Practical Pivot Trading

Practical Pivot Trading

Interview with Mark Moskowitz, of Edge Trading LLC

In 2003 Mark started JST Capital Partners a long/short hedge fund with $15 million in assets.  In 2009 Mark returned over $150 million in capital back to his investors with a cumulative return of 330% net of fees.  Mark then began to trade as an independent trader and created Day Trade Well his first education company.  Mark sold Day Trade Well to the Frommer Group where he was the head trader managing a team of 9 traders.  When the Frommer Group closed in 2011 Mark formed Edge Trading as a means of higher instruction for new traders and veteran traders alike.

Pivot  Points  are  becoming  more  popular  with  traders  working  to  find  support  and  resistance  levels based  on  the  previous  day’s  price  action.

There  are  various  ways  to  calculate  pivot  points,  including averaging the open, high, low, and close of the previous day’s price. Here we talk with one trader about how he combines pivot points with specific moving averages to find trading opportunities each day in the markets.

Tim  Bourquin:  Mark,  What  is  your  overall  approach  to  the  markets.  Do  you  consider  yourself  a technician? A fundamental trader? How do you categorize yourself?

Mark Moskowitz: I am an intraday trader, mostly equities, long and short sided, and I’m almost 100% technical  in  my  nature  of  trading.  I  use  just  one  strategy  which  is  looking  at  basic  pivot  points.  Pivot points  are  calculated  in  different  ways,  but  they  are  basically  places  where  price  is  likely  to  change direction.  These  pivot  points  are  determined  by  the  previous  day’s  open,  high,  low  and  close.  Two  of them are long points (places where a long trade might be appropriate) and two of them are short points (where  a  short  trade  may  present  itself).  And  when  I  get  signals  based  on  that,  I  will  make  trades  on either the long or short side as the pivot points are approached. If the following day’s market price falls below  the  pivot  point,  it  may  be  used  as  a  new  resistance  level.  Conversely,  if  the  market  price  rises above the pivot point, it may act as the new support level. From there, I will use moving average lines – usually 20, 50 and 200-day moving averages – to look for confirming levels of support and resistance.

Tim Bourquin: What types of chart timeframes do you monitor to see the moving averages and pivot points?

Mark Moskowitz: The charts that I use are typically short-term in nature. I use a three-minute chart, a five-minute chart, a 15-minute chart, and then I look at a daily chart with those same moving averages. I’m simply looking for some level of support and resistance and hopefully getting some confirmation of the pivot point signals as well. I like to refer to the pivot points as my “generals on the field.” So, once I get a signal from the pivot point, it’s usually going to give me a chance to get into a position with some sort of size. If I get a pivot point where I’ll get the confirmation from a lower moving average moving up through a higher moving average at that same area, it’s an excellent trading opportunity. I typically find those on the three and five-minute charts.  Also, if price reaches a pivot point and I see no overhead resistance from any of the moving averages, it will  be  “full  steam  ahead”  pretty  quickly.  I’m also a very big believer in scaling-in to your positions, so that  way  when  you’re  wrong  you  have  very  few  shares  and  when  you’re  right  you  have  your  max number of shares and I believe that’s what helps in getting consistent trading results. I put the ratios in my favor and that’s what has really been the key for me to become a profitable trader. So, if I get a pivot point  signal  but  my  moving  average  lines look a little tenuous at this point, I may go in with a 15% or 20%  position,  and  then  as  soon  as  I  get  those  moving  averages  moving  back  in  the  direction  I  need them to go, then I’ll typically scale up into a 75%, 80% or 100% of that position that I would like to get into.

Tim Bourquin: And so what does 70%, 80% or 100% look like in terms of just pure share size?

Mark  Moskowitz:  Well,  it  depends  on  the  capital  at  risk,  and  I  do all  those  calculations  before  the market opens in what I call my “pre-game strategy session.” I trade very high beta names because I like a lot of movement and price action. I’ve been trading a lot of the leveraged ETFs lately, such as SKF, FAZ,  and  SSO,  as  well  as  stocks  such  as  Apple  and  Goldman-Sachs  and  Google,  so  I  don’t  need  to trade a lot of shares to get a nice movement. On a stock like Apple, I’d say a full share size usually is 1500 to 2000 shares, so depending upon how much room there is between the pivot points I adjust my stop loss and profit targets accordingly.

Tim Bourquin: Are you scanning the whole market for a pivot point opportunities or do you like to focus on these handful of stocks and the leveraged ETFs that you follow?

Mark Moskowitz: For me, it’s primarily looking at a handful of names that I can study on a daily basis and get a feel for their movement during the day. I will look for some other names in the news especially during earnings season, but I am a big believer in getting to know your names very well and getting toknow them better than anybody else. I feel it gives me a little bit of an extra edge because sometimes I just know when something doesn’t look right. For example you might see an offer on the books out there that just doesn’t seem legitimate. After a while, you’ve seen it there a million times and if you go flipping back and forth to hundreds of different stocks each day you’re not going to really ever get that “feel.” So I have a core of 15 names that I look at and calculate my pivot points on every day. After I do that and if I  still  have  some  free  time,  I  look  to  see  what  else  is  in  the  news  and  maybe  see  if  there  are  other opportunities here and there. I also do pivot point calculations on the S&P 500 futures, so that I can get a feel for where the general market is going.

Tim Bourquin: How many trades a day typically are you putting on and how many do you have on at one time?

Mark Moskowitz: I will trade usually 60 to 80 times a day, so I’m a fairly high volume trader compared to many day traders. But that also includes scaling-in to positions. So, if I buy 300 shares of Apple and eventually get up to 1500 shares of Apple, that could be four trades. I also scale out of positions so that may be another four trades as well. I probably trade somewhere between 50,000 to 100,000 shares a day. I really don’t have much more than a couple positions on at a time. And as fast as my names move, I don’t like or need to have many on at a time. Also the stocks and ETFs I trade tend to be very highly correlated  to  each  other,  so  if  I’m  getting  the  general  markets  moving  in  a  direction,  odds  are  I’m probably just increasing my stress levels and risk unnecessarily by adding on too many positions on at a time.

Tim  Bourquin:  Your  trading  system  seems  relatively  simple.  How  did  you  come  about  learning  what worked for you personally?

Mark Moskowitz: I think trading is all about understanding yourself, understanding your own mentality and  learning  what  works  well for you and then trying to find the system that fits that best. I mean, my attention span is probably shorter than the average person, so for me to be a day trader it just fits. I like to be in and know right away if I’m wrong. I also like to know if I’m right pretty quickly and I’m happy to take  profits  when  they  present  themselves.  Of  course,  I  miss  some  larger  moves,  but  that’s  just  my personality, that’s my style. I’ve talked to some guys and have sat next to other traders who watched 20 different  indicators  like  MACD  and  stochastics  and  many  others,  and  I  think  those  are  all  good  for everyone individually. For me, personally, I have my pivot points, I do them every morning, and once I do them I don’t need to think about them again for the rest of the day. They either get confirmed by my moving averages or they don’t – nothing is forced. I also do a lot of tape reading which is something that maybe can get a little more technical in terms of looking for support and resistance that’s not necessarily showing up on the chart. If I keep seeing a level that a stock keeps getting to and can’t quite get through it, and finally does get through it, I’ll feel pretty comfortable that the stock will continue to move higher. As you can tell, simple support and resistance are critical to me.

Tim  Bourquin:  Let’s  talk  about  that  where  you  set  stops.  How  do you  find  an  area  on  the  chart  that you’re comfortable placing an order where if you’re wrong, you’ll be out quickly?

Mark Moskowitz: Well, again, scaling-in with a lower number of shares helps a great deal for me to feel comfortable within a trade. So, if I enter a trade with a few hundred shares and it goes against me, what am I really losing? If I’m losing a dime or 20 cents that’s really not a whole lot of money – maybe $40, $50, $60. So that’s really the purpose for me of going in with a smaller amount of size. What I look for is a  critical  moving  average  line  on  the  chart.  For  example,  if  a  position  is  near  its  200-day  moving average, I may add in to that trade just because I’m sitting right on some heavy support. So, if it were to break that 200-day MA line, I know it’s time to get out very quickly. And then if it bounces off to 200 a day, I know I probably have a very good level where I can keep buying in. My stop-losses will usually be just below a major support moving average – maybe 15 or 20 cents – but a lot of it depends on what I’m trying to earn on the upside too. If the pivot point is telling me that I should be able to make a dollar or dollar fifty, I’m going to give it some room on the downside. I’ll give it 40 or 50 cents on the downside. As long  as  I’m  keeping  my  profit  to  loss  ratios  at  a  high  level,  three,  four,  five  to  one,  I’m  usually  pretty happy with that.

Tim Bourquin: How do you set your profit targets?

Mark Moskowitz: When I an calculating my pivot points, I’m always looking for a 2:1 risk-reward ratio. So let’s say that you do a pivot point on Apple and the buy pivot is a $120 and it gives you a stop-loss of 119.50, so  you’re  risking  50  cents.  I’m  looking  for  moving  averages  or  some  other  support  and resistance to show me my upside is at least to $121. So the best pivot points give you a 2:1 ratio. Now, it’s up to the trader and it’s up to the trader’s execution experience to figure out a way to get to that 2:1 up to a an even higher ratio.

Tim Bourquin: And if you meet that profit target, are you out pretty quickly or would you take some of that off and, in just the same way you would on easing in, would you scale out as well?

Mark  Moskowitz:  Scaling  out  of  a  position  is  where  the  art  comes  in  to  being  a  good  trader.  As  you know, there is a science to it and there is an art to it. And the art of it, I believe, is scaling-in and out of trades. What I do is take 25% out on the first 50% of the move. So, if I’m looking to make a dollar in total on the trade, at the first 50 cents, I’ll take 25% of my position off. When it reaches what I consider to be my first target which would be the full level or full dollar in this case then I’ll take another 25% off. I would exit a full position with the remainder of shares once I got to a 3:1 level based on my stop loss.

Tim Bourquin: Can you tell me what your “perfect” trade looks like?

Mark Moskowitz: My perfect trade would be a pivot point giving me a signal and then pretty much at the same time, getting the moving averages to pair up with that. So usually what I like to see is a 20-period  moving  average coming up through the 50-day moving average at the same time, and I like to see  those  levels  with  a  lot  of  support  right  underneath  that  level.  If  that  happens  right  at  a  long  pivot point, that’s a great trade.

Tim Bourquin: How about the goals you set for yourself. Is it a flat monetary goal of making a certain dollar amount each day or week?

Mark Moskowitz: No. I’m not really thinking in terms of dollars. I think in terms of percentages typically. So, while I think in terms of cents or dollars on my stop-losses,  ultimately there can be more than 1% of my  capital  on  any  given  trade.  And  I’m  usually  going  to  try  to  make  anywhere  from  2%  to  3%  of  my capital  everyday.  So,  just  to  keep  the  numbers  round,  if  I  have  an  account  with  a  $100,000  in  it,  I’m going  to  lose  no  more  than  $1000  per  day  and  I’m  going  to  be  trying  to  make  somewhere  between $2000 to $3000 everyday. To me, if you’re willing to lose 1% a day and you’re able to target upside of 2% to 3% a day, those ratios are great. You don’t need to be 80% right with those kinds of ratios, you just need to have good trades that you manage well and get out quickly when you’re wrong.

 

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