| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Reversal Pivotal Points are a key factor in the Livermore Trading SystemLivermore Pattern Recognition Timing Keys Pivotal Point Trading Pivotal Points are the perfect psychological moment to make a trade. Reversal Pivotal Points mark a change in trend. Jesse Livermore REVERSAL PIVOTAL POINTS Reversal Pivotal Points are a key factor in the Livermore Trading System. Livermore was the first person to use the term Pivotal Point and incorporate it as an important part of his trading system. He never wanted to buy at the lowest price or sell at the top. He wanted to buy at the right time and sell at the right time. The Pivotal Point Trading theory allowed Livermore the chance to buy at the right time. But this also required him to have patience and wait for the perfect trading situation to develop. If all the right conditions did not coincide on a particular stock he was following, he didnt care, because the proper pattern would sooner or later appear on another stock. Patience . . . patience . . . patiencewait for the perfect tradethat was his key to timing success. Livermore always considered time as a real and essential trading element. He often said: Its not the thinkin that makes the moneyits the sittin and the waitin that makes the money. This often has been incorrectly interpreted by many people to mean Livermore would buy a stock, and then sit and wait for it to move. This is not so. What he meant was there were many occasions when he sat and waited in cash, until the right situation appeared. When these conditions came together, when as many of the odds as possible were in his favor, then and only then, like a cobra, he would strike, usually with great results. Buying on the Pivotal Point assured him the best chance of coming into the situation just as the action was about to begin. And once he was sure of his play, he wasnt afraid to make his commitment. He wasnt called the Boy Plunger for nothing. It was Livermores firm conviction that when a speculator can determine the Pivotal Point of a stock and plan the action at that point, he may make a commitment with the positive assurance of being right from the start. But bear in mind, when using Pivotal Points to anticipate movements, that if the stock does not perform as it should after crossing the Pivotal Point, this is an important danger signal that must be heeded immediately. Every time Livermore lost patience and failed to await the Pivotal Points, every time he fiddled around for easy profits, he lost money. The study of Pivotal Points is fascinating, providing a golden array of opportunities for personal research. The trader can derive a singular pleasure and satisfaction from successful trades based on his own judgment. You will discover that profits made in this way are immensely more gratifying than any that could possibly come from tips, or the guidance of someone else. If you make your own discovery, trade your own way, exercise patience, and watch for the danger signals, you will ultimately begin thinking like a successful trader. The Pivotal Points theory applies to commodity trading as well as stock trading. Livermore never considered this theory as a foolproof, perfect method of picking winners, but it does represent an essential part of the Livermore trading system. Pivotal Points are vital as the confirming signal that your judgment is correct, but you must let them play out. No trader is right all the time on the market. On occasion, the market will move contrary to what a speculator has predicted. At these times, the successful speculator must abandon his predictions, and follow the market action. A prudent speculator never argues with the tape. Remember what Livermore preached: Markets are never wrongopinions often are. The Crash of 1929 brought about Livermores complete belief in Pivotal Points. Black Tuesday was the biggest Pivotal Point in the history of the stock marketthe market fell 11.7 percent in one single day. This would represent a drop of 1100 points on the Dow in a single day in todays market. Livermore said that once he understood Pivotal Points they became one of the true trading keys, a reliable trading technique that was basically unknown, in a formal way, to stock speculators of the twenties and early thirties and is to this day hardly used by traders. Pivotal Points are a timing device that can be used to get in and out of the market with great success. The Reversal Pivotal Point is not easily defined. In Livermores mind it was a change in basic market directionthe perfect psychological time in basic market directionthe perfect psychological time at the beginning of a new move, representing a major change in the basic trend. For Livermores style of trading it did not matter if a stock was at the bottom or the top of a long-term trending move, because he would buy or sell any stock, going long or short at any time. The Reversal Pivotal Point flagged the optimal trading timing for him. Figures 4.1 and 4.2 show the Reversal Pivotal Point. Volume Factors Reversal Pivotal Points are almost always accompanied by a heavy increase in volume, a climax of buying, which is met with a barrage of sellingor vice-versa. Increased volume is an essential element in understanding Pivotal Pointsit is usually present and confirms the Pivotal Point. This battle between buyers and sellers causes the stock to reverse its direction, top out, or bottom out in a decline. In effect, it has changed momentum and is at the start of a new trend direction for the stock. Look for the tell-tale increase in volume. These important confirming volume spurts often end the day with a 50 percent to 500 percent increase in the average daily volume. Reversal Pivotal Points usually came after long-term trending moves. This is one of the reasons why Livermore always felt patience was so necessary for success in catching the big moves. You need patience to be sure that you have identified a true Reversal Pivotal Point. He developed the following tests: First, he would send out a probe. He would buy a small percentage of the overall stock position that he wanted to eventually establish; if he was correct on the first trade, he made a second trade. This strategy is fully explained in the Money Management section of this book. He used a second test to confirm whether a Reversal Pivotal Point had truly occurred. He employed his Top Down Trading Procedure and looked at the Industry Group, always looking at the two leading stocks in the group, to see if they had the same pattern as the stock he was interested in trading. This was the final confirmation he needed to confirm that he was on the right track. (See Figure 4.3.) Figure 4.3 When Livermore employed his Top Down Trading Procedure, he looked at the industry group, and then he looked at the two leading stocks in the group, to see if they had the same pattern as the stock he was interested in trading. Evaluating Continuation Pivotal Points Livermores Pivotal Point methodology divided Pivotal Points into two categories. The first, which we have already discussed, he called a Reversal Pivotal Point; the second he named the Continuation Pivotal Point. It is essential to understand that while the Reversal Pivotal Point marks a definite change in direction, the Continuation Pivotal Point confirms that the move is proceeding in the proper direction. Continuation Pivotal Points usually occur during a trending move as a natural reaction for a stock in a definite trend. A pattern is forming that demonstrates support or resistance lines. The trader must wait as this formation builds to determine if the pattern will develop into a support area. Or if the stock breaks out on the downside, this may be the area of resistance line in the next move upward. As has been stated so many times before in this book, never anticipate the market move, simply wait for the move to be revealed to you by the action of the stock. The Continuation Pivotal Point is a potential additional entry point in an ongoing moveit provides a signal, a chance, to increase your position. Of course, the stock must emerge from the Continuation Pivotal Point headed in the same direction it was in before the correction. If not, this is a clear signal to close out your position. Most importantly, Livermore defined a Continuation Pivotal Point as a consolidation in which the stock pauses and takes a breather in its ascent. It gives a stock a chance to consolidate, often allowing a stocks ratio of earnings and sales to catch up to its current price. It is usually a natural reaction in the stocks progress. The prudent trader, however, will carefully observe which way the stock will emerge from this consolidation, and not anticipate. Pause in the stocks progress. The prudent trader, however, will carefully observe which way the stock will emerge from this consolidation, and not anticipate. For Livermore, a stocks price is never too high to buy or too low to sell short. Waiting for these Continuation Pivotal Points signals gave him the opportunity to either open a new position or to add to a current position. Do not chase a stock if it gets away from youlet it go. Livermore would rather wait and pay more, after the stock had regrouped and formed a new Continuation Pivotal Point, because this provides a confirmation and mental insurance that the stock will most likely continue with its move. Conversely, this Pivotal Point theory can also uncover successful short-selling opportunities. Livermore looked for stocks that traded down to a new low for the last year or so. If they formed a False Pivotal Point, that is, if they rallied from this new low and then dropped down through and formed another new low, they were most likely to continue down from there and establish additional new lows for the move. By correctly catching either the Reversal Pivotal Points or the Continuation Pivotal Point, Livermore was able to make his initial purchase so that he had an entry point at the right price from the beginning of the move. This ensured that he was never in a loss position and could therefore ride out the normal stock fluctuations without risking his own capital. Once the stock had moved off the Pivotal Point Livermore was only risking his paper profits, not his actual capital, because he was in profit from the beginning of the trade. His early years of getting crushed because he had bought the stock at the wrong time in its move helped him formulate his unique theory of Pivotal Points. On many of those early trades he was never in profit. If a trader buys before the Pivotal Point is established, he may be early. This is dangerous because the stock may never form a proper Pivotal Point to establish its direction clearly. But the trader must be carefulplease note that if you buy more than 5 percent to 10 percent above the initial Reversal Pivotal Point, you may be too late. You may have lost your trading edge because the move is already well underway. The Pivotal Point (either the Reversal or the Continuation point) is the only tip-off you need to trade and win. A trader has to be patient, because it takes time for a stock to run its logical and natural course and form a proper Pivotal Point. (See Figures 4.5 and 4.6.) It will not be willed or forced forward by an impatient trader. It will come as a natural event. Be Patient! Trade only on the Pivotal Points. I always made money when I was patient and traded on the Pivotal Points. Jesse Livermore Livermore also firmly believed that often the largest part of a stock movement occurred in the last two weeks or so of the tradehe named it the Final Mark-up Phase. The same thing applies for commodities. So, once again, a trader must be patient, get into position and wait, but at the same time he must be completely alert for the clues when they come, good or bad, and then take action to either buy or sell his position. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |