Many articles and books have been written about WD Gann. I was fortunate enough to read some of his original writings back in the 1990s, a colleague of mine was part of a Gann Society that he paid a huge amount to join. I have studied Gann and have my own version of a Gann system. The most important statement that I read from Gann is “Time is the most important factor, when analyzing and forecasting market movements.” I could not agree more. In this article I will go over how I trade Pivot Points using Fibonacci levels and my version of Ganns principle of Time vs. Price.
The first points that you must find are what are known as swing points. A swing point is the most recent highest high, or lowest low. There has to be a minimum of 8 big figures between them to be considered moderate swing levels. You could use less point differences they are just not as significant. Once you identify one of these levels you move to the left on the chart (going Back in time) to find the other. I am going to use EUR/USD prices with the dates so you can find what I am doing and apply the analysis. Looking at the most recent price data(today’s date is 1/27/09) we have a solo top made on December 18th 2008 at 1.4720 level. We move to the left and find the lowest low at a double bottom made on October 27, and 28th 1.2330 level. Now we have the swing points to work with. We will find major levels of support and resistance to trade off of using Fibonacci ratios. Then find the daily pivot points to see if any over lapping occurs.
The formula to find the Fibonacci points are are follows. Take the highest high and subtract the lowest low to find the swing range. That would be 1.4720 – 1.2330 =.239 big figures. Fibonacci ratios are.382,.618,.8200(my ratio),1.382,1.618,2.236,2.618,3.618 We now take the range and multiply by the ratios..239 *.382=.091298 Now we would take the Highest High and subtract that Fibonacci factor. So first level of support would be 1.4720-.0913= 1.3807 Next level of support would be.239*.618=.147702 1.4720-.1478= 1.3242 Next level.239*.8200=.1964 1.4720-.1964= 1.2756 (just to pat myself on the back the low made on Jan 23 was 1.2765)
You can keep applying the other ratios if you like. They will be good until that top is taken out or a new low is made.
So once we have these levels calculated we will set up daily pivot points in order to see if any over lapping occurs (overlapping for me is 33points + or -), then I will give you my time verse price lesson. Keep in mind that these Fibonacci levels were past through on the way down, these same levels will now act as resistance on the way up. If they are breached they turn into support again. Lets go over the pivot point formula, and see how we apply it to the major Fibonacci levels.
The pivot point formula I am about to go over has been used for as long as I have been in the market(20+), and I was taught this formula by a guy who was in Forex since 1976. Like King Solomon said “There is nothing new under the sun” The pivot point formula takes on a new meaning when we have overlapping, with the Fibonacci levels. They become that much stronger, to take advantage of reaction points. Here is the Formula:
We must first calculate the base point. I calculate the pivot point on a daily bar because we are using daily data.(you can use this on any time frame, just keep the time sequence uniform, and I would not go less then 30 minute bars) Pivot Formula = High+Low+Close/3= x base pivot
I am going to pick today’s trading session.(yesterdays daily bar) to calculate. 1/26/09 Open 1.2974 High 1.3205 Low 1.2860 Close 1.3135
1.3205+1.2860+1.3135/3= base pivot 1.3066 2*1.3066-1.3205=1.2997 Support level 1 2*1.3066-1.2860=1.3272 Resistance level 1
Support Level 2 Base pivot -(R1-S1) 1.3066-(1.3272-1.2997)=1.3066-.0275=1.2791(Very Close to that Fib level) Support Level 3 Low-2x(high-Base pivot) 1.2860-2x(1.3205-1.3066)=1.2860-2x.0139=1.2860-.0278=1.2582
Resistance 2 Pivot + (R1-S1) 1.3066+(1.3272-1.2997)=1.3066+.0275=1.3341 Resistance level 3 High+2x(pivot-low) 1.3205+(1.3066-1.2860)=1.3205+.0206=1.3411
So these are our daily levels and we would plot them out on the charts with our old Fibonacci support levels that have become your resistance levels on the way up. So how do we trade these pivot points. Well the rule is to get long on a break above and short them on a break down. Easier said then done, because these are very reactionary points that can trade back and forth multiple times, cutting you up as they do. In order to prevent that from happening,you must give yourself a 35 pip stop loss(so if the market breaks up or down and holds above or below the pivot more than 12 minutes stay long or short with a 35 point stop. You need experience with Market Momentum.) This is where my version of Gann’s time verse price rules come into play. You can follow along using hourly charts, I am going to describe how I trade these points. This is what is know as discretionary trading, not a system per say. However, you now can work out your own rules to trade these points. My experience has proven to me that if the trades move quickly into the money,we are on the easy side of the market, and we will get out when the market momentum starts to slow.(I use a trailing Stop order.)
Let s get into it; The data points that came into play for me was the Fibonacci Point Of 1.3242 it does over lap with my daily pivot point of 1.3272. I would be looking to see how the market reacts to these levels. I am going to write what is in my trading journal of the day so you can see how I traded the market today. It is important to note that I have several primary systems that I trade. This is what I call a semi- trading system, because it is a bit discretionary.This is the environment that I am used to being in;Since I traded the interbank market for many years, It requires a lot of discretionary trading as you make markets. You should only attempt this if you have a good amount of trading experience. I still have hard and fast rules that I stick to when I trade discretionary.Here are my time rules. I will use today’s trading scenario. It would be the opposite if we were trading a support level. It s what I call the 15 minute rule. I break the 15 minutes of time into 3 five minute time frames. Your market attempts to break a resistance level and fails. You sell the level minus 7-9 pips. (our level is 1.3242-9 pips) So you would sell at 1.3233. You wait for a snap back (market retraces and attempts the resistance once again) You sell the snap back rally, for a smaller amount then your base position. (usually 1/3 less; this is a form of pyramiding. Always pyramid with a smaller amount.) Usually the snap back will go a bit higher (12-18 pips; its not a rule just what I have observed.) Monitor the market carefully. Wait another 5 minutes, if not in the money(your losing) close the trade and step back.
9:15 am EST Market attempts the Fib point of 1.3242 hitting a high of 1.3244 paid. It can’t sustain I sell 3 units of euros at 1.3231 price. I will pyramid on a snap back at the 1.3250 level. I have a over all S/L of 39 points.( just over the 1.3272 pivot level at 1.3281) Take profit 1.3130 level. Market closes on the five minute bar at 1.3239. 9:20 market attempts the 1.3244 high and can’t get over it I miss the bid at 1.3238. I will not add at this time. Market close at 1.3219.So far no snap back. 9:25 We are slightly in the money market in a tight range, I will sell small if I can see 1.3235 40 level. market closes on this bar at 1.3217 level. 9:30 Euro attempts the 1.32 figure and quickly gets paid up. It ends up closing at the 1.3215 level again. The market is choppy and at this point can go either way, if we can t get above 1.3258 I still think we can get back into the value zone of 1.3150. 9:35 Euro attempts to break the 1.32 35 level and is quickly rejected I sell small(1 unit) at 1.3224 price I am not to comfortable with that sale. I wanted to get them out higher.Its closing at the high 1.3227. I can’t add even if we break the 35 level I am all in at this point with my stop set. 9:40 Euro once again attempts the 30 level and fails that’s 3 times, we close at 1.3215 9:45 tight range trade 1.3215 1.3230 9:50 Still tight range trade 1.3211-1.3231 9:55 We finally break the figure and close at 1.3195.
10:00 We break down to 1.3140 level trailing stop in place.
10:15 Market takes me out at 1.3153.
So that s how I trade pivot points. As you can read from above I never did get that snap back, I was a bit on guard, because experience has shown me the longer the amount of time I stood higher, the more chance I had to test the next level of 1.3272.
My optimal trade would of been to sell the First resistance at 1.3240, have the market fall to the 1.3208 then snap back up to the 1.3260 level, where I would sell again. Then quickly crash down to the 1.3160 level. All within 20 minutes. Trades like that happen often, if you know what to look for (now you do). Today however the market made me work for my money. Cheers Tom