Floor Pivots

1. Floor Pivots: A Comprehensive Guide for Beginner Traders

Introduction

Floor Pivots are a type of technical analysis tool used to identify potential support and resistance levels in financial markets. Developed by Michael J. Carr, a former trader on the Chicago Board of Trade (CBOT), Floor Pivots are based on the previous day’s high, low, and close prices. Unlike standard Pivot Points, which are calculated solely using price data, Floor Pivots incorporate a weighting factor that aims to reflect the "floor trader's" perspective, taking into account how traders on the exchange floor might react to price movements. This article will provide a detailed explanation of Floor Pivots, their calculation, interpretation, and how to integrate them into your trading strategy. This guide is designed for beginners, so we will break down each concept in a clear and concise manner. Understanding Technical Analysis is crucial before delving into this topic.

The Origin and Philosophy Behind Floor Pivots

Michael Carr developed Floor Pivots after observing how traders on the CBOT interacted with price levels. He noticed that traders, particularly those working directly on the trading floor, didn't simply react to the traditional Pivot Point levels. They anticipated where levels would be defended or broken, based on a nuanced understanding of market psychology and order flow. Carr’s goal was to create a formula that mirrored this real-world trading behavior.

Traditional Pivot Points are calculated using a simple average of the previous day's high, low, and close. Floor Pivots, however, assign different weights to these values, giving more emphasis to the close, as it represents the final consensus of the trading day. This weighting aims to better predict where traders will focus their attention and potentially initiate buy or sell orders. The logic is that the close is the "last price paid," and therefore, holds significant weight in the minds of traders. The concept is closely related to Market Psychology.

Calculating Floor Pivots

The Floor Pivot calculation is more complex than that of standard Pivot Points. Here's a breakdown of the formulas:

• **Pivot Point (PP):** (High + Low + Close) / 3
• **Resistance Level 1 (R1):** PP + (High – Low) * 0.618
• **Resistance Level 2 (R2):** PP + (High – Low) * 1.618
• **Support Level 1 (S1):** PP – (High – Low) * 0.618
• **Support Level 2 (S2):** PP – (High – Low) * 1.618

Notice the use of the 0.618 and 1.618 multipliers. These numbers are derived from the Fibonacci sequence, a mathematical sequence that appears frequently in nature and is believed to have relevance in financial markets. The Fibonacci sequence and its ratios are fundamental to Fibonacci Retracements.

Let's look at an example:

Assume a stock closed at $50, with a high of $52 and a low of $48.

• PP = ($52 + $48 + $50) / 3 = $50
• R1 = $50 + ($52 - $48) * 0.618 = $50 + 4 * 0.618 = $52.472
• R2 = $50 + ($52 - $48) * 1.618 = $50 + 4 * 1.618 = $56.52
• S1 = $50 - ($52 - $48) * 0.618 = $50 - 4 * 0.618 = $47.528
• S2 = $50 - ($52 - $48) * 1.618 = $50 - 4 * 1.618 = $43.48

Therefore, in this example, the Floor Pivot levels would be: PP = $50, R1 = $52.472, R2 = $56.52, S1 = $47.528, and S2 = $43.48.

Many trading platforms automatically calculate Floor Pivots. You can also easily create a spreadsheet to perform these calculations. Understanding Candlestick Patterns can further enhance your interpretation of these levels.

Interpreting Floor Pivot Levels

Once calculated, Floor Pivot levels are interpreted as potential areas of support and resistance. Here’s how traders typically use them:

• **Support Levels (S1 & S2):** These levels are areas where the price is likely to find buying interest, potentially halting a downtrend or initiating a bounce. Traders may look to buy near these levels, anticipating a price increase.
• **Resistance Levels (R1 & R2):** These levels are areas where the price is likely to encounter selling pressure, potentially halting an uptrend or initiating a pullback. Traders may look to sell near these levels or take profits, anticipating a price decrease.
• **Pivot Point (PP):** The Pivot Point itself acts as a key level. A break above the Pivot Point can signal continued bullish momentum, while a break below can suggest further bearish movement.
• **Breaks and Retests:** A significant price movement *through* a Floor Pivot level often leads to a *retest* of that level. For example, if the price breaks above R1, it may later pull back to R1 before continuing higher. This retest provides another opportunity to enter a trade.

It’s important to remember that Floor Pivot levels are *not* guarantees of price action. They are simply potential areas of interest. Confirmation through other technical indicators is always recommended. Consider using Moving Averages to confirm trends.

Integrating Floor Pivots into Your Trading Strategy

Floor Pivots can be used in a variety of trading strategies. Here are a few examples:

1. **Breakout Strategy:** Look for a price breakout above R1 or R2 (bullish) or below S1 or S2 (bearish). Enter a trade in the direction of the breakout, placing a stop-loss order just below the broken level. 2. **Bounce Strategy:** Look for the price to bounce off S1 or S2. Enter a long position (buy) near the support level, placing a stop-loss order just below the level. 3. **Pullback Strategy:** Look for the price to pull back to R1 or R2 after a breakout. Enter a short position (sell) near the resistance level, placing a stop-loss order just above the level. 4. **Pivot Point Confirmation:** Use the Pivot Point as a filter. Only consider long trades if the price is above the Pivot Point and short trades if the price is below the Pivot Point.

Remember to always manage your risk by using stop-loss orders and appropriate position sizing. Learn about Risk Management before implementing any trading strategy.

Combining Floor Pivots with Other Technical Indicators

Floor Pivots are most effective when used in conjunction with other technical indicators. Here are some helpful combinations:

• **Volume:** Confirm breakouts with increased volume. A breakout accompanied by high volume suggests strong conviction. Volume Analysis is a key component of technical trading.
• **Relative Strength Index (RSI):** Use the RSI to identify overbought or oversold conditions. A breakout above a Floor Pivot level combined with an RSI reading below 30 (oversold) can be a strong buy signal.
• **Moving Average Convergence Divergence (MACD):** Use the MACD to confirm trend direction. A bullish crossover on the MACD combined with a break above a Floor Pivot level can signal a strong buying opportunity.
• **Bollinger Bands:** Use Bollinger Bands to identify volatility and potential price targets. A breakout above a Floor Pivot level that also breaks above the upper Bollinger Band can indicate a strong uptrend. Bollinger Bands are useful for volatility assessment.
• **Ichimoku Cloud:** Combine Floor Pivots with the Ichimoku Cloud to identify strong support and resistance zones and potential trend reversals.

Using multiple indicators provides a more comprehensive view of the market and can help to reduce false signals. Understanding Trend Following can also inform your strategy.

Floor Pivots vs. Standard Pivot Points

While both Floor Pivots and standard Pivot Points aim to identify support and resistance levels, there are key differences:

| Feature | Floor Pivots | Standard Pivot Points | |---|---|---| | **Calculation** | Uses Fibonacci ratios and weights the close price more heavily. | Uses a simple average of high, low, and close. | | **Origin** | Developed by a floor trader based on exchange floor behavior. | A more general technical analysis tool. | | **Sensitivity** | Generally considered more sensitive to price movements. | Can be less sensitive, potentially generating fewer signals. | | **Application** | Often favored by short-term traders and scalpers. | Used by a wider range of traders, including day traders and swing traders. |

The choice between Floor Pivots and standard Pivot Points depends on your trading style and preferences. Floor Pivots may be more suitable for traders who want a more nuanced and dynamic approach to identifying support and resistance. Explore Day Trading Strategies to see how these tools can be applied.

Limitations of Floor Pivots

Despite their usefulness, Floor Pivots have limitations:

• **Whipsaws:** Like all technical indicators, Floor Pivots can generate false signals, especially in choppy or sideways markets.
• **Subjectivity:** Interpreting Floor Pivot levels can be subjective. Different traders may have different opinions on the significance of a particular level.
• **Market-Specific:** Floor Pivots were originally developed for futures markets. Their effectiveness may vary in other markets, such as stocks or Forex.
• **Reliance on Past Data:** Floor Pivots are based on historical price data. They do not account for fundamental factors that may influence price movements. Consider integrating Fundamental Analysis into your overall approach.

It's crucial to be aware of these limitations and to use Floor Pivots as part of a comprehensive trading strategy, rather than relying on them as a standalone indicator.

Advanced Concepts and Considerations

• **Multiple Time Frames:** Analyze Floor Pivot levels on multiple time frames (e.g., daily, hourly, 15-minute) to identify confluence – areas where levels from different time frames align.
• **Dynamic Pivots:** Some traders adjust their Floor Pivot calculations based on the current market volatility.
• **Pivot Point Confluence with Other Support/Resistance:** Look for Floor Pivot levels that coincide with other established support and resistance areas, such as previous highs and lows or trendlines.
• **Psychological Levels:** Combine Floor Pivots with psychological levels (e.g., round numbers like $100 or $50) for increased significance. Trading Psychology plays a vital role in success.

Further Resources and Learning

• **Books:** Explore books on technical analysis and trading strategies.
• **Online Courses:** Take online courses on technical analysis and Floor Pivots.
• **Trading Forums:** Join online trading forums to discuss strategies and learn from other traders.
• **Backtesting:** Backtest Floor Pivot strategies to evaluate their performance on historical data. Backtesting Strategies is a valuable skill.
• **Demo Accounts:** Practice using Floor Pivots in a demo account before risking real money.

Technical Indicators Chart Patterns Trading Strategies Market Analysis Candlestick Analysis Forex Trading Stock Trading Options Trading Futures Trading Swing Trading Day Trading Support and Resistance Trend Lines Fibonacci Retracements Moving Averages Risk Management Market Psychology Volume Analysis Bollinger Bands Trend Following Ichimoku Cloud Fundamental Analysis Backtesting Strategies Trading Psychology Day Trading Strategies Algorithmic Trading

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