Intraday trading requires active attention to market trends, and there are several strategies that the traders employ to make intraday trading much easier with a concrete decision. One such strategy is the pivot point; in this strategy, the low, high, and mean closing prices of the previous day are used to analyze the market trend. If the analysis of the previous day is over the pivot point, the market is expected to follow a bullish nature. On the other hand, if the analysis of the previous day is below the pivot point, it is expected the market will follow a bearish nature.
There are seven pivot levels on the chart where the basic pivot level lies in the middle of the chart and three of the resistance pivot levels lie above the basic pivot, and three of the support pivot levels lie below the basic pivot.
Wondering what the pivot levels are for? The pivot levels help the intraday traders to calculate the expected point from where the prices can soar and find resistance. Similarly, the pivot levels can also help the intraday traders to calculate the expected point from where the prices can dip and find support.
When the right analysis is done, the pivot levels play an important role when the market opens each day. If a particular stock opens above the basic pivot level, it is expected to follow a bullish nature; on the other hand, if the same particular stock opens below the basic pivot level, it is supposed to be following a bearish nature. If an intraday trader needs to make a buy, the right time would be if the stock is following a bearish nature and surpasses the support pivot level R1. The support levels are below the basic pivot level, and the buyer starts when the stock reaches the support pivot level of R2. However, the trends are different each day, and there is no compulsion to follow an order; the intraday trader decides to make a move based on the entire technical analysis.
There are two basic concepts that are involved in pivot point trading strategy that help the intraday traders get a clear picture of how pivot point trading works. The two basic concepts of pivot point trading are pivot point bounce and pivot level breakout.
Pivot point bounce is one of the important strategies, and it directs the trader when to buy the stock and when to sell them. The focus of this strategy is to find the bounce in prices at pivot points in the chart. If the price of a particular stock touches the pivot point and bounces back, then it is an indication to open the trade. Now, when to buy and when to sell using the pivot point bounce strategy? In the pivot point bounce strategy, it is advisable to buy the stocks when there is an upward bounce on the upward side. While, if the reverse happens, there is a downward bounce, it is time to sell the stocks. One of the key points to note is setting the right position of the stop-loss order to reduce the losses. It is upon the preference of how long the stocks are to be held that the stop-loss order is set. If the trader is aiming for a short period, then the stop-loss is to be set above the pivot point, and if the trader is aiming for a long holding, then the stop-loss is set below the pivot point.
This trade is made with the help of the stop-limit order strategy, and the trader opens the position when the price passes the pivot level. The short trade is performed when the trend shows a bearish performance and has a long position when the trend shows a bullish performance. Usually, this trade is executed in the morning and begins with a short trade, and it is important to use the stop-loss order threshold in an appropriate position to avoid any kind of loss. The breakout trade usually happens in the morning, and placing the stop-loss limit secures funds against unexpected price changes. It is viable to adjust the stop-loss at a position before the breakout to reduce the risk.
Pivot points are easy to calculate, and the data is drawn from the previous day that helps the traders to predict the market trend. There are software that plots pivot point using OHLC (Open, High, Low, Close) bar charts for weeks and months, but the right thing to do is plot if for every single day using the previous day values as the market is volatile and there is a need for quick reflections that such older data may not sufficiently provide.
As mentioned earlier, there are seven pivot levels, and all the levels are to be calculated to plot the right OHLC pivot level graph.
The basic pivot level present at the middle is calculated using,
PP = (High+Low+Close)/3
The other six pivot levels (3 Support and 3 Resistance) are calculated using the following,
R1 = (2xPP)-Low
S1 = (2xPP) - High
R2 = (PP - S1)+R1
S2 = PP - (R1 - S1)
R3 = (PP – S2) + R2
S3 = PP – (R2 – S2)
The low and high values are drawn from the previous days, and these can help to manually draw an OHLC for different pivot levels.
Final Words
There are several benefits of using pivot points in the intraday, but there is no guarantee of the strategy working all the time. The best advice is to always use a stop-loss order strategy to minimize the risk, and it is not all; as a trader using pivot point trading, it is important to know where to position the stop-loss limit.
In this type of trading, If the analysis of the previous day is over the pivot point, the market is expected to follow a bullish nature. On the other hand, if the analysis of the previous day is below the pivot point, it is expected the market will follow a bearish nature.
There are seven pivot levels on the chart where the basic pivot level lies in the middle of the chart and three of the support pivot levels lie above the basic pivot, and three of the resistance pivot levels lie below the basic pivot.
Pivot point bounce is one of the important strategies, and it directs the trader when to buy the stock and when to sell them. The focus of this strategy is to find the bounce in prices at pivot points in the chart.
In this strategy, the short trade is performed when the trend shows a bearish performance and has a long position when the trend shows a bullish performance.