Woodies Pivot Points

1. Woodies Pivot Points

Woodies Pivot Points (often simply referred to as “Woodies”) are a sophisticated method of price action analysis developed by Woody R. Johnson, a trader and author known for his work in futures and forex markets. Unlike traditional pivot points, Woodies' system focuses on identifying key support and resistance levels based on the relationship between price, time, and volume. They are not merely calculated levels but are intended to represent areas where the market is likely to change direction. This article will provide a comprehensive overview of Woodies Pivot Points, suitable for beginners, covering their construction, interpretation, and application in trading strategies.

History and Core Concepts

Woody Johnson developed Woodies Pivot Points in the early 1990s as a refinement of traditional pivot point calculation. He found traditional methods lacked the precision needed to anticipate turning points accurately. His system addresses this by incorporating a more nuanced understanding of how price moves, focusing on identifying tessellations (geometric patterns) and fractal structures within market data.

The core concept behind Woodies Pivot Points revolves around the idea that markets move in a cyclical fashion and that these cycles can be identified and traded. Woodies emphasizes understanding the “feel” of the market and using pivot points as a tool to confirm that feel, rather than relying on them as standalone signals. He stresses the importance of confluence – when multiple factors align to suggest a potential turning point. Understanding concepts like Fibonacci retracements and Elliott Wave Theory can further enhance comprehension of the cyclical nature of markets that Woodies' system aims to exploit.

Calculating Woodies Pivot Points

Woodies Pivot Points are calculated differently from standard pivot points. They are based on the previous day’s (or period’s) High, Low, and Close, but utilize a unique formula. The system generates a series of levels – Central Pivot Range (CPR), Resistance Levels (R1, R2, R3, R4, R5, R6), and Support Levels (S1, S2, S3, S4, S5, S6).

Here’s the breakdown of the calculations:

• **Central Pivot Range (CPR):** (High + Low + Close) / 3
• **Resistance Levels:**

   * R1 = (High + CPR) / 2
   * R2 = CPR + (High - Low)
   * R3 = (R1 + R2) / 2
   * R4 = R2 + (High - Low)
   * R5 = (R3 + R4) / 2
   * R6 = R4 + (High - Low)

• **Support Levels:**

   * S1 = (Low + CPR) / 2
   * S2 = CPR - (High - Low)
   * S3 = (S1 + S2) / 2
   * S4 = S2 - (High - Low)
   * S5 = (S3 + S4) / 2
   * S6 = S4 - (High - Low)

These calculations are best performed using a charting platform that offers Woodies Pivot Points as a built-in indicator. Manually calculating them can be time-consuming and prone to error. Many trading platforms, such as MetaTrader 4/5, TradingView, and NinjaTrader, support Woodies Pivot Points.

Interpreting Woodies Pivot Points

Simply calculating the levels isn’t enough. The real power of Woodies Pivot Points lies in understanding how to interpret them. Here’s a detailed look at what each level signifies:

• **Central Pivot Range (CPR):** This is the most important level. It acts as a magnet for price and often serves as a key area of support or resistance. Price often revisits the CPR multiple times. Breaches of the CPR can signal the start of a new trend.
• **R1 & S1:** These are the first levels of resistance and support, respectively. They’re often the first points where price might encounter a reaction.
• **R2 & S2:** These levels are considered stronger than R1 and S1. A break above R2 or below S2 suggests increasing momentum in that direction. They often align with key trend lines or moving averages.
• **R3 - R6 & S3 - S6:** These are the outer levels, representing potential extreme points. They are less frequently tested but can provide significant profit targets if reached. These levels are often used in conjunction with harmonic patterns for precise entry and exit points.

Woodies emphasizes looking for "tessellations" - areas where multiple pivot points converge. These convergences create stronger zones of support and resistance. Furthermore, the distance between the pivot points provides valuable information. Widely spaced levels suggest strong momentum, while closely spaced levels indicate consolidation.

Using Woodies Pivot Points in Trading Strategies

Woodies Pivot Points can be incorporated into a variety of trading strategies. Here are a few examples:

• **Breakout Strategy:** Look for price to break above R2 or below S2. This signals a potential continuation of the trend. Enter a long position above R2 or a short position below S2. Place a stop-loss order just below R2 (for long positions) or just above S2 (for short positions).
• **Reversal Strategy:** Look for price to touch or penetrate a pivot point level (particularly R1-R3 or S1-S3) and then show signs of reversal (e.g., a bullish engulfing pattern at support or a bearish engulfing pattern at resistance). Enter a long position at support or a short position at resistance. Place a stop-loss order just below the support level or above the resistance level.
• **CPR as a Magnet:** Watch for price to repeatedly test the CPR. Trade bounces off the CPR in the direction of the prevailing trend. If price consistently fails to break the CPR, it might indicate a range-bound market.
• **Tessellation Trading:** Identify areas where multiple pivot points converge. These zones offer high-probability trading opportunities. Look for price action signals within these zones, such as candlestick patterns or chart patterns.
• **Combining with Other Indicators:** Woodies Pivot Points work particularly well when combined with other technical indicators. For example, use the Relative Strength Index (RSI) to confirm overbought or oversold conditions at pivot point levels. Combine with MACD for momentum confirmation. Use Bollinger Bands to gauge volatility around pivot points.

Advanced Concepts - Time & Volume

Woodies Pivot Points are not solely based on price. Woody Johnson places considerable emphasis on the interplay between price, time, and volume.

• **Time:** Woodies believed that certain times of the day or week are more conducive to specific types of price movements. He identified specific time windows where pivot points are more likely to be tested. Understanding market cycles and seasonal patterns complements this aspect.
• **Volume:** Volume confirmation is crucial. A breakout above a resistance level should be accompanied by increasing volume. Conversely, a breakdown below a support level should be accompanied by increasing volume. Low volume breakouts are less reliable. Consider analyzing On Balance Volume (OBV) alongside Woodies Pivot Points.

Woodies developed a concept called “Kill Zones” – specific time windows where he believed the highest probability trading opportunities occur. These kill zones are based on his observations of market behavior over many years.

Common Mistakes to Avoid

• **Treating Pivot Points as Static Levels:** Pivot points are dynamic, not static. They should be adjusted each day (or period).
• **Ignoring Confluence:** Don’t rely on pivot points in isolation. Look for confluence with other technical indicators, trend lines, or chart patterns.
• **Overcomplicating the System:** Woodies' system is powerful, but it's also relatively simple at its core. Avoid adding unnecessary complexity.
• **Not Understanding Time and Volume:** Ignoring the time and volume components significantly reduces the effectiveness of the system.
• **Lack of Backtesting:** Always backtest any trading strategy, including those based on Woodies Pivot Points, before risking real capital. Backtesting helps to validate the strategy's performance and identify potential weaknesses.
• **Ignoring Risk Management:** Proper risk management is crucial. Always use stop-loss orders and manage your position size appropriately. Utilize position sizing techniques to control risk.

Resources for Further Learning

• **Woody's Pivot Point System by Woody R. Johnson:** The original source material.
• **TradingTutors.com:** Offers courses and resources on Woodies Pivot Points.
• **Babypips.com:** Provides a basic introduction to pivot points, which can be a starting point for understanding Woodies’ system.
• **Investopedia:** Offers definitions and explanations of various technical analysis terms used in conjunction with Woodies Pivot Points.
• **Books on Price Action:** Studying books on price action trading can complement your understanding of Woodies Pivot Points.
• **Online Forums and Communities:** Engage with other traders in online forums and communities to share ideas and learn from each other. Trading forums are invaluable resources.
• **Webinars and Tutorials:** Many traders offer webinars and tutorials on Woodies Pivot Points.

Conclusion

Woodies Pivot Points are a powerful tool for identifying potential support and resistance levels and anticipating market turning points. While they require a deeper understanding than traditional pivot points, the rewards can be significant. By combining the principles of price, time, and volume, traders can gain a more nuanced perspective on market behavior and improve their trading decisions. Remember that consistent practice, backtesting, and sound risk management are essential for success. Understanding advanced concepts like wave analysis, candlestick patterns and market microstructure will further improve your ability to apply Woodies' system effectively. Utilizing a solid trading journal will also help refine your strategy over time.

Technical Analysis Trading Strategies Candlestick Patterns Chart Patterns Support and Resistance Trend Lines Moving Averages Fibonacci Retracements Bollinger Bands Relative Strength Index (RSI) MACD Elliott Wave Theory Harmonic Patterns Market Cycles Seasonal Patterns On Balance Volume (OBV) Backtesting Risk Management Position Sizing Trading Forums Wave Analysis Market Microstructure Trading Journal Time Zones Volume Spread Analysis Price Action Market Sentiment

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