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The role of the marketplace is to facilitate trade between buyers and sellers. Price will auction higher and lower as it attempts to find an area where trade can be easily facilitated. If price opens too low, it will auction higher to find sellers, and if price is too high, it will auction lower to find buyers. If you put this into an easily understood framework, you will come to see that this information makes complete sense.
Secrets of a Pivot Boss PDF Book by Franklin O. Ochoa
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If an original painting by Pablo Picasso were to be auctioned for a starting bid of $10 on the open market, buyers would enter the market en masse because price is too low. Buyers would drive price higher until the last buyer stood alone, essentially ending the auction with the sale, likely for a price in the tens of millions of dollars.
However, what would happen if I were to auction off a painting by my one-year-old daughter with a starting bid of $1 million dollars? Obviously, the starting bid is too high; the price would begin to auction lower in search of buyers. Eventually, price would auction low enough to find a buyer, perhaps her loving grandmother, for a mere $10.
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Price continually moves higher and lower in search of the best value to both buyers and sellers. Buyers will enter the market when they feel price is below value, while sellers will enter the market when they believe price is overvalued. This will be a consistent theme over the course of the book. It boggles my mind how a novice trader can be a smart shopper in the everyday marketplace.
But become a completely different person when engaging the stock and futures markets. Meet Novice Joe, who is a fantastic shopper when it comes to food, clothes, and even cars, but throws all of his instincts out of the window when it comes to trading. Joe loves to eat lobster, but he knows that this can be an expensive habit, so he must buy when the price of lobster is below value.
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He keenly observes the price of lobster regularly and knows that the average price per pound is about $10.99. As you can expect, when the price per pound drops to $6.99 he pounces on the offer and buys several pounds. This type of day is basically like a game of tennis. The players stand on opposite sides of the court and take turns volleying the ball to one another throughout the match.
As the ball is in flight, a player will wait for the best opportunity to strike the ball, essentially returning the ball to the otller side of the court. Likewise, buyers and sellers will stand at the extremes of the day and will enter the market in a responsive manner when price reaches the outer limits of the day’s range.
Responsive sellers will enter shorts at the top of the range, which essentially pushes price back toward the day’s lows, while responsive buyers will enter longs at the bottom of tlle range, which pushes price back toward the day’s highs. This pattern will continue until the closing bell sounds. Figure 1.6 shows a five-minute chart of the YM during a classic Trading Range Day. Secrets of a Pivot Boss PDF Book
Notice that the initial balance was fairly wide to begin the session, which meant that the base for the day would likely support the session’s trading activity. As price rose toward tlle top of the range at around 9,740, responsive sellers saw price as overvalued and entered the market with sell orders, essentially pushing price back toward the day’s low .. t\s price approached the bottom of the range at around 9,660, responsive buyers saw value and entered the market with buy orders, which pushed price toward the opposite extreme.
This type of market day offers easy facilitation of trade and gives traders amazing opportunities to time their entries. If you recall the child on the trampoline for a moment, you’ll realize that the child had to force the bounce mat down before he could spring into the air. Also, remember Jennifer the cake baker? She initially pushed price to $20 per cake, which sent a flood of orders into her shop.
The flood of buying pressure eventually sent the price of her cakes to $35 apiece. Basically, price had to test the $20 level before it could rise to $35. Let’s analyze the outside reversal setup in a different light for a moment. One of the reasons I like this setup is because the two-bar pattern reduces into the wick reversal setup, which we covered earlier in the chapter. Secrets of a Pivot Boss PDF Book
If you are not familiar with candlestick reduction, the idea is simple. You are taking the price data over two or more candlesticks and combining them to create a single candlestick. Therefore, you will be taking the open, high, low, and close prices of the bars in question to create a single composite candlestick. Take a look at Figure 2.13, which illustrates the candlestick reduction of the outside reversal setup.
Essentially, taking the highest high and the lowest low over the two-bar period gives you the range of the composite candlestick. Then, taking the opening price of the first candle and the closing price of the last candle will finish off the composite candlestick. Depending on the structure of the bars of the outside reversal setup, the result of the candlestick reduction will usually be the transformation into a wick reversal setup, which we know to be quite powerful.
Therefore, in many cases the physiology of the outside reversal pattern basically demonstrates the inherent psychological traits of the wick reversal pattern. This is just another level of analysis that reinforces my belief in the outside reversal setup. Like the developing point of control, the Money Zone also plots the developing value area as it dynamically updates in real time. Secrets of a Pivot Boss PDF Book
The Developing Value Area (DVA) calculates where 70 percent of the day’s trading activity has occurred in real time, bar by bar. This process is identical to the way the Market Profile calculates its value area throughout the day as the bell-curved structure develops. Essentially, the developing value area allows you to see where the bulk of the day’s trading activity is taking place as it happens.
Take a look at Figure 3.6, which illustrates the developing value area on the same two-day view of the YM. As soon as the first bar of the day has completed, the developing value area will begin to calculate. The DVA will dynamically update as the day progresses, widening and tightening along the way as price behavior expands and contracts.
When the market closes, the final values of the Developing Value Area High (DVAH) and the Developing Value Area Low (DVAL) will then become the static V AH and VAL for the next session. Once trading begins the next day, the DVA will pick up where it left off and will begin to update dynamically as new data enters the market. Secrets of a Pivot Boss PDF Book Download
The DVA can be a very powerful tool to help you distinguish where the bulk of the money is changing hands and when price may be ripe for a breakout opportunity. As price moves above and below the DVA’s range, you will see responsive parties enter the market in order to push price back toward fair value.
However, the longer the DVA remains in the same general vicinity, and the tighter the range becomes, thereby introducing a breakout opportunity that is fueled by initiative parties. Let’s take a look at Figure 7.8, which shows a five-minute chart of the Copper futures contract. Copper basically traded in a clear range the prior session, establishing clear areas of support and resistance.
The fact that price opened the day firmly within the prior day’s range was indicative that continued trading range behavior was likely to occur-at least until a breakout from the range proves otherwise. Copper reacted to both H3 and L3 pivot levels early in the day, but the wick reversal signals did not allow for proper trade location, as the candlesticks were quick large. Secrets of a Pivot Boss PDF Book Download
Later in the day, Copper formed two bearish wick reversal candlesticks at H3 resistance, which was a level that had already proven to appeal to responsive sellers. I entered the trade short during the development of the second candlestick and set my target to L3 support, which was quickly reached for a handsome profit.
While this trade worked out perfectly for me, you’ll notice that I did not rush an entry at either pivot level earlier in the day, as I was not completely comfortable with the size of the candlesticks, which seemed rather erratic. I did miss a perfect bullish outside reversal setup at L3 support just before my short entry, but such is the life of a trader.
Professional traders are quite content taking smaller moves within a clearly defined trading range. They will continuously scalp twenty points on the YM throughout a session, hitting the ball out of the park by virtue of base hits. Not every trade becomes a one hundred-point winner, but every one hundred-point winner was first a twenty-point trade. Secrets of a Pivot Boss PDF Book Download
Remember, traders do not like obstacles standing between their trades and potential profits. Trying to ride a trade to a one hundred-plus point intraday target (from L3 to H3 in this case) can be an obstacle on many days. Instead, the inner layers of the indicator provided the same reliable pivot behavior, but reduced the inherent risk typically associated with wide price ranges.
Throughout the book, I have discussed the importance of recognizing the trend of the market while playing the pivots. To fully appreciate and profit from the pivots, you must buy at support while in an uptrend, and sell at resistance during a downtrend. Every pull-back becomes a buying opportunity in an uptrend, while every rally becomes an opportunity to sell in a downtrend.
Understanding this axiom will allow you to hone in on the high probability buy and sell zones of the market. Obviously, the Camarilla indicator makes this process as elementary as possible due to the color-coded pivots that direct you to buy or sell at certain levels. Up to this point in the chapter, we have looked at two-day pivot relationships to give us a feel for potential behavior in the upcoming session. Secrets of a Pivot Boss PDF Book Free
Pivot trend analysis is basically the same, but strings together multiple days during trending markets. The concept remains the same; buy at support in an uptrend, and sell at resistance in a downtrend. Every pull-back to H3 should be a selling opportunity during a bearish trend, while every retracement to L3 should be a buying opportunity during bullish trend.
I remember alerting my readership that a move of over two thousand points could be seen in the Dow in the months ahead, but direction still eluded me. Of course, this forecast received a mi.-xed reaction. On the one hand, many traders and investors were happy for the advanced notice. However, others were not so pleased, especially given the indecision about direction. I’m not fortune teller.
I used pivot width analysis and basic technical analysis to forecast a calculated price move. However, only the market can decide direction. When the Dow broke below the 13,000 level to begin 2008, we had our direction. I forecasted a move to 10,000, and then readjusted my targets to 8,385 and 6,500 over the course of the following months, using the pivots as a guide. Secrets of a Pivot Boss PDF Book Free
As you recall, the Dow reached the 8,385 level by the end of 2008, and then reached 6,500 early in 2009 after reaching the yearly Sl pivot level, which became the low of the eighteen-month bear market. A.5 a matter of fact, a mechanical system I created for a managed futures fund fired a long signal at the central pivot range at about $136 per barrel in July.
This signal put us in the move to all-time highs in this commodity and gave us a handsome profit in return. Of course, soon after Crude Oil reached all-time highs during the historic rally, it experienced an epic collapse, as the price of Crude dropped from nearly $150 per barrel to under $40 in just si:x months.