Trade Pivots

Let's go back to January to illustrate how I trade the weekly and monthly pivots. The chart below shows the GBPJPY from the first week in January of this year. The trading system is very simple (as most of the good things in life are).

The key is to trade the pair to the pivot. In the example above, I traded two sets of stacked trades, one down to the weekly pivot point and one stack down to the monthly pivot point. My stacks are simply one trading unit each 10 pips above the pivots. I stack no more than 20 positions on any pivot trade and I trade two units for the first 10 positions and 1 unit for the second 10 positions. In the above trade, for the weekly pivot, I had 10 two unit orders and 2 one unit orders. For the monthly pivot, I had the full 10 orders for two positions and 10 orders for one unit. Both closed profitably (weekly on Jan. 4 and monthly on Jan. 5) for a total of 1330 pips on the weekly trade and 2650 pips for the monthly pivot trade (the total pips were actually 3864.8 for both trades due to the spread and slippage).

The key to any consistent trading system is to find something that reoccurs more often that it does not and to take advantage of it. Look at the pivot trades for the GBPJPY for the last several years and you'll see what I mean. More on this later.

Happy Trading!

Pivot Points - My New Trading Style

As I indicated in my earlier post, I have changed the focus of my trading from straight support and resistance to a pivot point based system. What are pivot points? Pivot points (or as I sometimes call them, Pivots) are simply mathematically derived price points based on the previous period's price movement. The simple calculation for pivots for any period is to add the High, Low and Close for the previous period, and divide by three. The result is the pivot point for the current period. For example, if you are trading the GBP/JPY and are looking for today's daily pivot, you would look at yesterday's High, Low, and Close, add them together and divide by three (High=148.63, Low=146.64, and Close=147.33). In this case the calculation would result in a daily pivot point of 147.53.

What is the significance of the pivot? Quite simply, the price in a given period almost always hit the daily pivot (or comes very close). It seems as if the price of a currency pair is drawn to the pivot point. Missed pivots are rare and can themselves give rise to great trading opportunities. The way I'm trading now, for the most part, is by placing orders from the pivot point toward the current price when, on a weekly or monthly timeframe, the pivot has not yet been hit.

The order style I use is also different than the way I was trading support and resistance before. Where I would enter into a single position for and S/R trade and have a stop loss that trailed behind the price as it moved toward my profit target (a legitimate way to trade by the way), now I stack orders from the pivot point toward the price. For example, using the GBP/JPY as an example, if the weekly pivot were at 147.50 and the price was below the pivot at 146.00, I would place a buy order, starting at 147.40 every ten pips down toward the current price. I leave a little room for the price to move so that the chance of an order opening while the price is moving away from me is minimized. So, in this example, I would place 10 orders, 10 pips apart from 147.50 to 146.50 with the pivot as the profit target. Then I would wait.

That is it. That is the trading style I use most often now. I intend to post the trades I'm making here so that those of you who care to can follow along. I will also post a few additional trading tips this week so that the trading style makes more sense. I'll be talking about stops and losses in the next post.

One very important thing I need to say before signing off today is that I've spent the last 6 months or so backtesting this trading style and trading small lots to see how it works in real money situations. I encourage you to do the same. Never take someone else's word that a system works. There are plenty of tools for backtesting out there. Take the time to test these ideas, then try them using small lots. Only when you are convinced that they will work for you should you commit significant resources.

Happy Trading!

I'm Back!

Greetings fellow traders. I want to say thanks to those who have emailed me in the last 3 or 4 months. I've been on a break since about September (not from trading, only from blogging), but have solved some of the issues that have kept me from the keyboard - more on that later.

I will be starting to post again, but with a different accent on trading. Up until now, its been support and resistance, which is a fine and profitable way to trade. For the last six months or so though, I've been working and testing a new trading method related to pivot points. I'll share with you what I've learned and discuss trades as they develop.

Again, sorry for the hiatus. There was just no other way for me to do what I needed to do.

Happy Trading!

Currency Pairs - What does that mean?

When you trade in the Forex Market, you will trade "Currency Pairs". This is the source of a lot of initial confusion for new traders. "Why Pairs? Why can't I just trade Dollars, or Euros or Francs?" is a question you hear often. The answer is easy, every exchange on the Forex Market (or at any border exchange kiosk for that matter) involves two different currencies. You are trading US Dollars for Canadian Dollars, British Pounds for Euros, Euros for Japanese Yen, Australian Dollars for Mexican Pesos or one country's currency for another's. This exchange is done on the Forex Market by trading currency pairs. For instance, when you are trading the EUR/USD pair, you are exchanging Euros and US Dollars. If you believe that the Euro is going to strengthen against the US Dollar, you buy the pair. If you believe that the US Dollar is going to strengthen against the Euro, you sell the pair.

In each pair, the first pair is the primary currency, or the currency against which the other is denominated. This means that in any quote for the EUR/USD, the EUR number is always 1. So if the quote for the EUR/USD is 1.3547, that means that it takes 1.3547 US Dollars to purchase 1 Euro. If you are following the USD/JPY and the quote is 112.58, that means that it takes 112.58 Japanese Yen to purchase 1 US Dollar. For the GBP/CHF, if the quote is 1.5128, it takes 1.5128 Swiss Francs to purchase on British Pound. You get the idea.

When you are "buying the pair" you are, in effect, borrowing the second currency to buy the first. So, if you are buying one standard lot of the EUR/USD, and the quote is 1.3547, you are borrowing USD $135,470 in order to purchase €100,000. Your hope is that the Euro will strengthen and you will sell your Euros and get more US Dollars for them. For example, if the pair rises to 1.3850 and you sell your position, you will get USD $138,500 for the €100,000 you bought. After repaying the loan of USD $135,470, you will net USD $3,030, which is your profit for the trade. To give an example of how the other side would work, if you think that the Australian Dollar is going to weaken against the Japanese Yen, then you would sell the AUD/JPY pair. Suppose that the quote for the pair was 71.60 (meaning that 1 Australian Dollar cost 71.60 Japanese Yen), you would borrow 100,000 worth of Australian Dollars and purchase ¥71,600,000. If the AUD did weaken and the price for the pair fell to 69.90, you would sell your Yen and pay off the loan to your broker and have ¥1,700,000 in profit, which would be converted to whatever currency you trade in and credited to your account (in US Dollars you might get $17,000, in Euros you might get €13,000).

Now, when you borrow money from your broker to buy or sell a currency pair, you will pay or receive interest on the loan, depending on the difference between the two countries' interest rates. This is called Carry or Roll For a more exhaustive discussion of the Foreign Exchange Market from Wikipedia, click here.

I hope that helps clear up some confusion on why currency is traded in pairs. As always - Happy Trading!

Why I'm Still Investing in Stocks

This is a re-post of something I wrote in January. I find that it is still true, so, I bring you a golden oldie:

Most reasonable minds agree that we are currently in the midst of the biggest economic decline of our generation (and perhaps the one before, depending on how old you are at the moment). Things are bleak. Unemployment is high and going up. You can't open a paper these days without being met by an article about a company that's cutting jobs. Not just mom and pop companies, the big ones too: IBM, GE, Microsoft, pick a bank. Good jobs are getting scarce. The Dow is playing with 8000 and may drop by another 25% (seriously, it could happen). Foreclosures are at record highs and not just the sub-primes, prime jumbo mortgages are running at about a 7% default rate (according to Tuesday's WSJ).

What can be done? Who knows? Politicians will spend our money, people will get unemployment and go on welfare, we will scrimp and save and then, slowly, when no one is watching things will begin to turn around, little by little, and life will, over the course of a year or two, return to normal. We will all forget the bad times and people (who, as a rule, are stupid), will begin to act in the same ways they did before, over extending themselves, using too much credit, buying houses they can't afford. To put it simply, we will return to being Americans.

But, in the mean time, I'm investing in stocks . . . a lot. Prices are low. They may go lower, but right now they are low. I see one of two things happening in our country. One possibility is that history will repeat itself, and after a period of decline, we will pull out of the darkness and our economy will boom. This recovery is usually led by the markets. Stocks begin to rise before we all acknowledge that the worst is over. This is how it has happened in the past. The other alternative is that the markets go to zero and all meaningful productivity stops. We lose everything. We become Haiti. Everyone is broke and the country is irreparably broken. If this happens, no savings plan (whether in your bank or under your mattress) will help you. The dollar will be worthless because there will be no country to back it up. This second option, while possible, is very unlikely (in my opinion) and something that, unless you are going to build a compound and be able to raise your own food, is not worth preparing for. So, I'm buying stocks of good companies that are being drug down by the market in recession, and preparing for the turn around that will come and make me much, much, much better off.

Taking a Break

Greetings All- I just wanted to post a note saying that I am taking a break for a bit and will continue regular trade ideas in July. Sorry for the short notice, but it could not be helped. Hopefully, you've been following the trades well enough to be able to see developments as they come. If not, page back through the older posts to see how support and resistance trading works.

Happy Trading

What I'm Watching Now - EUR/CHF

You can see that the Euro/Swiss has been trading in a pretty tight range for the last several weeks (see Daily Chart to the right). I expect that the pair will break out of the consolidation pattern it is now in and will move strongly in one direction or the other. I'll probably trade it on the hour chart, but will be watching it closely in multiple time frames. If I see something develop, I'll post it here.

Happy Trading!