Day Trading Using Pivot Points
Intraday traders widely use the pivot trading strategy to assess entry and exit points. Suppose a day trader wants to purchase security; the ideal time would be when the stock follows a bearish trend and drops to support level R1. The support levels are below the basic pivot levels, and traders may place a buy order as the price reaches support level R2. Let us understand two of the most crucial concepts employed by day traders using pivot points.
- Pivot Point Bounce - Suppose the security price reaches the pivot point and bounces; it cues the trader to open a trading position. If the stock seems to test the chart from the upper side, following an upward bounce, traders seek to buy those stocks. Conversely, traders may be willing to sell their stocks during a down-ward bounce. Traders who aim short set their stop loss above the pivot point, and those targeting long may set their stop loss below the pivot point.
- Pivot Point Breakout - Pivot point breakout is a technique whereby traders use stop-limit orders. Traders may typically open their positions when prices go beyond a pivot price level. Such breaks generally are expected to occur during the morning hours. If the breakout suggests a bearish trend, it may be time to enter into a short trade. Conversely, a long trade is initiated when the breakout suggests a bullish run.
How to enter a trade using pivot points
Step 1: Open the chart
Once you have calculated the pivot points, open the OHLC chart (Open, High, Low, Close) chart and add pivot points to it.
Step 2: Observe
Look for instances when the price closes at the pivot point. For long trades, as the prices get closer to the pivot point, they will touch new lows. Conversely, look out for prices touching new highs while nearing the pivot point in a short trade.
Step3: Let prices reach the pivot point
Stay on standby as the price reaches the pivot price.
Step4: Enter the trade
You may enter the trade in scenarios such as when the high of the first price bar does not touch a new low has been broken.
What do Pivot Points indicate?
ETraders may use the pivot point trading technique with other trend indicators while trading in stocks, commodities, and futures. Traders can identify stop losses and target prices utilizing this technique. Unlike other indicators, such as oscillators and moving averages , pivot points remain stagnant at the same prices during the day. It, therefore, becomes convenient for traders to plan their trades based on these levels.
How to calculate pivot points?
Traders use the previous day’s data to calculate pivot points that help predict the market trend. There are seven pivot point levels to plot the OHLC pivot level graph. Let us understand how these values are calculated.
Basic Pivot Level (PP) = (High + Low + close) / 3 |
R1 | (2*PP) - Low |
S1 | (2*PP) - High |
R2 | (PP - S1) +R1 |
S2 | PP - (R1 - S1) |
R3 | (PP - S2) + R2 |
S3 | PP - (R2 - S2) |
How Significant are Pivot Points?
Pivot points are significant because they provide traders with potential support and resistance levels. These levels help traders decide where to enter and exit trades, making it easier to predict market movements. The static nature of pivot points during the trading day allows traders to strategize effectively without the need for constant recalculations, as required by other indicators. This reliability makes pivot points a vital tool for intraday trading.
Why is Pivot Point Trading Important?
Pivot point trading is important because it offers a systematic approach to identifying key levels in the market that can influence price action. By using pivot points, traders can better predict potential market reversals, set stop-loss levels, and establish profit targets. This method enhances decision-making by providing clear, predefined points of reference, reducing the emotional element of trading, and fostering a disciplined trading approach.
Conclusion
Understanding and using pivot points in intraday trading can significantly enhance a trader's ability to predict market movements and make informed decisions. By incorporating pivot points into your trading strategy, you can identify critical support and resistance levels, optimize entry and exit points, and improve overall trading performance. As with any trading tool, it is essential to practice and refine your approach to maximize the benefits of pivot point trading.