Monday, December 28, 2015

Using PPS (Person's Personal Pivot Study) for trading

Person's Personal Pivot

Whether you are a chartist or not, observing a chart does give a sense of direction and it's important to incorporate it into your trading techniques.

Now say you're playing a quick equity earnings play, specifically a short strangle , a trend can be brought to an abrupt end and reversals can be very quick and dangerous.So it's probably not advisable to use PPS on an earnings play.
This is one of the reasons support and resistance levels can be quickly breached after earnings. I have seen stocks halve or even lose a third of their value overnight after earnings

At the very simplest level PPS is basically a set of arrows that indicate when to buy and when to sell, it's a proprietary formula developed by John Person.
It's a very useful tool to determine entry and exit points on Bull Put and Bear Call trades or can  be combined while placing Iron Condor trades.

PPS works nicely when used in tandem with another related study called Persons Pivot which gives a Support , Resistance and Pivot or midpoint level.
You can use these to execute strategic trades and add what-if scenarios to restrict losses and gauge underlying movements.

So to begin with lets take a look at the SPX today with the PPS study added

Look closely at the 2 ovals, notice that the Study correctly predicted the fall and the resurgence after the market collapsed in the 3rd week of August 2015.

Now in addition to the PPS let's add Persons Pivot study and see what the same chart looks like.
You can see the Pivot, Support (green) and the Resistance (red) levels on a weekly basis.

So say on the week of Aug 24 you wanted to place an Iron Condor , what you could do is look for the Buy or Sell signal, in this case there was a Sell signal at around 2100. Now take that in conjunction with the support level of 1863 depicted on the chart and place the trade.
Alternatively if you wanted to play extra safe you could look at the support at the second or third level and factor in further moves before making the trade.

Let's take a closer look at the same week.

So on 8/10 which is a Monday SPX was around 2100 with a Sell signal and support at 1863 for the 8/24 expiry, 2 weeks out.

To play it safe I could have factored in a further fall or 50 Points and established support at 1810 or 1800.

Now here's the problem on 8/10 VIX was at around 14, so premiums on 8/24 or 8/31 would have been low, it only started to rise on 8/17.

But you would have been safe to look at the indicators prior to making the trade. Further on 8/24 had you placed an Iron Condor with VIX at around 41 premiums were through the roof and even a 1750/1755 spread would have  paid around 3$.
Thats 3$ for a wing of 5$ or 66% return on margin.

Now as I said before, the above is useless during earnings I would never  use PPS during an earnings play.