Calculation and study of the pivot range as part of the ACD system by Mark Fisher
Logo
  1. Data for testing
  2. Point A
  3. Failed Point A
  4. Point C
  5. Pivot range
  6. W-pivot range -new
  7. Points A and C through the pivot
  8. Closing method -new
  9. Dynamics of Points A and C
  10. Significant time frames
  11. Entry and exit

Appendix

5. Pivot range

In this chapter, I am going to find out if the pivot range is really strong support or resistance. For this purpose I will use the concept of the mirror pivot range, which is obtained by reflecting the pivot range relative to the level of the opening price - see Fig. 5.1.

Figure 5.1. Mirror pivot range

If the pivot is really strong support or resistance, then the market should break through the mirror pivot range much more often than the pivot range.

The pivot range is calculated based on the high, low, and close of the previous trading period according to the formula presented on page 37 of The Logical Trader. You can also see this formula in ACD basics. The number of days in the pivot varies from 1 to 10. The test results related to the pivot are presented in Table A.6 in the Appendix. You can find the most important data in the last column of the table, which contains the ratio of the number of days when the market breaks through the pivot to that when the market breaks through the mirror pivot, in percent. In most cases, this ratio is less than 50% (excluding LKOH stocks, for which this ratio generally exceeds 50%). This confirms that the pivot is indeed support or resistance, although it is difficult to say how strong it is. In my opinion, if support or resistance were strong, then this ratio would be lower, say, about 40%. According to The Logical Trader, if the pivot is broken through, there may be a significant movement in the direction of the breakout. This statement will be confirmed in chapter 7.

The penultimate column of the table indicates the ratio of the number of days when the market moves in the pivot direction and closes closer to the pivot, to the number of days when the market moves in the opposite direction and closes further from the pivot at the end of the trading day, in percent. One would expect this ratio to be less than 50% in most cases if the pivot is really support or resistance. But it turned out that this ratio more often exceeds 50% compared with the ratio associated with the breakthrough of the pivot and the mirror pivot.

The table also contains the number of plus and minus days in relation to the total number of days as a percentage and shows how this ratio depends on the number of days in the pivot. For example, for a 1-day pivot, plus and minus days are observed 20-30% of the time.

It is noteworthy that the market usually opens outside the pivot range in 82-98% of cases, and the more the number of days on which the pivot is based, the more often the market opens outside the pivot range. Although it would be more logical if it were the other way around.

Perhaps the properties of the pivot range depend on the pattern of price changes on the previous day. Let’s look at Fig 5.2 and Fig 5.3. They show how different patterns form the same pivot range. In Fig. 5.2 the pivot range plays the role of support, which is probably stronger for pattern (a) than for pattern (b), because in the latter case, most bars on the previous day are significantly lower than the pivot range. In Fig 5.3 the pivot range plays a role of resistance which is probably stronger again for pattern (a) than for pattern (b), because in the latter case, most bars on the previous day are significantly higher than the pivot range.

Figure 5.2-5.3. Pivot as support and resistance

Fig. 5.4 shows two candles that are different from each other, but the pivot range is the same for them. The white candle (a) is probably a sign of the continuation of the bull market the next day, while the white candle (b) is called a hanged man and warns of a possible decline. The black candle (a) is probably a sign of the continuation of the bear market the next day, while the black candle (b) is called an inverted hammer and warns of a possible rise. Thus, candles (a) and (b) can cause the market to behave differently the next day, while the pivot range is the same for them.

Figure 5.4. Pivot range is the same for candles(a) and (b)

To address the aforementioned drawbacks of Mark Fisher’s pivot, I developed my own pivot, described in chapter 6.