Intraday traders employ various analysis techniques to make informed trading decisions, including the calculation of pivot points. Pivot points are derived from the mean of the previous day’s low, high, and closing prices, and they help determine the overall market trend at different times.
The pivot point itself can indicate bullish sentiment if trading is above, it or bearish sentiment if trading is below it. Additionally, pivot point calculations can be used to forecast support and resistance levels. These levels, including the primary pivot point, three resistances, and three supports, are plotted on the chart.
By identifying these pivot levels, traders can anticipate potential support and resistance points for a stock’s price. Movement through these levels can also provide insights into the direction of price movement. It’s important to note that pivot levels are specifically relevant for intraday trading, and there are various formulas available to calculate them.
Day Trading using Pivot Points
To effectively utilize pivot points in intraday trading, one approach is to observe the stock’s opening price in relation to the Basic Pivot Level (PP). If the opening price is above the PP, it suggests a bullish bias. Further, if the price surpasses R1, it may signal a buying opportunity with a target set at R2. Conversely, if the opening price is below the PP, it indicates a bearish bias. These charts are specific to intraday trading and are recalculated daily based on closing prices.
There are two common intraday trading strategies that involve pivot points: pivot point bounce and pivot level breakout.
Pivot Point Breakout
In the pivot level breakout strategy, a trade is initiated using a stop limit order when the price breaks past a pivot point level, often occurring in the morning. For bearish breakouts, a short trade is initiated, while bullish breakouts indicate a long trade. It is crucial to set a stop loss to manage risk, preferably placing it slightly above or below the breakout point to protect against unforeseen price movements. The trade is held until the price reaches the next level.
Pivot Point Bounce
The pivot point bounce strategy involves identifying price bounces at pivot points as trade opportunities. If the price bounces off a pivot point after testing it from above, it signals a buying opportunity. Conversely, if there is a downward bounce after testing from below, it indicates a selling opportunity. Stop loss levels should be set above the pivot point for short trades and below the pivot point for long trades. These trades are held until the price reaches the next level on the chart.
How to enter a trade using pivot points
Here’s a simplified step-by-step approach to using pivot points in trading:
1. Chart Analysis: Calculate the pivot points for the day and add them to your OHLC bar chart.
2. Market Observation: Monitor the market closely and observe if the price is approaching a pivot point. For long trades, look for new lows being touched, and for short trades, watch for new highs being touched.
3. Price Touch: Wait for the price to touch the pivot point, indicating that the stock is trading at the pivot price.
4. Trade Entry: Enter the trade when the high of the first price bar that couldn’t touch a new low (for long trades) or the low of the first price bar that couldn’t touch a new high (for short trades) is broken.
What Do Pivot Points indicate?
Pivot points serve as useful intraday indicators for traders in commodities, stocks, and futures. Unlike other indicators, such as moving averages or oscillators, pivot points remain fixed at the same prices throughout the day. This stability allows traders to plan their trades more effectively based on these levels. Levels like S1, S2, R1, and R2 can be used as stop-loss levels or target prices. Many traders also combine pivot points with other trend indicators to enhance their trading strategies.
Pivot Points and Consistency
Determining the appropriate timing for exiting trades is a significant concern for intraday traders. Making premature exits or overstaying positions can lead to missed opportunities or avoidable losses. Hence, mastering the skill of knowing when to exit is crucial for intraday traders.
Fortunately, pivot points offer valuable guidance in this regard. They provide clarity on three critical aspects of intraday trading: entry points, exit points, and stop-loss placement. If you’re struggling with identifying the optimal entry and exit points, pivot points can be a valuable tool to assist you in making informed trading decisions.
Why are pivot points so important?
Pivot points hold significant value for traders due to several reasons:
1. Intraday Focus: Pivot points are specifically designed for intraday trading. They utilize previous trading day data to calculate levels for the current trading day. This ensures their relevance and precision for intraday trading strategies.
2. Short Time Frames: Pivot points are most effective on shorter time frames, such as 1-minute, 2-minute, and 5-minute charts. Their accuracy and suitability for day traders make them a preferred choice in short-term trading scenarios.
3. Market Influence: Pivot points are widely used and recognized by traders, which gives them the power to influence market dynamics. By aligning with these widely followed levels, traders can align themselves with the prevailing market sentiment.
4. Rich Source of Data: Pivot point charts provide traders with seven distinct levels, offering a comprehensive set of information for a trading session. These levels serve as valuable reference points for making trading decisions.
5. User-Friendly Tools: Pivot point indicators are commonly available on various trading platforms, making them easily accessible and user-friendly. Traders can utilize these indicators without the need for manual calculations, enhancing convenience and efficiency in their trading process.
Knowing when to exit
Pivot points provide a valuable tool to quickly identify losing trades in a trading position. If a long trade breaks below a previously identified resistance level, it indicates a challenging situation. Additionally, the time elapsed since entering the position is a crucial factor to consider. If the trade is near the breakout level after 30 minutes, it serves as a warning signal. Once the decision to exit is made, it is important not to second-guess and wait. Exiting the trade when it fails to hold a level is advisable.
Trading software often allows traders to choose between displaying pivot points from the current day or previous days. While focusing on current-day levels is understandable, pivot points from previous days can establish resistance levels on the chart. Pivot points also aid in determining stop loss levels, which require careful identification for effective risk management.
