Exploring the Basics of Pivot Point Trading Strategy

Have you ever found yourself seated in front of your trading screen, gazing at the constantly fluctuating prices of assets and feeling bewildered? Succeeding in the fast-paced realm of day trading can be quite challenging. However, there's no need to fret. Pivot point analysis is a time-tested technique that traders have employed for many years to gain a competitive advantage in the market.

In this article, we will delve into the intricacies of pivot points, demonstrating how you can utilize the pivot point strategy to execute more deliberate and informed trades. So, sit back, grab a cup of coffee, and let's embark on this journey!

What Exactly are Pivot Points?

According to Prime Codex, pivot points serve as technical analysis tools that identify potential levels of support and resistance within the price movement of an asset. These points are calculated by determining the average of the highest, lowest, and closing prices from the preceding day, week, or month. They act as reference points for traders to assess whether an asset is likely to experience an upward or downward trend across various time frames. Day traders, in particular, find this indicator useful in determining optimal entry and exit points.

The most widely used method for calculating pivot points is the five-point system, which consists of the following pivot points:

Pivot Point (PP) - The primary pivot point is determined by averaging the high, low, and closing prices of the asset from the previous period.

First Resistance (R1) - This level of resistance is calculated by adding the difference between the asset's high and low prices from the previous period to the pivot point.

First Support (S1) - This level of support is calculated by subtracting the difference between the asset's high and low prices from the previous period from the pivot point.

Second Resistance (R2) - This level of resistance is calculated by adding twice the difference between the asset's high and low prices from the previous period to the pivot point.

Second Support (S2) - This level of support is calculated by subtracting twice the difference between the asset's high and low prices from the previous period from the pivot point.

How to Calculate Pivot Points?

The formula for calculating pivot points in the five-point system is as follows:

Pivot Point (PP) = (High + Low + Close) / 3

Where:

High = The highest price of the asset during the previous period

Low = The lowest price of the asset during the previous period

Close = The closing price of the asset during the previous period

Once the pivot point has been computed, the other pivot points in the system can be calculated using the following formulas:

First Resistance (R1) = (2 x PP) - Low

First Support (S1) = (2 x PP) - High

Second Resistance (R2) = PP + (High - Low)

Second Support (S2) = PP - (High - Low)

How to Utilize Pivot Points in Day Trading?

Day traders can employ pivot points in various ways. One common approach is to utilize pivot points as levels of support and resistance. When an asset's price nears a pivot point, traders may seek buying or selling opportunities based on the direction of the asset's trend. If the asset is experiencing an upward trend and its price approaches a support level, traders may consider it a buying opportunity. Conversely, if the asset is undergoing a downward trend and its price approaches a resistance level, traders may perceive it as a selling opportunity.

Another way traders utilize pivot points is by assessing the overall market sentiment. If an asset's price resides above the pivot point, it may indicate a bullish sentiment in the market. Conversely, if the price is below the pivot point, it may indicate a bearish sentiment. Traders can utilize this information to make well-informed decisions regarding their trades.

Lastly, pivot points can also serve as trailing stop loss levels. This means that traders can set their stop loss orders at a pivot point level, which helps protect their profits while still allowing room for the trade to continue if the asset's price continues to move in their favor.

In conclusion, pivot points offer a valuable tool for traders in navigating the complexities of the market. By identifying support and resistance levels, determining market sentiment, and utilizing trailing stop losses, day traders can enhance their trading strategies and make more calculated trading decisions. Remember to adapt these techniques to your individual trading style and always combine pivot point analysis with other forms of technical and fundamental analysis for a comprehensive trading approach. So, armed with this knowledge, go ahead and conquer the trading screen with confidence!