WHAT IS THE PIVOTAL POINT?

Yesterday I have received some questions and comments about the yesterday blog http://www.bfmassets.com/2015/01/break-out.html what is it exactly the pivotal point and how to use that pattern.

Good question since this is a key tool for trading and almost unknown by the traders, but frankly without this is hard trade the falling markets. The funny thing is its unpopularity between traders, while that pivotal point theory is more than 90 years old and invented by Jesse Livermore by the greatest investor ever. http://en.wikipedia.org/wiki/Jesse_Lauriston_Livermore He wrote about the pivotal point in his book of "How to trade in stocks", 1940, http://www.r-5.org/files/books/trading/speculation/Jesse_Livermore-How_To_Trade_In_Stocks_%281940_original%29-EN.pdf

To understand it, it is practical and easier if I take some current examples. Recently the stock markets are in bullish and long trend, but there are many periods were we experienced some severe corrections like in last October the S&P 500 dropped closely 10% and in the last 10 days the index fell roughly 4%. In these tumbling periods we never know where the lowest point is, but with the pivotal point strategy we could indicate the first point when we have to start to buy the dips. The plain „buy the dip” strategy is too risky and not objective at all, we have to wait for the clear break out signs. Livermore stated if you are greedy and open positions too early without any pivotal point you will lose and burn out shortly, but if you have patience and wait for the pivotal point you are going to survive.

Here are two examples from the last couple of weeks:

• Between 20th September and 17th October 2014 was a huge correction in the DAX. We were just watching and waiting for the pivotal point, for the first break-out. We didn’t want to catch the falling knife. We first started to buy on 17th of October at the second red arrow because that top closed above the previous top – which is a pivotal point. The price clearly closed above the previous top. 
• Recently – precisely today we have another pivotal point in DAX. The yesterday closing price did draw a pivotal point at 9.820 because it has closed above the previous top.

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The BFM Assets Team.