Trading based on whole number pivot points

One of the keys to making money trading stocks is to learn certain ways in which people behave in illogical or emotional ways and then trade to take advantage of those people. It is even better to understand why people act in certain ways so that the trader can be certain that they won’t change. One example of this is the pump and dump: I know that people are always greedy and lazy, so some people will always be willing to buy into the hype of a pumped company. I can profit from this by buying well-pumped stocks and by shorting them when the pump is over.

One of the things I have found with stocks is that people put a lot of importance on round dollar marks, such as $1.00, $2.00, $5.00. So if a stock breaks a round number it will tend to run. People like to think with whole numbers partly because it is easier to do mental arithmetic using those numbers. This leads people to place many buy and sell orders right around round numbers. For a stock at $2.90, there may be twice as many sell orders between $2.99 and $3.01 as between $3.01 and $3.10. So if a stock can break through a round number (in either direction) it will tend to run a bit. While this does not work all the time, it does work more than 50% of the time, at least with momentum stocks priced under $10.

While it is easy to find inefficiencies in the market, it is possible for many of them (like the January effect) to be arbitraged away. Therefore, it is always nice to see evidence that a particular inefficiency has been known for some time and yet remains; this indicates it is less likely to go away. Here is what the great trader Jesse Livermore wrote about round numbers:

Many years ago I began to profit from the simplest of type of Pivot Points trades. Frequently I had observed that when a stock sold at 50, 100, 200 and even 300. a fast and straight movement almost invariably occurred after such points were passed.

Thanks to Pradeep over at Stockbee for mentioning the above quote from Livermore’s book How to Trade in Stocks.

Another psychological pivot point that I use to trade is green/red or red/green, when a stock breaks above or below its previous day’s close. While the difference of a couple cents is minuscule in real terms, there is a big psychological difference between a stock being up for the day and a stock being down for the day. This is related to the tendency of traders to prefer to take small profits but not take small losses. Even if the amount of money involved is tiny it is psychologically painful to take a loss but pleasurable to take a gain.

0 thoughts on “Trading based on whole number pivot points”

  1. Man! I was gonna do a post about this after watching $CHIP and hoping for $DRAM to break $3 (After using Stocktwits I can’t help but put a $ in front of tickers). I just got home from work (@ the lovely Target) and might as well end my blog. I think I’ll actually just do a post about you so everyone can come and get learned…oh wait, I already did that. Can’t wait for the next video 🙂

  2. I got tied up in a marathon meeting today, I guess after that article you can keep the Duck………for now.

    Short LEE overnight, 800 shares @ 3.03 hoping for a morning panick. Truth is I couldn’t get out of it and things didn’t go my way at work so it is what it is.

  3. Reaper in your experience is any of the round numbers under 10 more effective to trade off than others (say when a stock breaks 3 it runs more than when it passes 7)?

    While I don’t have hard evidence to back me up, my own personal experience is that 1.00,10.00, 2.00 and 5.00 (roughly in that order) seem to be more powerful than the rest.

    1. No clue. I haven’t used this except in combination with other strategies and my records aren’t that great. The ideal way to test the hypothesis would be to look specifically at the 30 or 50 highest ADR stocks over a period of 6 months or so. Too much work for me.

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