Range Deviation Pivots (RDPivot)

This study looks at the range of a daily bar over a user-defined look back period and places 1, 2, and 3 standard deviations around the opening.

This study can be applied to:

•      Intraday and daily bar chart

•      Intraday and daily candlestick chart

•      Intraday and daily Equalize Sessions chart

•      Intraday and daily Fill Gap chart

•      Intraday and daily Line chart

•      Intraday and daily No Gap chart

•      Intraday and daily TBTF chart

•      Intraday and daily Yield chart

It appears on the chart as seven dashes. RDPLo1, RDPLo2, and RDPLo3 dashes reference 1, 2, 3 standard deviations below the opening price and RDPHi1, RDPHi2, RDPHi3 to 1, 2, 3 standard deviations over the opening price. RDPMidPoint dash corresponds to midpoint of RDPLo1 and RDPHi1. All dashes are overlaid.

You are able to turn off the display of RDPMidPoint dash.

Philosophy

Normal Pivot theory has inherent flaws in that they are often based on just the previous day or last few days price action, and then predict the limits of range or support and resistances points based on the daily bars value. This means that overnight gaps can make the values redundant. They also suffer from the fact that if yesterdays range is wide today’s pivots will be wide, and narrow range days, (which are often ahead of heavy news days), mean that the pivots are narrow just when an expansion is due. The final flaw is the fact that the values are symmetrical and take no account of the dominant trend.

Range Deviation Pivots attempt overcome these problems in various ways. Firstly the computation of the three Pivot levels is set at 1 2 and 3 standard deviations around the opening price of today’s daily bar. This means that any gap opening does not affect the reference points. Secondly, they use a user defined lookback period far longer than traditional pivots so are not affected by the more recent price action. Finally and most crucially, they have in built propriety algorithm that analyses the strength of trend and means that pivots above and below the opening are not necessarily symmetrical. If the trend is down then the pivots below the market will be wider apart from the ones above the market. This does two things. It allows the trend more room to develop and accelerate, and also tightens the risk parameters for what qualifies as a trend ending or reversing. (See page 44 of Trading Time and the Appendix for statistics on Stocks).

Interpretation

There are many applications to the Pivots which are explained in detail in Trading Time. However, some basic uses involve pyramiding to existing trend following systems. Most pyramids are based on entering on the close which means that the risk is greater on the pyramid because if the trend is down the close is more likely to near the low of the day. As the pivots are based on the opening value there is a fixed level at which to pyramid at the 1st deviation up if in a downtrend. The more dynamic the trend the closer the 1^st Deviation will be to do opening due to the in built skew for trending. Analysis of the vast majority of trend following systems show not only an increase in profitability, but more importantly, no decrease in the stability of the system results.

The next application involves the qualification of breakouts, especially in individual stocks. These can be linked to Bollinger Band confirmation or for qualifying reversal patterns such at TD Combo™ and TD Sequential™. This involves price closing beyond the 3^rd Range Deviation or reversing from one side of the Pivots to the other side.

The next application involves the qualification of Pivot levels by the Volatility Time Bands. Hitting a range Deviation Pivot when at the 3^rd deviation of the Volatility Time Bands on 30 or 60 minute charts qualifies short term profit taking points or aggressive contra trend trades.

Finally the appendix of Trading Time shows various tables that measure the probability of how many pivots can be touched in any one trading day. This has particular application in understand risk and expectation for day trading purposes.

RDPivot Parameters