Using Range Deviation Pivots to Grade Trends and Daily Performance

Many methods can be used to understand trend, but few can provide a uniform method to calculate daily relative performance and trend. My preferred method is range deviation pivots. Traders use range deviation pivots to grade other technical signals such as divergence and specific patterns.

Range deviation pivots have critical differences when compared to normal pivot theory. First, they take an average range over a user-defined period. Second, they have a built-in calculation to skew for the current trend so that pivots are not symmetrical. Third, the values are fixed to the current day’s opening and remain fixed throughout the day. These differences help overcome the flaws associated with normal pivot theory. Taking an average range means that pivots are not dictated by just the previous day’s price action, which can create abnormally narrow or wide values. By providing a skew to the trend, range deviation pivots allow for trend expansion while tightening risk against the trend. This develops in a parabolic-type pattern the longer the trend continues and the wider the daily ranges become. Finally, by placing the value on the opening price, study values are not distorted by opening gaps from the previous day’s close.

The skew for trend and any expansion or contraction in range is shown in the eurodollar. The daily eurodollar chart in Figure 1 shows an initially large expansion in range in the recent downtrend. This causes the pivot values to move further apart below the opening price in order to allow the trend to develop. As time continues, the pivots above the opening price contract and, therefore, create tighter risk management as no trend can last forever. A typical trend will last 15 to 20 bars before a corrective phase begins. This tightening of pivot values means it will take less upward movement to create an end-of-trend signal. It is also possible to grade each trading day based on the pivot values touched. The top, before the downtrend begins, shows a series of dojis. The final doji shows a false breakout that reached the second pivot above with the low at first pivot down, while the previous two both respected the inner first up and first down.

Figure 1: Daily Eurodollar Performance

Source: CQG

Figure 2 shows a daily cable chart. Once a downtrend began, the normalised limit of range was the third pivot down. This represented the low of the day three times, at points A, B, and C, providing a fixed reference point for day trade profit taking. Pivots can be linked with volatility time bands (to be covered in a future post), allowing the actual time of day a pivot is hit to be qualified in terms of volume executed and whether it is likely to be the low of the day, as it was in these cases. Finally, the downtrend line break can also be qualified. The break at point D shows price hit the first pivot down and closed above the second pivot up. This strength confirms that the trendline break is valid.

Figure 2: Daily Cable Performance

Source: CQG



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Mark Carney Bank of England