2 Profiting With Pivot-Based Moving Averages

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2 Profiting with Pivot-Based Moving AveragesPROFITINGWITHPIVOT-BASEDMOVING AVERAGESFRANKLIN O. OCHOA, JR.PivotBoss.comDISCLAIMER:Trading the financial markets has large potential rewards, but alsolarge potential risk. You must be aware of the risks and be willing toaccept them in order to invest in the stocks, futures, currency, andoptions markets. Don’t trade with money you can’t afford to lose.This material is neither a solicitation nor an offer to buy or sell stocks,futures, options, or currencies. No representation is being made thatany account will or is likely to achieve profits or losses similar tothose discussed in this book. The past performance of any tradingsystem or methodology is not necessarily indicative of future results.Copyright 2010 PivotBoss.com

3 Profiting with Pivot-Based Moving AveragesCONTENTSIntroduction4What’s the Pivot Point?5Pivot-Based Moving Averages6Multiple Pivot Moving Averages8The PEMA Pull-Back10The PEMA Breakout20The PEMA Crossover26The Modified PEMA Crossover33Engaging Pivot-Based Indicators38Appendix41Copyright 2010 PivotBoss.com

4 Profiting with Pivot-Based Moving AveragesINTRODUCTIONPivot-based indicators are the essence of PivotBoss.com. Ifyou are an indicator-based trader, you must consider using pricebased, market generated indicators, like Floor Pivots, the CamarillaEquation, and Market Profile levels.These are leading edgeindicators that reveal a mountain of information about price, whichallows you to make informed trading decisions ahead of the crowd.These indicators give you a true edge. As they say in trading, an edgeis all you need to make money in this game.In this e-book, I will explore how I use pivot-based movingaverages to profit in the market. It is often said that the most robusttrading strategies are oftentimes the simplest to understand. Movingaverages have been around a long time, but it continues to amaze mehow many traders, investors, and professional money managers stillrely heavily on these indicators. What is not always commonknowledge to those outside of large trading firms is the fact that manyfund managers use moving averages when deciding to deploy largebaskets of capital. I would even go so far as to say that a healthypercentage of managed funds incorporate moving average systemswhen putting their money to work.Why? Because moving averages work. Moving averages areextremely versatile. They allow you to easily decipher the trend,anticipate a change in trend, identify overvalued and undervaluedprice levels, and anticipate breakout opportunities – all with anindicator that is easily understood by all. Moreover, additionalindicators can be created using the inputs from moving averages,thereby giving you different ways to view related information. It’seasy to see why moving averages have stood the test of time.Copyright 2010 PivotBoss.com

5 Profiting with Pivot-Based Moving AveragesThe problem, however, is that many traders do not know howto properly use moving averages. There are certain tendencies andnuances to using moving averages to profit in the market. In thesections ahead, I will show you powerful money-making setups usingpivot-based moving averages. Setups like the PEMA Pull-Back, thePEMA Breakout, and the PEMA Crossover have been a mainstay inmy trading and analysis. Whether you are an intraday trader, swingtrader, position trader, or investor, the concepts in this e-book canhelp you make money in any market with a pulse, from stocks toforeign exchange.Before we move on, however, let’s first discuss the pivot pointand why I use it as the centerpiece for the pivot-based setups that wewill explore.WHAT’S THE PIVOT POINT?The pivot point has been called the heartbeat of the Floor Pivotsindicator. This price level is used by many professional traders toforecast potential price movement for the upcoming session and totrigger entries and exits in the market. The pivot point, also called thepivot or the central pivot point, is derived by taking the average of thehigh, low, and close prices of a period of time. See below:P (H L C ) / 3To calculate the pivot point for the upcoming month oftrading, you would take the high, low, and close prices of the currentmonth and divide the sum by three. For example, you would use thehigh, low, and close prices of June to calculate the monthly pivotpoint for July. As a matter of fact, this formula can be used tocalculate the daily, weekly, monthly, and yearly pivot points, so youcan focus on the timeframe that suits your trading style.Why is this important? At any given time the pivot point canbe support or resistance. It can give professionals a feel for marketdirection and market sentiment.It exposes price when it isovervalued and undervalued. Simply put, the pivot point is thecompass of the market. Regardless of the timeframe you are using toCopyright 2010 PivotBoss.com

6 Profiting with Pivot-Based Moving Averagestrade, knowing the price of the pivot allows you to keep your fingeron the pulse of the market.Now that we understand the pivot point and its importance,let’s see how it’s used in pivot-based moving averages.PIVOT-BASED MOVING AVERAGESThe moving average offers perhaps the easiest method fordeciphering a market’s trend. The most common moving average isthe simple moving average (SMA), which totals the close price over acertain number of periods and then divides this total by the numberof periods, essentially calculating the arithmetic mean. Therefore, a10-period simple moving average would total the closing prices overthe last ten periods and then divide the sum by ten. When a new datapoint enters the string, the oldest data point is released. This providesa smooth line of price movement that eliminates the noise of a chart,thereby allowing you to identify the trend of a market in a clean andeasy fashion.A pivot-based moving average is exactly like a your traditionalmoving average, except the key input is the pivot point, which as youmay recall is the average of the high, low, and close prices. While atypical moving average is based on the close price (or in some casesthe high, low, or open price), we can build a moving average that isbased on the central pivot point, which has much more merit andrelevance in our charts. Therefore, a 10-period pivot-based movingaverage would total the pivot points over the last ten bars and thendivide the sum by ten.The pivot point directs the flow of traffic in most charts andcan be easily used to gain a bullish or bearish bias on a particulartrading instrument. Why not also use it to analyze a market’s trendvia a pivot-based moving average? After all, the central pivot point isthe compass of the market. Using this approach allows you to gaugethe value of the market in a more precise manner than your typicalmoving average.Pivot-based moving averages gauge the market’s value better than standardmoving averages because the data points hold more significance.Copyright 2010 PivotBoss.com

7 Profiting with Pivot-Based Moving AveragesTake a look at Figure 1, which is a weekly chart of Apple, Inc.( AAPL) with a 10-period pivot-based SMA plotted. The pivot-basedmoving average looks and smells just like a normal moving average,but we have more confidence in its validity knowing that it is basedon the central pivot point, and not just an arbitrary data point. Takinga look at the chart for Apple, you’ll notice the 10-period pivot-basedSMA clearly illuminates three types of markets over an 18-monthperiod of time – a bearish market, a neutral market, and a bullishmarket. While this concept is straight forward, understanding thesetypes of markets is an important part of the pivot-based setups thatwe will cover.FIGURE 1: A pivot-based SMA offers an easy method for identifying the trend.Simple moving averages are the most commonly used type ofmoving average. However, there are many types of moving averagesthat are used today, like weighted, triangular, and adaptive versions.Personally, I prefer exponential moving averages (EMA), which putmore weight on the most recent price data when calculating themoving average. This allows the moving average to react quicker toprice movement than a simple moving average, thereby allowing youto react to price change before the crowd. Throughout the rest of thisCopyright 2010 PivotBoss.com

8 Profiting with Pivot-Based Moving Averagese-book, I will be using pivot-based exponential moving averages (PEMA),which can be used to find powerful (and profitable!) setups across allmarkets and timeframes.As a resource, I have included the scripts of every indicator, system, and stopdiscussed in this e-book in the Appendix. There are a total of nine scriptsthat can be used to help you find and trade the same setups that I will coverin the following sections. Enjoy!MULTIPLE PIVOT MOVING AVERAGESA single moving average gives you the general trend of pricemovement. However, professionals typically use two or moremoving averages to gain a better feel for consensus direction and totrigger more precise entries or exits in the market. For example, afund manager may use two moving averages to decipher when amajor change in trend is likely to occur. Or, professionals may use atrio of pivot moving averages to monitor the short, medium, and longterm trends of a market, which sheds light on a trend’s intensity frommultiple timeframes.Figure 2 shows a daily chart of Apple with the PEMA 3indicator (file name: iPEMA3) plotted, which displays three pivotbased exponential moving averages: the 13-, 34-, and 55-periodaverages. Why these three? Each periodicity offers insight into aspecific time frame in the chart. In turn, each time frame represents acertain type of trader (day, swing, position), which allows me to keepmy finger on the pulse of the market. A 13-period EMA gives me theshort term trend, while the 34- and 55-period EMA’s give me themedium and long term trends, respectively. Of course, this is mypreference. Any number of periodicity combinations can be used,depending on the types of setups you are looking for and thetimeframes you are trading, as you’ll see later on.Looking back at the chart of Apple, notice how price pushedabove the three EMA’s in early March and traded steadily higheruntil the beginning of May, staying above the 13-period EMA theentire time. The fact that all three EMA’s were trending higher atforty-five degree angles during the advance was very bullish. This iswhat professionals call “Stacked and Sloped”, meaning all three movingCopyright 2010 PivotBoss.com

9 Profiting with Pivot-Based Moving Averagesaverages are in agreement with strong trend consensus. Appleeventually broke below the 13-period EMA, which signaled shortterm weakness, but bounced off the 34-period EMA several timesbefore resuming the uptrend, thereby confirming the stock’s mediumand long term strength. Until the stock violates the 55-period EMA,the bullish trend will remain intact.FIGURE 2: Multiple moving averages help determine trend direction and intensity.Now that you have a feel for pivot-based moving averagesand understand why using multiple moving averages can bebeneficial, let’s delve into some money-making setups! In thefollowing sections, I will reveal several indicators, systems, andsetups that I use daily in my trading and analysis, including thePEMA Pull-Back, the PEMA Breakout, the PEMA Crossover, and theModified PEMA Crossover. Collectively, these tools and techniquesare what I call the PEMA Method. Let’s take a look at the first setup ofthe PEMA Method – the PEMA Pull-Back!THE PEMA PULL-BACKCopyright 2010 PivotBoss.com

10 Profiting with Pivot-Based Moving AveragesThe PEMA Method is great for identifying consensus marketdirection and offering a variety of setups to play different marketenvironments. Perhaps the most trader-friendly PEMA setup is thePEMA Pull-Back, because it forces you to trade in the direction of anestablished trend. In this section, I will show you how I use thePEMA Pull-Back to pinpoint fantastic undervalued and overvaluedentries into established trends.Professionals monitor the health of a stock or commodity invarying ways when choosing to enter the market. Many times, thegoal is to find opportunities when price is considered overvalued orundervalued, as this presents excellent opportunities to “buy the dips,and sell the rips”. That is, the pros are looking to buy dips in a bullishmarket, and sell rips in a bearish market. This tactic allows you tobuy at a discount during an established bull run, and sell at apremium during a bear run. This technique can be a fabulous entrymethod for swing and position traders, since you can grab anywherefrom a 3- to 10-bar move, or more. If you are trading with daily bars,this would be 3 to 10 day moves, or 3 to 10 week moves if using aweekly bar chart. Let’s see how the PEMA Pull-Back helps us identifythese prime opportunities!The idea of the PEMA Pull-Back is to buy the market at a discount during anuptrend, and sell the market at a premium during a down trend.The goal of the PEMA Pull-Back is to take advantage ofsituations when price is in an established trend, either bullish orbearish, and all three moving averages are stacked and sloped, as seenin Figure 3. When this occurs, the market has developed trendconsensus among three important time frames. Any pull-back to thefirst or second pivot EMA offers a buying (or selling) opportunityback in the direction of the established trend.This setup is powerful because it forces you to buy belowvalue and sell above value, while keeping you disciplined to theexisting trend. Let’s take a look at the mechanics of the trade.Copyright 2010 PivotBoss.com

11 Profiting with Pivot-Based Moving AveragesFIGURE 3: The PEMA Pull-Back identifies prime entry opportunities during a trending market.ENTERING THE TRADEThere are three steps to playing the PEMA Pull-Back. The firststep is to identify the current trend of the market

a smooth line of price movement that eliminates the noise of a chart, thereby allowing you to identify the trend of a market in a clean and easy fashion. A pivot-based moving average is exactly like a your traditional moving average, except the key input is the pivot point, which as you may recall is the average of the high, low, and close prices. While a