A Powerful Trading Combination: Pivot Points, Candle Patterns and Moving Averages.

Name: John Person Company: Sponsored by FX Futures.com

Years Trading: 27 Favorite Movie: The Godfather

As promised, this article is the last of a four week series that will introduce you on how to improve your trading by optimizing your charting software to incorporate pivot points and how to use the pivot point as a moving average. You may find this concept will help you in determining if the market trend is bullish, bearish or neutral. With that insight, it will help illuminate the potential direction of the market and then you can look for specific trading patterns or opportunities. This method can also help filter out which target support and resistance numbers to use. I challenge you to apply what you will learn in this article and apply this new found knowledge to the test by entering and using these techniques in the FX Futures Million Dollar Trading Competition.

To help you further, I will share with you some pretty amazing statistics on the frequency of certain chat patterns that form the high and low of a given trading session. This information might help you discover major turning points and some high probability trading set-ups. When we combine the study of price action by the use of Candle charts with using Pivot Point analysis it can truly give traders an edge in the markets.

Candle Stick Charting is a basic building block method that immediately shows a trader the important connection between the four most important aspects of price analysis. That is the relationship between the Open, High, Low and close of a given session. It includes color coordination to differentiate the relationship between the open and close referred to as the real body.

Candles also help illustrate the close relationship to past price action and where prices are as it relates to the current range. We can see if the close is closer to the high, which gives a general bullish bias or if the close is closer to the low which gives a general bearish bas. Candles help illustrate the current markets environment and the current time frames acceptance or rejection of a specific support or resistance level in a clear visual manner.

If for example, on a given trading session, prices move higher from the opening price and close near the highs, it shows strong buying interest. If after the open, the market trades up establishing the high and then fails, the distance formed from those points of interest is called the shadow, which shows rejection from that price level.

There is one particular candle called a Doji, this forms when there is no main real body formation as the market closes at nearly the exact level from where it opened.

The next candle of interest is the Shooting star, after long up-trends or consecutive price increases over a period of time, this candle has a long range where the market closes closer to the low, and the shadow that is created is nearly two times the size of the real body. These patterns generally identify a strong resistance level and we go on further to illustrate that they can indeed form the high of the day.

I have performed a back-test study on the frequency and reliability of certain candles as to which form at the high and low of a given session. Later in this article I will share some amazing findings on the Euro currency futures that are sure to help you uncover turning points in the markets. These statistical findings are from my new book, “Candlestick and Pivot Point Trading Triggers + CD-ROM: Setups for Stock, Forex, and Futures Markets”. This book can be found on amazon.com or on my website at www.nationalfutures.com.
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Clearly put, candlesticks do help identify “swing points” or “pivot points” which are areas where momentum changes direction. Not to be confused with Pivot Point Analysis which is utilized to predict support and resistance areas, this reference is based on price action that reaches its absolute value and reverses.

Most day and swing traders use the pre-determined support and resistance levels based on the mathematical calculations from Pivot Point Analysis. As a quick review the pivot point number is the sum of the high, low and close divided by three. P= (H+L+C)/3= pivot point. There are typically three levels of resistance and three levels of support calculations.

Through the years I have noticed that Doji, hammers and shooting star formations formed more often than not at these pre-defined levels. In fact it was this casual observation which led me to run a back test study on the relevancy of these patterns on different markets. That is the focus we want to concentrate on, how price behaves and what patterns form at pivot point support and resistance levels especially when Doji’s, hammers and stars appear. Then when we introduce a moving average component which is overlaid on prices, it can really illuminate or help in identifying turning points, which translates into higher quality trading opportunities.

The key is watching for confirmation for a transition to take place and to act when there is a shift in momentum. When we see a specific conditional change take place in the markets behavior, for example after a downtrend we want to watch for bullish conditions to start forming especially when prices are at a pre-determined pivot support level. For example, for a bullish set-up we want to see prices establishing a higher closing high, especially if it is above a Doji’s high at or near a Pivot Point support level. This is what I call the High Close Doji pattern (HCD pattern). The picture below magnifies what you are looking for, once the market closes above the Doji’s high we see an immediate reaction of positive or bullish momentum and a continuation of higher prices to follow.

This is a high probability intraday trading pattern. The chart example below is the CME Euro Currency FX contract from the trading session on Tuesday April 17th 2007, notice how the Doji forms right on the Pivot Point Support Line.

Here the candle right after the Doji not only closes above the doji’s high but see how it engulfs the real bodies of prior candles of the Doji as well. Then the same formation occurs again which ignites a stellar rally in the market. That helps signal the power behind the original reversal HCD pattern.

As you can see we have two moving average values one colored orange and based off the pivot point formula, they help show and confirm a conditional change in the market. One is a shorter term time period and the other is a longer term time period. When the moving average values cross and prices have closed above these moving average values, a confirmation is given that there is bullish momentum and that helps validate the HCD buy signal.

This is a set-up that I want you to practice trading on. Initially you can use a set price amount or tick value below the low of the Doji. As for a profit objective you can look to scale out of half of your positions at the targeted pivot point resistance and trail your stop orders accordingly.

This is a pattern that should show an immediate positive change as the reversal takes hold. Also, as the move takes place, we see green candles develop, which reflects each time periods close above their respective opens (C > O). This indicates buyers are dominating the market.

As we see the trade develop, notice that as prices approach the pivot point resistance, which is the red horizontal line a shooting star pattern develops. This is a strong clue to not only exit the trade, but at the least to tighten up your stop orders. Here is why, pivot point analysis deals with pin pointing not only price but price targets in a specific time period, if you are a day trader, the market will only move so much in time, and this trade took most of the session to develop.

Earlier I stated “Doji’s form more often than not at Pivot Point Support and resistance levels”. I went and took this observation one step further as the chart below shows the statistical occurrences when Doji’s, Stars and Hammers forms. This information was derived from an independent back test study performed by Genesis Software. The test results were based on the US open out cry session using a fifteen minute time period on the CME’s Euro currency contract. Looking at this bar chart below we see that 22% of the lows are established by a doji while 41% of the lows are made by Hammer formations. Combined, that accounts for a 64% chance that the low is made by a Doji or Hammer based on a 15 minute time interval. At market tops 18% of the time they are made by Doji’s and 41% are made by shooting stars, combined it accounts for a whopping 65% statistic.

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