How to use a pivot point trading strategy?

Do you get confused when it comes to pivot points? Fret not as we are here to simplify it all. Let's dive into the world of pivot points and how they can enhance your trading strategy. Investors have been relying on pivot points for years to identify crucial support and resistance levels in the market. It's like finding those sweet spots where an asset can potentially experience a shift in supply or demand.

The Pivot Point trading strategy is considered one of the most effective and popular tools for technical analysis. With multiple lines of resistance and support, pivot points help you identify the best entry and exit points for your trades.

So, how does it work? Well, pivot points are calculated using the previous day's price data. They give you a snapshot of where the market might experience significant shifts in momentum. These levels act as guideposts, helping you make informed trading decisions.

The Concept of Pivot Points

Pivot Points are technical analysis indicators derived using a stock’s low, high, and close values. The parameters depend on the previous day's trading range, meaning you must use the previous day’s range to determine today’s pivot points. Similarly, you must look at the last week’s trading range to calculate this week’s pivot points and the previous month’s trading range for this month’s pivot points.

These are used in technical analysis to identify potential levels of support and resistance in a stock's price movement. They help traders determine key price levels at which a stock is likely to experience a change in direction. By plotting pivot points on a price chart, traders can anticipate potential entry and exit points for trades, set stop-loss and take-profit levels, and assess overall market sentiment.

Calculation of Pivot Points

Calculating pivot points is easy; it draws data from the previous day to predict the next day's market trend. Although pivot points are available for weeks and months, the sound pivot point trading strategy involves plotting pivot points for every single day. That is because the stock market is highly volatile, and quick reflections are necessary for appropriate decision-making.

There are seven pivot levels, and you must calculate all of them to plot the correct pivot level graph. The middle pivot level is basic, and the formula to calculate it is:

PP = (High+Low+Close)/3

The remaining six levels, three supports, and three resistances, are as follows:

Resistance 1 = (2 x PP) – Low

Support 1 = (2 x PP) – High

Resistance 2 = (PP - S1) + R1

Support 2 = PP - (R1 - S1)

Resistance 3 = (PP – S2) + R2

Support 3 = PP – (R2 – S2)

After drawing the high and low values from the previous day, it's easy to draw different pivot levels manually.

Utilising Pivot Points in Intraday Trading: A Comprehensive Guide

If you plan to use the pivot point trading strategy, one way to do that is to pay attention to the different pivot levels. For instance, a stock's price above the Basic PP at the opening indicates a bullish trend. If it crosses R1, purchase the stock and set your target at R2. However, if the opening stock price is below the Basic PP, it indicates a bearish trend. This strategy is suitable for intraday trading and fluctuates daily based on that day’s closing prices.

Intraday trading has two strategies that use pivot points. These are:

Pivot Point Breakout Strategy

In this strategy, you enter a trade using a stop limit order and open a position when the stock price bypasses a pivot point level. These breakouts often occur at the beginning of a trading session when the market is fresh and traders actively place their trades. Consider starting a short trade if the break shows a bearish trend. However, make a long trade when the breakout is bullish, and always use a stop loss. Therefore, knowing where to set a stop loss is significant too. The right decision is to stick to the bottom or top before the breakout. The pivot point breakout strategy will save you from unforeseen price changes. Hold the trade until the price reaches the next level.

Let's say you're trading stock using the pivot point breakout strategy. If the stock price surpasses a pivot point resistance level (breakout) at INR 50, you enter a long trade with a stop limit order at INR 50.20. You set your stop loss at INR 49.80, just below the breakout level. You hold the trade until the price reaches the next pivot point resistance level at INR 55.

Pivot Point Bounce Strategy

This is another trading approach that uses pivot points while focusing on the price bounce at points. If a stock's price touches a point and bounces, it is the right time to open the trade. If a stock touches the chart from the top side and bounces upwards, you can buy the stock. However, if the opposite happens and you notice a downward bounce, it is the right time to sell the stock. If you aim short, set the stop loss on top of a pivot point, while if you target long, set it below a pivot point. Hold the trades until their price reaches the next level.

For instance, a stock's price touches a pivot point support level at INR 30 and bounces upward. In this case, you open a long trade and set your stop loss just below the pivot point at INR 29.80. Hold the trade until the price reaches the next pivot point resistance level at INR 35. On the other hand, if the price touches a pivot point resistance level and bounces downward, you open a short trade and set your stop loss just above the pivot point.

Entering a Trade Using the Pivot Point Trading Strategy

Follow these steps to enter a trade using the pivot point trading strategy:

• Opening the Chart: After calculating the day’s pivot points, open the bar chart and add pivot points to it.

• Wait: Keep an eye on the market until the price closes on a pivot point.

• Stay on Hold: Wait for confirmation as the stock's price approaches the pivot point, considering price action and other technical indicators.

• Enter: Start trading when the first price bar’s high breaks and it cannot touch a new low.

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Conclusion

The pivot point trading strategy offers advantages in intraday trading, but it's important to note that it is not foolproof. While it helps identify potential entry and exit points, it's essential to determine appropriate stop-loss levels and use the strategy effectively, considering other factors and risk management techniques for maximising benefits and minimising losses.

Disclaimer: Intraday trading and its strategies involve financial risks and uncertainties. Always do thorough research, seek professional advice, and trade responsibly with awareness of potential losses.