The Pivot Fade
If you haven’t visited our “What’s Are Pivot Points?” page yet, be sure to check it out to learn how this powerful trade indicator works.
Below you will find examples of Pivot Fades. All of the charts on this page are 5 minute timeframe charts. These charts serve to illustrate how Pivot Points play a major role in day trading successfully. Even if you don’t add the Pivot Fade to your personal trading strategies, knowing exactly where pivot points are is a must have piece of information for any stock you decide to trade. If you are trading without knowing where the pivots are you might as well be trading blindfolded. Market Prowler provides Members with pivot point calculations for over 30 commonly day traded stocks in our weekly newsletter.
Volume was high in the pre-market session, and pre-market price movement was strongly trending upwards. Using pivot points we calculated the weekly R1 to be at $79.53, so before the opening bell we are looking to fade the upward trend. We enter an open order to short DE at $79.45, slightly below the R1 pivot. Our stop loss order is set at $79.63, since we are executing pivot fades we don’t need a wide stop. It will be very quickly apparent wether the pivot point accepts or rejects the trend. Within 10 minutes of the opening bell our order is filled, and we are shorting DE at $79.45, our stop loss is never hit, as the S1 pivot forces a trend reversal, and we are in a position where we entered a short 5 cents below the high of the day.
Same setup as DE, high pre-market volume and upward price trend. Because SCTY has such a low Average True Range (ATR), we are looking for an options play here instead of shorting stock. We calculate the R1 to be at 24.83, so we will buy slightly in the money Put Options at 24.75 in order to not miss the pivot. 20 minutes after the opening bell the price reaches 24.75, we buy Put Options with a market order (no need to mess with limit orders because of how fast pivot point reversals are). SCTY establishes it’s high of the day at 24.81 2 cents below the pivot, and it reverses. We wait for price to trade down to the P which we calculated at 24.37. As soon as price comes to 24.40, just above the P, we sell our Put Option contracts at 22% return. This trade assumed more risk by waiting for price to reach P, as usually we will exit a trade when price is half way between pivot points.
We calculate the R1 to be at 56.40 and the S1 at 55.52 for the weekly SBUX pivots. We are looking for an Options Trade with slightly in the money Puts, trying to fade the R1 at 56.35. The stock price never reaches 56.35, instead it establishes a high at 56.29, so we don’t take the trade. We assess the situation and notice price is falling back down. Using our pre-calculated weekly pivot points we revise our strategy to try and fade the S1 Pivot using Call Options. We place a market order for Calls when the stock price reaches 55.55, just above the S1 pivot. Our call options go up in value as the price bounces upwards from the S1. Ideally we want to sell our calls when price reaches P at 56.05, however we’ve done this enough times to learn not to be greedy, so we sell the calls when SBUX is half way between S1 and P. We are out at 55.78 with 17% return.
SCTY – Day 2
Before trading even starts we already know what the pivot points are, we have the weekly pivots for SCTY pre-calculated. As soon as the market opens we notice a huge gap down and the stock falling hard. We take this as an opportunity to fade the S1 pivot. Since we know the S1 is at 23.90 we place an open order to buy shares of SCTY at 23.97 just above the pivot. We are filled at 23.97, the price chart reverses itself establishing a low at 23.92. To reduce risk we sell 1/3 of our shares when price reaches 24.20 (the midpoint between the 2 pivots), and we spend the rest of the day managing out trade and scaling out of out position as price increases. This was a fairly easy and stress free trade for those who used Pivot Fades as their strategy that day.
Using pivot fades we were able to get 2 Option Trades in on AMD this day, with a 18% return on the first trade, and a 27% return on the second trade. Our first trade was fading the R1 pivot immediately at open, we sold all of our option contracts half way between the P and R1 in order to not be greedy. While AMD was happily trading along we were busy conducting trades on other stocks, by the time we checked back to AMD it was in the process of re-testing the S2. This brings me to an important rule. DO NOT FADE THE SAME PIVOT 2 TIMES IN 1 DAY. The 2nd test of a pivot point usually means that the stock will break through that pivot and make its way up to the next highest pivot. So in this case we watched AMD trade up with a plan to short it at R2. Slightly below the R2 pivot we entered the trade by buying Put Options at the market. Since the stock showed no signs of retracement we waited until it reached the R1 level again to get out of our trade. We exited with a 27% return on the 2nd AMD trade of the day.
This is a good example of the importance of setting your stop-loss parameters wide enough so that market noise doesn’t reject them. At the open we knew that the R1 pivot was at 28.65, so we entered the trade at 28.60, with a stoploss of 28.75. GT established a high for the day at 28.72, had we been conservative and used a 5 cent stoploss we would have gotten stopped out of a perfectly good Pivot Fade trade. Remember to always set your stop losses wide enough to filter out any market noise, regardless of what setup you’re trading. If necessary, reduce your position size and widen your stop loss.
Have you learned about Squeeze Trades yet?
The Intelligent Trader
To learn more about basic and advanced uses of Pivot Points check out The Intelligent Trader, which is a book that covers both this trade setup and many more in depth. This book takes readers from the beginner level all the way up to the professional technical analyst level step by step with easy to follow lessons and examples.
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