Pivot Identification

There have been questions by various posters on how to identify pivots. Although it's been explained
in my original document clearly, a couple of charts with examples should make this easy subject clear
and hopefully no more doubts or questions on this subject. I have also added a link to this page from
the SSPS technique thread for future reference.

An uptrend is a series of upswing pivots (USP) and a downtrend is a series of downswing pivots
(DSP).

Pivots can form in 2 different ways

1) When a USP is broken, the prior highest high becomes the new downswing pivot. When a DSP is
broken the prior lowest low becomes the new upswing pivot.

Example:

In the chart below (NF_Pivot1.gif) when the USP @ 5617.5 breaks, the trend turns down and the prior
highest high which is 5759.95 becomes the new downswing pivot.
2) When a rejection in an uptrend leads to new recovery highs, the lowest low preceding the rejection
becomes the new USP. A much simpler way of identfying the same is to find the lowest point between
the prior highs and the new recovery highs.

Similarly, When a rejection in a downtrend leads to new lows, the highest high preceding the rejection
becomes the new DSP. A much simpler way of identfying the same is to find the highest point
between the prior lows and the new lows.

Example:

In the chart below (NF_Pivot2.gif), after the pivot (DSP) break we start uptrending. Then we get a
rejection from the 34 EMA. I have marked the prior high and new recovery high in pink circles. The
lowest low point betwen those two circles is the new USP. In this example we get a series of 4 USPs
before the trend changes.

Role of RSI(5) in identifying pivots

------------------------------------

We need a valid rejection for pivots to be formed. RSI(5) should be used to resolve the ambiguity
about rejections. If a rejection occurs with a touch of the 34 ema then it's a valid rejection and then
there is no need to use the RSI(5).
If the rejection occurs by the price coming close to the 34 ema, but not touching it, then check the
RSI(5).

(i) In an uptrend, if the RSI(5) is oversold (below 30) prior to the rejection, then it can be considered
a valid rejection
(ii) In a downtrend if the RSI(5) is overbought (above 70) prior to the rejection, then it can be
considered a valid rejection.

Examples:

Chart (NF_Pivot3.gif) - 34 EMA not touched, but RSI(5) oversold. Hence, a valid rejection.

Chart (NF_Pivot4.gif) - 34 EMA not touched and RSI(5) not overbought. Hence, not a valid rejection.
Entry, Exit and Stop Loss guidelines - Swing pivots system

The reason i posted this system here is twofold.

1) I often see new traders asking questions like

Where do we close today ? Are we going up or down today ?

Is this a time to go long/short ?
What do you think the market will be tommorow ?
I am trapped in a position. What should i do ?
Will Nifty hit 3000 ? Will Nifty go to 8000 ?

These are all newbie questions. And they are irrelavent to trading. In trading you only need to know
where to enter, your stop loss and where to exit. To enter you need to understand the concept of
reversal. For a secure stop, you need to have rules and ideas as to where to put them. Exit again
requires the knowledge of reversal.

2) I have learn't various techniques over the years from many good hearted traders who have
generously shared their techniques. This is a unique technique that i have developed, for my trading
purposes and i just think it's good "Karma" to share it with fellow traders. If the technique suits you or
you find it useful, use it, or else junk it. All i can say is it works for me.

Entry, Exit and Stop rules/guidelines (For Type I reversals)

In my system swing reversal is simply defined as taking out the prior swing pivot. So where does one
enter and exit ?. For upside reversal, one should enter as soon as the prior downswing pivot (shown in
down arrow in the chart) is crossed and exit when the upswing pivot (shown in up arrow on the chart)
is taken out. For downside reversal, enter on break below the upswing pivot and exit on crossing of
downswing pivot. While this is the theory, in practice this would require very wide stops. So to make it
practical, i have defined a few entry and exit rules. You may develop your own rules based on what
suits your risk tolerance. A picture is worth thousand words. So i have attached four charts, two
showing upside reversal entry technique (NF1.gif and NF2.gif) and two showing downside reversal
entry technique (NF3.gif and NF4.gif).
NF-1
NF-2
NF-3
 NF-4

Entry and Stop loss

Technique #1: (Recommended technique)

(i) For upside reversal wait for a green candle which closes above the prior downswing pivot and the
candle should also close above the prior candle high. Candle close above the prior candle high ensures
that the momentum is in your favor. Stop loss should be below the reversal candle. If the candle is too
big and requires a very big stop loss which does not suit your risk tolerance, don't take the trade. It's
not the end of the world. In such cases, wait for a pullback to 34 ema and rejection to enter.

In NF1.gif, there's a candle in the red circle which takes out the downswing pivot, but fails to close in
a green candle above the prior candle high. The price action after that is one of a pullback rather than
acceleration. So that's not a good entry point. That highlights the necessity of a candle closing above
prior candle high, which ensure price acceleration, since the momentum will be in your favor.

(ii) For downside reversal the rules are same. We need a red candle which closes below the prior
upswing pivot and close below the prior candle low. Stop loss rules are different here. One should
place the stop loss above the immediate swing high on the charts. The reason being, tops have
different characteristics than bottoms. Bottoms tend to be "V" affairs. Tops are "M" affairs. Tops gets
tested many times before we go down in earnest. So putting a stop above the red reversal candle will
almost always result in a stop-out.

Technique #2:
One can start a daytrade from lower levels and convert it into a swing trade, if the swing pivot is
taken out. If we fail to take out the swing pivot, close it out as a daytrade. This is assumes that one
has good daytrading techniques to enter from lower levels. Although i use this approach often, it's not
a recommended technique.

Exit rules

Technique #1: One can exit the entire position at the swing reversal. Although this is the right
technique in strongly trending markets, it may wipe out all the profits in range bound markets upon
reversal.

Technique #2: This is the technique i use. I exit about 30% of my positions on a 1:2 risk/reward. So if
my stop size (risk) is 50 points, i close 30% of my positions on a reward of 2*50 = 100 points. The
rest, i close on swing reversal.

Enjoy and good luck with your trading !

Naveen Swamy
- a.k.a Speculator[url][/url]