Pivot points trading strategy: What is it and how to integrate it
Pivot points trading strategy
To make intraday trading decisions easier, traders use various strategies and closely monitor market trends. One such strategy is the pivot point, which analyzes the low, high, and mean closing prices from the previous day to determine market trends. If the analysis shows that the market closed above the pivot point, it’s expected to be bullish, while below the pivot point indicates a bearish trend.
The pivot chart includes seven levels, with the basic pivot level in the middle, three resistance pivot levels above it, and three support pivot levels below it. These levels help intraday traders calculate potential resistance and support points for price movements. By using pivot levels, traders can anticipate when prices may soar or dip, making informed trading decisions.
Using Pivot Levels for Intraday Trading
Intraday trading can be made easier with the use of the pivot point strategy, which involves analyzing the low, high, and mean closing prices of the previous day to determine the market trend. The pivot levels on the chart help traders calculate the expected points of resistance and support for prices.
When the market opens each day, the pivot levels play a crucial role in determining the market trend. If a stock opens above the basic pivot level, it is expected to be bullish, while opening below the basic pivot level indicates a bearish trend. Intraday traders can use the pivot levels to determine the right time to buy or sell, based on technical analysis.
For example, if a trader wants to make a buy when the stock is following a bearish trend, they can wait for the stock to reach the support pivot level of R1 or R2. However, the trend can be different each day, and traders should not feel obligated to follow a particular order.
There are two basic concepts involved in pivot point trading: pivot point bounce and pivot level breakout. Traders can use these concepts to gain a better understanding of how the pivot point strategy works.
Pivot Point Bounce
The pivot point bounce strategy is a crucial strategy in intraday trading that guides traders on when to buy and sell stocks. This approach involves identifying bounces in prices at pivot points on the chart. If the price of a stock touches the pivot point and bounces back, it indicates that a trade should be opened. For optimal results, it is advisable to buy stocks when there is an upward bounce on the upward side, and sell stocks when there is a downward bounce.
Setting the stop-loss order is a vital aspect of this strategy as it helps to reduce losses. The position of the stop-loss order is determined by how long the stocks will be held. If the trader intends to hold the stocks for a short period, the stop-loss order should be set above the pivot point. Conversely, if the trader intends to hold the stocks for a long time, the stop-loss order should be set below the pivot point. By applying this strategy effectively, traders can maximize profits while minimizing losses.
Pivot Level Breakout Strategy
Intraday traders use the pivot level breakout strategy to open a trade with the help of a stop-limit order. This strategy involves opening a position when the price passes the pivot level. When the trend is bearish, a short trade is executed, while a long trade is performed when the trend is bullish. Typically, this trade is initiated in the morning with a short position. It is important to set the stop-loss order at an appropriate position to avoid any potential loss. In this strategy, the breakout trade is executed in the morning, and placing the stop-loss limit helps secure funds against any unexpected price changes. It is advisable to adjust the stop-loss order at a position before the breakout to minimize risk.
How to calculate Pivot Points?
To calculate Pivot Points, follow these steps:
1.Take the High, Low, and Close prices from the previous trading day.
2. Calculate the Pivot Point (PP) using the following formula:
PP = (High + Low + Close) / 3
Calculate the Resistance 1 (R1) and Support 1 (S1) levels using the following formulas: R1 = (2 x PP) – Low
Calculate the Resistance 2 (R2) and Support 2 (S2) levels using the following formulas: R2 = PP + (High – Low)
Calculate the Resistance 3 (R3) and Support 3 (S3) levels using the following formulas: R3 = High + 2 x (PP – Low)
Once you have calculated the pivot levels, you can use them to analyze the market trend and make trading decisions accordingly. It’s important to note that pivot points are typically calculated on a daily basis using the previous day’s data.
Pivot points can be a useful tool for intraday traders to make trading decisions, but like any other trading strategy, they have their limitations and may not work all the time. It is important to use a stop-loss order to minimize the risk and to position it appropriately based on the trader’s strategy and risk tolerance. Ultimately, successful Forex pivot point trading depends on a combination of factors, including a solid understanding of technical analysis, risk management, and market psychology.