Judgements about the market behavior is likely to be based on the analysis of impulse may be even more productive if we have predetermined levels available that can act as “pricing models” in the interpretation of the activity of the trading day. The “system dynamics” is one of these approaches.
The floor traders and other professionals who do the actual buying and selling futures contracts in the pits of trade, generally employ very similar systems for valuing the price of these instruments in the absence of major external influences. This system of support and resistance pivot determines the relative levels of valuation based on price the previous day.
Pivot price levels of the system act as potential support and resistance zones throughout the day. They serve as focal points for floor professionals as they adjust their bids and, especially when trading activity is slow. The plant was active trader can use these same values as an aid in determining appropriate areas for trade entry, stop placement and outputs.
The formulas for calculating the levels of system support and resistance pivot are:
DP = (H L C) / 3
R1 = 2 * DP – L
S1 = 2 * DP – H
DP R2 = (R1 – S1)
S2 = DP – (R1 – S1)
DP represents the daily dynamics. R1 and R2 identify levels of resistance above the daily dynamics. S1 and S2 to identify support levels below the daily dynamics. As an alternative to manual calculation, the trapper pattern offers easy-to-use online calculator
The first reference level is the daily pivot. Generally, to enter each trading day we consider this level as a balance between bullish and bearish forces. A demonstration of the significant price activity above the daily dynamic that has implications considered bullish, while the activity below is bearish. Although actual trade entry and exits are initiated by a variety of market factors, first observe the behavior of relative prices on a daily pivot as an aid in determining the overall directional bias market.
The day trading activity in general can be considered around and gravitating towards the daily pivot level. As the price moves away from this area and approaches or the first resistance level (R1) or the first support level (S1), the behavior of the market is increasingly important. Any rejection of these new standards achieved increases the likelihood of a return to the daily dynamics. Moreover, a breach of any of these levels is considered as initial market acceptance and a change of perception in the valuation of instruments traded be.
Also, if the market extend its movement beyond the daily dynamics, penetration through each successive level of support or resistance is generally regarded as having taken a greater degree of participation interests outside the plant. An increase in interest outside the plant is a bigger risk than long-term positions are being created, resulting in a greater potential for the market to trend even further. Each consecutive level greater pivot system violated support or resistance is generally considered to have aroused the interest of the participants on the longer term.