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Understanding and Using Pivot Points in Option Trading
Pivot points have been around since Charles Dow first began trading, and invented Point and Figure charting in the late 1800’s.
Pivots are nothing more than points when the prices begin changing direction, and are leading indicators.
For traders that view simple bar charts it’s very simple.
Using the OHLC (Open/High/Low/Close) bar charts simply “read”…if the OHLC bars have “lower lows” it’s a pivot low, and conversely if the OHLC bars before and after a bar have lows below the low of the bar, it begins a “pivot high”.
Index Options, the QQQQ, emini’s and the OEX are all best and simply viewed, however, using Dow’s simple point and figure charting. The following chart is how we “see” the market each day.
From this we calculate the defined pivot point, and very specific support and resistance lines for that DAY. This is how one can learn to day trade options.
Pivots help define short-term trends. Trends are made up of simple up and down movements in the market (swings). Within the up and down movement are the typical market actions….reaction (bear) and rally (bull).
At OEX Options we look for the pivot point for a single day first to help identify the short-term directional bias. If the market moves up and above the pivot point we’ve established and reported…it’s likely the market will move up. If the market moves down below that same pivot point it’s likely the market will move down.
We watch the overall movement in the first hour of trading to define this simple rule of thumb.
Pivots are also key to our recommendations for Floyd’s Folly, our credit spread, stock and option service. Here we identify more of what a downtrend is.
For example, if the price of a stock is going UP but closes near the low of the day….a reversal is in the offing. The reversal may be greater if the closing price is lower than the prior day close.
Some reversals take place after a “three day movement” directionally if a stock or option moves up or down consecutively. At OEX Options we teach what to watch for with movements like this.
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