Intraday traders use different analysis techniques when making trading decisions. One such metric is a pivot point. A pivot point in the share market is a tool for technical analysis that steers a trader in the direction of the general trend of the market, at different points in time. It is constituted of the average of the low, high, and closing prices of the previous day.
The pivot point calculation can also be used to forecast support and resistance levels. There are three resistances and three supports. The seven pivot levels placed on the chart are the essential or the basic ones. These lie in the middle of the chart and are alternatively called primary pivot points.
The different levels within the pivot point can assist you in detecting where the stock price could face support or resistance. The direction of the price movement can also be detected when the price moves through a few of these levels. These levels are valid just for intraday trading. There is an array of formulae that can be used to find out the pivot levels.
Pivot points in intraday trading
With the right analysis, pivot points play a significant role when the market opens, each day. If a particular stock opens at a point above the basic pivot level, it means that there is an expectation to follow a bullish nature; inversely, if the stock opens below the basic pivot level, it leans towards a bearish nature.
If an intraday trader wishes to make a buy, the prime time would be when the stock is following a bearish nature and surpasses the support pivot level R1. The support levels are below the essential or basic pivot level, and therefore the buyer starts when the stock reaches the support pivot level of R2. However, the trends vary every day, and there is no mandate to follow a particular order. Intraday traders decide to make a move based on their entire technical analysis.
Intraday pivot point trading strategies that help traders get a clear picture of how to use pivot points in intraday trading involve two basic concepts – pivot bounce and pivot breakout.
Pivot point bounce
This is a type of pivot point trading approach that focuses on the bounce in prices at these pivot points. If the price reaches a pivot point and then bounces, that makes for a cue to open the trade. When you notice a stock testing the chart from the upper side, after which there is an upward bounce, this is the time when you should buy the stock.
Similarly, vice versa, meaning when there is a downward bounce, then that is when you sell the stock. In this particular pivot point intraday technique, the stop loss should be set above the pivot point (if you are aiming short) and otherwise, beneath the point (if you are targeting long). You should put a hold on these trades until the price touches the chart’s next level.
Pivot point breakout
In this intraday pivot trading technique, you enter the trade by using a stop-limit order, opening your position at a time when the price goes beyond a pivot point level. These breaks usually happen in the morning. Start a short trade if the breakout indicates a bearish promise. However, when the breakout has a bullish tendency, your trade should be a long one.
When using the pivot point trading breakout strategy, remember to make use of a stop loss. Understanding where to set the stop loss is very important. A simple and wise way to go about this is sticking to the top or the bottom that is situated just a bit before the breakout. By doing this, you secure yourself against unexpected price movements. You should hold the trade till the point when the price reaches the subsequent level.
What do pivot points indicate?
If you trade in commodities, stocks, and futures, pivot points are handy intraday indicators. Unlike other indicators like moving averages or oscillators, pivot points are stagnant. They remain fixed at the same prices during the day. As a result, it is easier for traders to plan their trades based on these levels. S1, S2, R1, and R2 are levels that can be used by setting them as stop-loss levels or as target prices. In analyzing the market, it is very common for traders to combine pivot points with various other trend indicators.
Why is pivot point trading important?
Now that you have a rough idea about how to trade pivot points, let’s look at their importance.
- They are unique to intraday trading. Pivot points trading is an extremely precise practice.
- The data the pivot points give is only applicable to one trading day. This makes them highly specific. Suitable for only short time frames, 1-minute, 2-minute, and 5-minute time frames are the best for pivot point indicators.
- Pivot point indicators are part of the upper rung of tools when accuracy is concerned. This is because pivot points are extensively used and so, they impact the flow of the market.
- Pivot point charts provide a lot of data. With 7 levels, they provide a trader with sufficient insight for a trading session.
- A pivot point indicator is a popular trading tool on account of its user-friendly nature. For this reason, the pivot point indicator is offered by most trading platforms.
Final words
There are many benefits of pivot point trading. However, like any other strategy, there is no guarantee of success all the time. It is advisable to always use a stop-loss order strategy so that you minimize your risk. As a trader using pivot point trading, it is very important to Analyse using Trading App where to position the stop-loss limit.
