Introduction to Pivot Point Trading Strategies
Pivot point trading strategies are prevalent among day traders. These strategies allow traders to determine critical price levels that can be used to define trades. Pivot points are calculated using the high, low, and closing prices of the previous trading day. Depending on the situation, traders may use pivot points to identify potential levels of support and resistance or potential entry and exit points.
Understanding Pivot Points
Before diving into the strategies, it is essential to understand what pivot points are. Pivot points are technical analysis indicators used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low, and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.
Calculating Pivot Points
The pivot point is calculated as follows:
Pivot Point (P) = (Previous High + Previous Low + Previous Close) / 3
The pivot point can then be used to calculate two support levels and two resistance levels. These are calculated as follows:
Support 1 (S1) = (P x 2) – Previous High
Resistance 1 (R1) = (P x 2) – Previous Low
Support 2 (S2) = P – (Previous High – Previous Low)
Resistance 2 (R2) = P + (Previous High – Previous Low)
Pivot Point Trading Strategies
1. Pivot Point Bounce Strategy
The pivot point bounce strategy involves entering and exiting trades based on the price action bouncing off the pivot points. Traders can buy when the price bounces off a support level and sell when the price bounces off a resistance level. Stop-loss orders are typically placed just below the support level for long trades and just above the resistance level for short trades.
2. Pivot Point Breakout Strategy
The pivot point breakout strategy involves entering trades when the price breaks through a pivot point level. A breakout above the pivot point could signal a move into higher territory and could be a good time to enter a long position. Conversely, a breakout below a pivot point could indicate a move lower and could be a good time to enter a short position.
3. Pivot Point Reversal Strategy
The pivot point reversal strategy involves entering trades when the price reverses its direction after hitting a pivot point level. If the price hits a resistance level and then starts to move lower, a trader might enter a short position. If the price hits a support level and then starts to move higher, a trader might enter a long position.
Conclusion
Pivot point trading strategies can be a powerful tool for traders, allowing them to identify potential entry and exit points and overall market sentiment. However, like all trading strategies, they are not foolproof and require practice and experience to use effectively. It’s also essential to combine these strategies with other forms of technical analysis and risk management techniques to increase your chances of trading success.