Sunday, 19 June 2016

How to use Pivot Points to Trade Profitably

Today, I will be discussing what Pivot Points are and how it can be very useful in trading.

Personally, my style of trading is classified as swing trading or momentum trading. I look for short term reversal in prices and capitalise on that in order to make a profit.

The question remains, where do you close your position and take profit? This largely depends on your risk appetite and trading style. The more aggressive traders would have their take profit further away while the more conservative would have it closer.

However, Pivot Points provide a very good estimate as to where short-term support and resistance are located. Basically, these are areas where prices then to bounce on.

This is helpful to me in 2 ways:

1. It helps me determine if a reversal pattern is valid (aka, if it occurs near a pivot point, the reversal is more valid then if it occurred randomly)

2. It helps me determine my take profit in order to calculate whether my risk-reward ratio is acceptable based on my risk appetite.

Let's look at a recent trade that I made, Skechers USA Inc:

The highlighted candlestick is a reversal pattern known as "Hanging Man". All the yellow lines are known as " Pivot Points".

Pivot Points (Standard) have the following labels and there are calculated as follows:

Pivot Point (P) = (High + Low + Close)/3
Support 1 (S1) = (P x 2) - High
Support 2 (S2) = P - (High - Low)
Resistance 1 (R1) = (P x 2) - Low
Resistance 2 (R2) = P + (High - Low)

The source of the high, low and close depends on what time frame you are using to view your charts.

  • Pivots for 1, 5, 10, 15 charts use the prior day's high, low and close. 
  • Pivot Points for 30 and 60 minute charts use the prior week's high, low and close. 
  • Pivot Points for daily charts use the prior month's data.
Click here to read more about Pivot Points as well as different variations on it.

Based on my trading methodology, I will look for reversal candles, like the "hanging man" that occur near a particular pivot point. After which, my take profit would be as follows,

Short Entry

My take profit would either be the higher of the previous swing low, or the next immediate pivot point.

Long Entry

My take profit would either be the lower of the previous swing high, or the next immediate pivot point.

So back to the Skechers example, I shorted the stock based because the reversal candle occurred near a pivot point. The previous swing low was higher than the next pivot point below it. Therefore, I used the swing low as my take profit level.

Using this method to identify swing trading opportunities coupled with the risk management that I mentioned in the previous post, the odds of making a profitable trade are in your favour. 

I will be posting more updates about the indicators that I personally use to identify my trades so stay tuned!

As always, happy trading.


Wednesday, 15 June 2016

May Trading Review

After taking a break from trading in April to relook into my trading methodology, I'm glad to say that the results seem to be improving. After implementing the new risk management technique that I mention in Part 1 and Part 2, my losses have been significantly lesser. Of course, I will incur a higher trading cost, but that's the price I'll have to pay for protecting my downside risk.

Total profit after considering trading cost is roughly $1130 (approximately 16%) which is pretty decent. Hopefully I'll be able to generate this kind of returns for 2016. I'll be back with June's performance in about 2 weeks.

I will also be discussing new indicators that I am currently using which have definitely helped me screen for higher probability of trades. Stay tuned!

As always, happy trading.


Tuesday, 14 June 2016

Risk Management Part 2

In my previous post, I discussed the mentality one should adopt in order to manage their risk effectively. I also touched on how to adjust your order quantity such that your loss is calculated and therefore, reduces your uncertainty.

Today, I will be discussing another technique which I personally use for managing my risk. In simple terms, I close half my position when the price hits the mid point between my entry price (the price I buy/short) and the target price (the price I will close my position).  After closing half my position, I will move my stop loss to either just below the low of the day or breakeven, whichever is higher for long positions, or whichever is lower for short positions.

Let's go through the examples.

Example - Starhub

Lets assume you want to buy 1000 shares of Starhub at the price $3.34. Your target price is $3.5. You calculate the midpoint by taking ($3.5-$3.34)/2 + $3.34 = $3.42

After longing the position, the price eventually hits your midpoint price, you sell 500 shares and move your stop loss to the higher of either the day's low or breakeven. In this case, it is the day's low (note: place stop just below the low)

You keep adjusting the stop loss every day to move it to just below the day's low until you get stopped out or the price hits your target price.

In this case, the your remaining 500 shares for Starhub would have been stopped out at $3.42. It did not go according to your plan which is $3.5, but it was still a profitable trade. If you keep this up, you will greatly minimise the the losses that you will experience.

This strategy of course isn't the optimal strategy for everyone. You will have to access your personal risk tolerance and see if this fits in your overall strategy and goal.

I find that by having this strategy, there is a lesser chance my unrealised profits will be wiped out. Essentially, once the price hits the midpoint, I am guaranteed profit on the trade. You will have successfully removed all uncertainty regarding potential losses.

What a great position to be in wouldn't you say?

As always, happy trading.


Sunday, 12 June 2016

What is Proper Risk Management? Part 1

It's been a pretty long time since my last update. I have been focusing on exams but I'll be continuing to post my trades and my methodology on this site so stay tuned!

Today, I wish to discuss 'risk management' and how important it is for anyone who is investing/trading.

I started out trading with the mentality of asking myself "How much could I win?". This mentality made me hold on to positions even though it was going south. In my mind, I was constantly telling myself that I wouldn't close the position unless it was making at least some profits. If this sounds familiar to you, better read on!

I have shifted my view on this to what I feel is a more appropriate way to view a trade, which is to ask yourself "How much am I willing to lose?". Having a predefined amount that you are willing to let go off in the event the trade goes against you lets you feel in control. Your level of uncertainty when it comes to losses is greatly reduced. To do this, adjust your order quantity so that it allows your potential loss to match your risk appetite.

Lets me give you an example:

This is the chart of Sembcorp Marine S51. Lets assume that you want to short at $1.695 and you calculated a stop loss of $1.81. The next question to ask yourself is, "How many contracts should I short?"

In order to ensure that you have a controlled level of risk, lets assume you are going to risk $200 if the trade does not work out. You should calculate the "distance" or the difference between your entry price and your stop loss.

In this case, it would be $1.81 - $1.695 = $0.115

Therefore, the number of contracts you should short would be = Risk Amount/Distance = $200/$0.115 = 1739

If you shorted 1739 contracts of Sembcorp Marine S51 at $1.695 and placed your stop at $1.81, your estimated potential loss is $200. Doesn't this sound way better than an undefined amount where you base position size on "feel" rather than calculated risk?

I will be posting more articles about risk management soon so stay tuned!

Feel free to leave a comment and I'm happy to listen to any of your suggestions or feedback.

As always, happy trading.