Mastering Pivot Points for Effective Day Trading Strategies
Introduction to Pivot Points
Pivot points are a crucial tool in technical analysis, used by traders to determine potential support and resistance levels. These are points where the price of a security could potentially change direction. In day trading, pivot points are extensively used to identify entry and exit points in the market. This article will guide you on how to use pivot points effectively for day trading.
Understanding Pivot Points
The pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point, it is usually evaluated as bullish, or bearish if below.
Calculating Pivot Points
The pivot point is calculated using the following formula:
Pivot Point (P) = (High + Low + Close)/3
Apart from the pivot point itself, there are several other support and resistance levels that traders consider. These are calculated using the pivot point value (P).
First Level Support (S1) = (P x 2) – High
First Level Resistance (R1) = (P x 2) – Low
Second Level Support (S2) = P – (High – Low)
Second Level Resistance (R2) = P + (High – Low)
Using Pivot Points for Day Trading
Pivot points can be used for day trading in different ways. Here are some of the most common ways to use pivot points in day trading.
1. Pivot as a Predictive Indicator
When used as a predictive indicator, a pivot point and its associated support or resistance levels can be a predictive indicator of price movement. Traders use these levels as potential entry and exit points.
2. Pivot as a Confirmation Indicator
Traders can use pivot points as a confirmation indicator. For example, if a trader is considering buying a stock because it’s broken out of a resistance level, they might wait until the stock also crosses above a pivot point before entering a position.
3. Pivot as a Stop Loss or Take Profit Level
Pivot points can also be used to set stop loss or take profit levels. For instance, a trader might set a stop loss at a support level below the pivot point or a take profit level at a resistance level above the pivot point.
Advantages of Using Pivot Points in Day Trading
Pivot points have several advantages in day trading. They are straightforward and easy to use, and they provide a systematic way of looking at the market. They help traders to predict the overall trend of the market over different time frames, and they provide clear and objective levels for entry, exit, stop loss, and take profit.
Conclusion
Pivot points are a valuable tool for day traders. They can help to predict price movements and provide clear levels for trade management. However, like all trading tools, they should be used in conjunction with other indicators and methods to increase the chances of trading success.