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Pivot Reversal Trading Guide

The Pivot Reversal strategy involves entering option positions when a stock price reaches identified intraday support or resistance levels and then reverses direction. Standard pivot point formulas are used to calculate support and resistance levels from the previous day's high, low, and close prices. Trades are entered with calls or puts when the stock price touches a support/resistance level and shows signs of reversing. Positions are exited incrementally as the stock moves in their favor or all at once if the stock breaks below support or above resistance.

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445 views3 pages

Pivot Reversal Trading Guide

The Pivot Reversal strategy involves entering option positions when a stock price reaches identified intraday support or resistance levels and then reverses direction. Standard pivot point formulas are used to calculate support and resistance levels from the previous day's high, low, and close prices. Trades are entered with calls or puts when the stock price touches a support/resistance level and shows signs of reversing. Positions are exited incrementally as the stock moves in their favor or all at once if the stock breaks below support or above resistance.

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rahimsajed
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Strategy Description Pivot Reversal Basic Concept: 1. The Pivot Reversal is a reversal play off of a support or resistance line.

2. Support and/or resistance is determined using standard Pivot Point formula. 3. The Pivot Point Calculator in Extreme Charts will provide the support/resistance levels. 4. Appropriate option positions (calls or puts) will be entered to capture potential profits on a given move in the stock price. General Description: Pivot point and related intraday support and resistance levels are calculated based on standard pivot point formulas. The Morning Lab Extreme Charts Pivot Point Calculator automatically calculates these levels daily for any stock or index. These levels allow a trader to consider whether to enter and/or exit an option trade based on a reversal of the stock at that intraday support/resistance level. The standard pivot point formulae can be used to build a pivot point calculator in a spreadsheet, however these formulae will still require the user to enter the previous days high low and close for each stock. The formulae are:
For Excel Spreadsheet: H- HIGH, L- LOW, C- CLOSE, PP-PIVOT POINT

PP = (H + L + C) / 3 then R1 = (2*PP) - L R2 = PP + (H - L) R3 = H + 2*(PP -L) S1 = (2*PP) - H S2 = PP - (H - L) S3 = L - 2*(H - PP)

Once the intraday support and resistance levels have been calculated they are plotted onto the stock charts that will be traded that day. Candidates are selected based on high average true range to maximize potential intraday movement. Execution: As soon as the market opens, the trader will watch for the stock price to move to a support or resistance level and then watch for reversal signals. These may include waning volume as the stock approaches the support or resistance level, small bodied candlesticks as support/resistance is approached and reversal patterns such as tweezers bottom/top, bullish/bearish engulfing, harami patterns, double bottom/top, etc. An option position may be taken by buying the appropriate option (call or put) with the appropriate expiration (typically the front week/month) and the appropriate delta (typically a mid 60 to 90 delta). Trade Management: Care is taken to enter the option position when the stock price is as close to the intraday support/resistance level as possible. This allows the trader to exit just on the other side of the support/resistance level if the stock goes against the position, reducing losses in the trade. If the stock price moves in favor of the trade, the trader may scale out of the position by selling half of the position at an acceptable profit. Another half can be sold as the stock price continues to move in the trader's favor, potentially reducing risk and leverage. The remaining positions can be sold if the stock price reaches the next intraday support/resistance level. Prior to entering the trade, the chart must be evaluated to determine the positioning of the stop exit. This can be based on recent trading activity above resistance or below support. If the stock moves against the trade, then the trade should be exited as soon as the stock price breaks the support or resistance level, especially if the break happens on increasing volume. Light volume breakouts/breakdowns must be evaluated and managed carefully. The key to a good stop exit rests on a good entry to the position as close to support/resistance as possible.

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