Moving averages are the most popular directional gauges. They are typically the first technical indicator in the novice trader’s toolbox. Many professional traders rely on them as well. Typically, the directional signals come when a short-term MA crosses a longer-term MA. The problem with this method is that by the time the averages converge and cross, the directional move is often already well on its way. Thus, entering a trade using this method usually leads to late entry or poor trade location. Poor trade location increases risk and reduces profits.
Speeding Up a Moving Average
To improve entry, many traders use exponential moving averages (EMAs). These are calculated with more weight on the most recent prices. Thus, they tend to converge and cross faster than simple MAs, which should lead to earlier entry and improved trade location.
Calculating Pivots
Most MAs are calculated using the close of the day. But for intraday or short-term traders, these MAs are often useless when volatility is high. Speculators and swing traders frequently use daily pivot levels for short-term directional signals. These indicators can be calculated in many ways. Maybe the most popular is to take the average of the daily high, low and close. If the market closes below this average price, it means sellers have the edge; a settle above this price means bulls gain the advantage.
Create Pivots that Suit Your Time Frame
When I was younger, I had the energy to be a speculator or day trader. I rarely took home a position, exiting trades before the end of the session. As high frequency systems became more popular, I found it difficult to compete with these computer-generated models. Plus, it was exhausting to trade so actively.
After many years at the CBOT and CME and charting many markets for almost four decades, I found that a 3-day pivot works for the type of trade I prefer. Simply, when a market moves from this pivot it will travel the length of an average day range and sometime the length of an average week.
Swing Trader Pivot
I designed a pivot that suits my time frame and style. To calculate this pivot, I take an average of the high, low and close over a 3-day period. So, the pivot is an average of 9 prices. If the close is below this pivotal price on the 3rd day, odds favor a move lower over the next 24 hours. On the other hand, a close above this pivot means long positions should pay the next day or longer. The moves from the pivot tend to be quicker and larger if the previous 3 sessions have below average ranges and volume.
Final Thoughts
There are no right or wrong technical indicators. They all have strengths and weaknesses depending on market conditions. Each trader must find the tools and time frames that fit their personality. Through experimentation I found my niche. Along with some other gauges, the 3-day pivot suits my style. The average amount of time you intend to spend in a trade may dictate the pivotal price you should calculate.
John Seguin
Senior Technical Analyst
Market Taker Mentoring
