Moving averages are the most popular directional gauges. They are typically the first technical indicator in the novice trader’s toolbox. Many professional traders rely on them as well. Typically, the directional signals come when a short-term MA crosses a long-term MA. The problem with this method is that by the time the averages converge and cross the directional move is often already well on its way. Thus, entering a trade using this method usually leads to late entry and poor trade location. Bad trade location increases risk and reduces profits.    

Speed Up a Moving Average

To improve entry, many traders use exponential moving averages (EMA). These are calculated with more weight on the most recent prices. Thus, they tend to converge and cross faster than simple MAs, which should lead to earlier entry and improved trade location.

Calculating Pivots

Most MAs are calculated using the close of the day. But for intraday or short-term traders these MAs are often useless when volatility is high. Day and swing traders frequently use daily pivots levels for short-term directional signals. These indicators can be calculated in many ways. Maybe the most popular is to take the average of the daily high, low and close. If the market closes below this average price, it means sellers have the edge. If it settles above this price, bulls gain the advantage.

Create Pivots that Suit Your Time Frame

When I was younger, I had the energy to be a speculator or day trader. I rarely took home a position exiting trades before the end of the session. As high frequency systems become more popular, I found it difficult to compete with these computer-generated models. Plus, it was exhausting to trade so actively.  

After many years at the CBOT and CME and charting many markets for 35 years, I found the time frame that suits my approach. I have found that a 3-day pivot works the type of trade a prefer. Simply, when a market moves from this pivot it will travel the length of an average day range and sometime the length of an average week.

Swing Trader Pivot

I designed a pivot that suits my time frame and style. To calculate this pivot. I take an average of the high, low and close over a 3-day period. The pivot is an average of 9 prices. If the close is below this pivotal price on the third day, odds favor a move lower over the 24-hour period. On the other hand, a close above this pivot means long positions should pay the next day or longer. The moves from the pivot tend to be quicker and larger if the previous 3 days have below average ranges and volume.

There are no right or wrong technical indicators. They all have strengths and weaknesses depending on market conditions. Each trader must find the technicals and time frames that fit their personality. Through experimentation I found my niche. Along with some other gauges the 3-day pivot suits my style. The average amount of time you intend to spend in a trade may dictate the pivotal price you should calculate.

John Seguin, Market Taker Mentoring