Select Page

Pivot Point Trading Strategies: Traders must constantly monitor the market movements and trends in intraday trading as it involves buying and selling securities within the same day. There are various ways in which traders employ while trading on an intraday basis but the most basic form of trading is with the help of support and resistance levels in the market.

One can use various techniques to plot the levels of support and resistance daily, one of which includes using pivot points. In this article, we will provide you with an overview of pivot points and pivot point trading strategy.

## What Is a Pivot Point In Trading?

A pivot point is a technical indicator that uses the numerical mean of the previous trading day’s high, low, and closing prices of a particular security. This forms reference points that can be used by the traders to identify the levels of support and resistance during the intraday session.

The pivot point can help the traders identify the bullish and the bearish momentum in the security. A security that trades above the pivot point on the next is said to be in bullish momentum. At the same time, security that trades below the pivot point on the next is said to be in bearish momentum.

Apart from the pivot point, the components of this indicator include Support 1, Support 2, Resistance 1, Resistance 2 and so on, which act as a ceiling and floor of the price movements and act as areas where the price of the security may bounce downward or upward. Traders can use these bounces to determine the entry and exit points for their trades.

Let us now understand how the pivot point and the levels of support and resistance are calculated in this indicator.

Also Read: What Is Bank Nifty Pivot Point? Nifty Technical Indicator!

## Calculation Of Pivot Points

The 5-point system is the most widely used technique for computing this indicator. which includes 1 pivot point, 2 resistance levels, and 2 support levels.

The formula goes as follows:

PP = (Low + High + Close)/3

S1 = (PP x 2) – High

S2 = PP – (High – Low)

R1 = (PP x 2) – Low

R2 = PP – (High + Low)

Here,

High= highest price from the previous trading day

Low = Lowest prices from the previous trading day

Close= Closing price from the previous trading day

• Pivot Point Bounce:

The price of the security either passes through the pivot points or bounces back. In this pivot point trading strategy, we will discuss when to enter and exit a position based on the bounce.

If the price of the security is trading above the pivot point, you can enter a buy position in the security when the price comes close to the pivot point and reverses from that level. The profit target in this case can be placed at different resistance levels depending on your risk-to-reward ratio and the stop loss should be taken when the security falls below the pivot point.

If the price of the security is trading below the pivot point, you can enter a short position in the security when the price rises close to the pivot point and reverses from that level. The profit target, in this case, can be placed at different support levels depending on your risk-to-reward ratio and the stop loss should be taken when the security rises to the pivot point.

• Pivot Point Breakout:

In this pivot point trading strategy, you enter a trade when the prices breach the pivot point level with an assumption that it will continue trading upwards or downwards.

If the price of the security has opened below the pivot point and breaks above the line during the trading session, you can enter a long position in the security. The profit target in this case can be placed at different resistance levels depending on your risk-to-reward ratio and the stop loss should be taken when the security falls below the pivot point.

If the price of the security opens above the pivot point and it breaks below the line during the trading session, you can enter a short position in the security. The profit target in this case can be placed at different support levels depending on your risk-to-reward ratio and the stop loss should be taken when the security rise above the pivot point.

### The benefit of Pivot Points

Fixed Levels: As the calculations for the pivot point indicator are based on the prices of the previous trading day, the levels calculated for the next trading day remain fixed throughout the day which can help the traders plan out their trades in advance.

### Limitation of Pivot Points

Relies Only On Previous Data: Pivot points are calculated based only on previous day data which may lead to failure to plot the important levels in the security. Thus, any sudden changes in the market conditions can lead to the indicator not working accurately.

## In Closing

Overall, the pivot point indicator is a valuable technical analysis tool that can help traders identify potential levels of support and resistance in the market. Traders should use it in combination with other technical analysis tools to make informed trading decisions.

## FAQ:

What is pivot level in trading?

A pivot level is a technical analysis indicator used in trading to determine potential levels of support and resistance. It is calculated based on the previous day’s high, low, and closing prices, and is used to identify potential price movements in the market.

Which pivot points are best for swing trading?

For swing trading, the most suitable pivot points are the daily pivot points, which consider the previous day’s high, low, and close prices. Shorter time frames like one minute, two minutes, and five minutes are more appropriate for day traders who use pivot points as a tool to identify potential support and resistance levels.

How is Pivot Point Trading Strategy Used?

A pivot point trading strategy is used to identify potential levels of support and resistance in the market. Traders use pivot points to determine entry and exit points, set stop-loss levels, and gauge the overall market sentiment.