Floor Pivot Points

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  1. Floor Pivot Points

Floor Pivot Points (FPPs) are a technical analysis method used to identify potential support and resistance levels in financial markets. Developed by Michael J. Carr, FPPs build upon traditional pivot point calculations by incorporating the previous day's high, low, and close, but crucially, also adding a "floor pivot" based on the previous day's settlement price. This addition aims to identify key levels where institutional buying and selling pressure is likely to occur. FPPs are widely used by day traders and swing traders to determine entry and exit points, set stop-loss orders, and identify potential profit targets. This article provides a comprehensive guide to understanding and applying Floor Pivot Points, suitable for beginners.

Understanding the Core Concepts

Before diving into the calculations, it's essential to grasp the underlying philosophy behind FPPs. Carr believed that institutional traders – large banks, hedge funds, and other financial institutions – often use settlement prices as key reference points. These institutions accumulate or distribute positions around these levels, creating predictable price action. The 'floor' aspect refers to the previous day's settlement price, which is considered a critical area of demand.

Traditional Pivot Points are valuable tools, but they can sometimes lack the granularity needed to pinpoint precise levels. FPPs address this by adding the settlement price as a crucial component. This allows traders to identify more subtle, yet significant, support and resistance zones. The settlement price is often the price at which futures contracts are settled at the end of the trading day, and is considered a benchmark for the next day's trading.

Calculating Floor Pivot Points

The calculation of FPPs involves several steps. Here's a breakdown:

1. **Pivot Point (PP):** This is calculated the same way as in traditional pivot points: (High + Low + Close) / 3

2. **Support Levels (S1, S2, S3):** These levels are calculated as follows: 

   *   S1 = (2 x PP) - High
   *   S2 = PP - (High - Low)
   *   S3 = (2 x PP) - (High + Low)

3. **Resistance Levels (R1, R2, R3):** These levels are calculated as follows: 

   *   R1 = (2 x PP) - Low
   *   R2 = PP + (High - Low)
   *   R3 = (2 x PP) + (High + Low)

4. **Floor Pivot (FP):** This is simply the previous day's settlement price. It's the core difference between FPPs and traditional pivot points.

5. **Additional Support and Resistance Levels (Using the Floor Pivot):** These are derived from the Floor Pivot: 

   *   FP + (High-Low)/2
   *   FP + (High-Low)
   *   FP - (High-Low)/2
   *   FP - (High-Low)

These additional levels, calculated around the Floor Pivot, are often very significant, particularly in the early trading hours.

Applying Floor Pivot Points in Trading

Once the FPPs are calculated, traders can use them in several ways:

  • **Identifying Support and Resistance:** The calculated levels act as potential areas where the price might find support (bounce upwards) or resistance (face selling pressure and move downwards). These levels aren't guaranteed reversals, but they represent areas of increased probability.
  • **Entry Points:** Traders may look to enter long positions (buy) near support levels and short positions (sell) near resistance levels. However, it's crucial to confirm these levels with other Technical Indicators.
  • **Stop-Loss Orders:** Placing stop-loss orders just below support levels (for long positions) or just above resistance levels (for short positions) can help limit potential losses if the price moves against your trade.
  • **Profit Targets:** Resistance levels can serve as potential profit targets for long positions, while support levels can serve as profit targets for short positions.
  • **Early Trading Hours:** FPPs are particularly effective in the early trading hours, as institutional traders often establish positions based on the previous day's settlement price.
  • **Combining with Price Action:** Look for confirmation of FPP levels with Candlestick Patterns like dojis, engulfing patterns, or hammers. These patterns occurring near FPP levels can strengthen the signal.

Examples of Floor Pivot Point Usage

Let's consider a hypothetical example:

  • Previous Day's High: $155
  • Previous Day's Low: $150
  • Previous Day's Close: $153
  • Previous Day’s Settlement Price (Floor Pivot): $152.50

1. **PP:** (155 + 150 + 153) / 3 = $152.67 2. **S1:** (2 x 152.67) - 155 = $149.34 3. **S2:** 152.67 - (155 - 150) = $147.67 4. **S3:** (2 x 152.67) - (155 + 150) = $142.34 5. **R1:** (2 x 152.67) - 150 = $155.34 6. **R2:** 152.67 + (155 - 150) = $157.67 7. **R3:** (2 x 152.67) + (155 + 150) = $162.34

Additional Levels based on Floor Pivot ($152.50):

  • FP + (High-Low)/2 = $152.50 + (5/2) = $154.75
  • FP + (High-Low) = $152.50 + 5 = $157.50
  • FP - (High-Low)/2 = $152.50 - (5/2) = $150.00
  • FP - (High-Low) = $152.50 - 5 = $147.50

If the price bounces off the S1 level ($149.34) with a bullish candlestick pattern, a trader might consider entering a long position, placing a stop-loss order slightly below $149.34, and targeting the R1 level ($155.34) as a profit target.

Advantages and Disadvantages of Floor Pivot Points

    • Advantages:**
  • **Identifies Key Institutional Levels:** FPPs are designed to pinpoint areas of potential buying and selling pressure from large institutions.
  • **Improved Accuracy:** The inclusion of the floor pivot often provides more precise levels compared to traditional pivot points.
  • **Versatility:** FPPs can be used on various timeframes, from intraday charts to daily and weekly charts.
  • **Easy to Calculate:** The calculations are relatively simple, making FPPs accessible to beginners.
  • **Early Trading Hour Effectiveness:** Particularly useful during the opening hours of a trading session.
    • Disadvantages:**
  • **Not a Guarantee:** FPP levels are not foolproof and can be broken.
  • **False Signals:** Like any technical analysis tool, FPPs can generate false signals.
  • **Requires Confirmation:** It’s crucial to confirm FPP levels with other indicators and price action analysis.
  • **Market Specific:** Effectiveness may vary depending on the market being traded (e.g., stocks, futures, forex).
  • **Subjectivity:** Interpreting the significance of a break through a FPP level can be subjective.

Combining FPPs with Other Technical Analysis Tools

To enhance the reliability of FPPs, it's highly recommended to combine them with other technical analysis tools:

  • **Moving Averages:** Use Moving Averages to identify the overall trend and filter out trades that go against the trend.
  • **Relative Strength Index (RSI):** The RSI can help identify overbought and oversold conditions, providing additional confirmation for potential reversals at FPP levels.
  • **MACD:** The MACD can signal potential trend changes and momentum shifts, confirming signals generated by FPPs.
  • **Volume Analysis:** Increased volume at FPP levels can indicate stronger conviction behind the price movement.
  • **Fibonacci Retracements:** Fibonacci Retracements can be used to identify potential support and resistance levels that align with FPPs.
  • **Bollinger Bands:** Bollinger Bands can help identify volatility and potential price breakouts or breakdowns near FPP levels.
  • **Ichimoku Cloud:** Ichimoku Cloud provides a comprehensive view of support, resistance, trend, and momentum, complementing FPP analysis.
  • **Support and Resistance Zones:** Identify broader Support and Resistance Zones to confirm the significance of FPP levels.
  • **Trend Lines:** Draw Trend Lines to visually identify the prevailing trend and potential areas of support or resistance.
  • **Chart Patterns:** Look for Chart Patterns like triangles, flags, or head and shoulders patterns that form near FPP levels.

Advanced Considerations

  • **Multiple Timeframe Analysis:** Analyze FPPs on multiple timeframes to identify confluence – levels that appear significant on both short-term and long-term charts.
  • **Market Context:** Consider the overall market context, such as economic news releases or geopolitical events, which can impact price action.
  • **Dynamic FPPs:** Some traders adjust FPP calculations based on market volatility or specific market conditions.
  • **Backtesting:** Backtest FPP strategies on historical data to assess their effectiveness and optimize parameters.
  • **Risk Management:** Always use proper risk management techniques, such as setting stop-loss orders and limiting position sizes. Consider the Kelly Criterion for optimal position sizing.

Resources for Further Learning

  • **Investopedia:** [1]
  • **TradingView:** [2]
  • **Babypips:** [3] (While focused on Forex, the pivot point concepts apply broadly)
  • **StockCharts.com:** [4]
  • **Technical Analysis Books:** Explore books on technical analysis by authors like John J. Murphy and Martin Pring.
  • **Online Trading Courses:** Consider taking online courses on technical analysis and trading strategies.
  • **Trading Forums:** Participate in online trading forums to learn from other traders and share ideas.
  • **Financial News Websites:** Stay informed about market news and economic events that can impact price action. [5] [6] [7]
  • **Trading Psychology Resources:** Understand the importance of Trading Psychology for successful trading. [8]
  • **Risk Management Strategies:** Learn about effective Risk Management Strategies to protect your capital. [9]
  • **Candlestick Pattern Recognition:** Master the art of Candlestick Pattern Recognition for improved trade setups. [10]
  • **Understanding Market Trends:** Learn to identify and trade with Market Trends. [11]
  • **Elliott Wave Theory:** Explore Elliott Wave Theory for advanced pattern recognition. [12]
  • **Harmonic Patterns:** Learn about Harmonic Patterns for precise entry and exit points. [13]
  • **Gann Analysis:** Investigate Gann Analysis for unique support and resistance techniques. [14]
  • **Wyckoff Method:** Study the Wyckoff Method for understanding market structure. [15]
  • **Point and Figure Charting:** Explore Point and Figure Charting for a different perspective on price action. [16]
  • **Renko Charts:** Learn about Renko Charts for filtering out noise and identifying trends. [17]
  • **Heikin-Ashi Charts:** Utilize Heikin-Ashi Charts for smoothing price data. [18]
  • **Ichimoku Kinko Hyo:** Dive deeper into the intricacies of Ichimoku Kinko Hyo. [19]
  • **Volume Spread Analysis (VSA):** Understand Volume Spread Analysis (VSA) to interpret market sentiment. [20]


Technical Analysis Pivot Points Support and Resistance Trading Strategies Risk Management Candlestick Patterns Moving Averages RSI MACD Trading Psychology

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