Intraday traders use different analysis to help them make their trading decisions. A pivot point is one such calculation. It is a tool for technical analysis that allows a trader to determine the general trend of the market at different times. It comprises of the mean of the low, high and closing prices of the previous day. The pivot point of the previous day indicates current bullish sentiment if the trading is over the pivot point. On the other hand, bearish sentiment is indicated if the trading is beneath the pivot point.
Support and resistance levels can also be forecast using the pivot point calculation. The seven pivot levels placed on the chart are the basic ones. There are three resistances and three supports.
The basic ones lie in the middle of the chart and are also called the primary pivot points. The three resistances 1, 2, and 3 are three pivot levels above the basic. Supports 1, 2, and 3 are three pivot levels below the basic.
The different levels in the pivot point can help you detect the points where the price of that stock could face support or resistance. The direction of the price movement can also be detected when the price moves through some of these levels. These levels are valid only for intraday trading. There are a variety of formulas you can use to find out the pivot levels.
Day Trading using Pivot Points
If you are wondering how to use pivot point in intraday trading, here is one of the ways you can use it. It the price of the stock at the opening is above the Basic Pivot Level (PP), it points towards a bullish bias. If it then bypasses R1, then you can buy the stock by setting your target at R2. If the opening price is below the PP, that becomes indicative of a bearish bias. These charts are solely for the purpose of intraday trading, and fluctuate every day on the basis of the closing prices for that day.
There are two strategies in intraday trading which make use of pivot points. They are the pivot point bounce and pivot level breakout.
Pivot Point Breakout
In this technique, you enter the trade by making use of a stop limit order, opening your position when the price goes past a pivot point level. These breaks happen most frequently in the morning. You should start a short trade if the breakout shows a bearish promise. Your trade should be a long one, however, when the breakout has a bullish tendency. If you are using the pivot point breakout strategy, always remember to make use of a stop loss. Knowing where to set the stop loss is important too. A wise decision is sticking to the top or bottom that is situated a bit before the breakout. If you do this, you always secure yourself against unexpected price shifts. You should hold the trade till the point the price reaches the next level.
Pivot Point Bounce
This is another type of trading approach making the use of pivot point. In this strategy, the focus is on the bounce in prices at these pivot points. If the price touches a pivot point and then bounces, that is your cue to open the trade. If you notice a stock testing the chart from the upper side and there is an upward bounce, you should choose to buy the stock at that time. If the reverse happens and there is a downward bounce, that is when you sell the stock. In this technique, you should set the stop loss above the pivot point if you are aiming short and below the point if you are targeting long. You should hold these trades until the price touches the chart’s next level.
How to enter a trade using pivot points
Open a chart– After you have calculated the pivot points of the day, open the OHLC bar chart, and add the pivot points to it.
Wait and watch– Watch the market closely now, and wait for the price to close in on a pivot point. If it is a long trade, new lows should be touched by the price bars as they get closer to the pivot point. If the trade is a short one, watch out for the price bars touching new highs as they approach the pivot point.
Let the price touch the pivot point– After this, you should stay on hold until the price touches the pivot point, which basically means that the stock is trading at the pivot price then.
Enter the Trade– You should begin the trade when you find that the high of the first price bar that could not touch a new low has been broken.
What Do Pivot Points indicate?
If you are trading in commodities, stocks and futures, pivot points car be handy intraday indicators for these. Pivot points are different from other indicators like moving averages or oscillators because they are stationary and remain fixed at the same prices during the day. Since they are fixed, it becomes easier for traders to plan their trades on the basis of these levels. S1, S2, or R1, and R2 are levels that can be utilized by setting them as stop loss levels or target prices. Traders also very commonly combine pivot points with various other trend indicators.
Pivot Points and Consistency
For intraday traders, figuring out when to exit their trades is a constant point of worry. Traders most often leave too early and regret it, or stay too long and face losses that were avoidable. Knowing when to exit a particular trade is one of the most important skills for intraday traders.
Pivot points come in very handy in helping you figure this out. Pivot points offer traders much needed clarity regarding 3 of the most crucial steps in intraday trading- the points where they should enter the trade, exit it and place their stop loss. If you are having difficulty figuring out your entry and exit points in intraday trading, pivot points will be of great assistance to you.
Why are pivot points so important?
There are multiple reasons why pivot points are so important. These are the reasons why traders love using pivot points-
- They are unique to intraday trading. In the pivot point formula, the previous trading day data is used to calculate the data for the current trading day. Because of this, the levels on the chart are relevant to only the present day. So, pivot points are precise indicators for intraday trading.
- Since the data the pivot point gives is only applicable to one trading day, it becomes highly specific. So, it is suitable for only short time frames. Short time frames like 1-minute, 2-minute and 5-minute are the best for pivot point indicator. This makes pivot points more preferable to day traders.
- Pivot point indicators are amongst the best tools when accuracy is concerned. This is because of the fact that pivot points are so widely used. So, they impact the flow of the market, and by making use of them, you will be going with the flow too.
- The charts based on pivot points are rich sources of data. Since they provide 7 levels, they provide a trader enough information for a trading session.
- A pivot point indicator is a trading tool that is popular due to its user-friendly nature. Because of this, this indicator is offered by most trading platforms. So, if you have access to a trading platform, you will not need to calculate the levels yourself. All you need to do is read the chart and base your trade upon that.
Knowing when to exit
Pivot points are useful for another reason- they help you identify very quickly when you are involved in a trade that is losing.
Suppose you are involved in a long trade after there has been a break in a resistance level, but the stock suddenly turns over and goes below that level, then you should know that you are in a tricky spot. Time lapse is an important indicator. If you are somewhere near the breakout level after having entered the position 30 minutes ago, that is another warning signal. Do not try to rethink your decision after you have decided to make an exit. If the trade you are in is unable to hold a level, you should exit then, instead of trying to wait it out.
Most of the software that traders use offers the option to choose between the display of pivot points of that day, or of the ones from previous days. While wanting to pay attention to just the current day levels is understandable, the points from previous days can develop resistance on the chart. Another way in which trading points help is in the placement of stop loss. You should take care while identifying your stop loss points.
Pivot points are calculated using a simple formula, and offer a bunch of benefits to traders. But, they might not prove to be useful to all. While these points are accurate to a certain degree, they cannot offer complete guarantee that the price will stop or reverse at the levels indicated on the chart, or even reach those levels. It is important to keep in mind that the pivot points are basically predictions. So, you should use them along with other indicators, and not rely on them blindly.