5 ways to use pivot points in intraday trading
Once you are accustomed to trading, many of the traders think they are seasoned traders, and using only an equity or commodity margin calculator is enough and indulge in trading, thereby incurring significant losses. It is not wise to enter into intra-day trading without sufficient knowledge of technical analysis. This helps the traders in understanding the market trends and plan the trading accordingly to reap profits and also to minimize losses. Let us see one such strategy.
What are pivot points?
- A pivot point is an indicator or strategy used in technical analysis to make informed decisions for making entry or exit in the market.
- Be it commodity pivot point or that of stock, it helps in understanding the general trend of the market over a period.
- It could be thought of as the average of the intraday high and low, and the closing price from the last trading session.
Pivot Point= (High+low+close)/3
Support and Resistance
|Resistance 1 = (Pivot Point×2)−Low||Support 1 = (Pivot Point×2)−High|
|Resistance 2 = Pivotpoint+(High−Low)||Support 2 = Pivot point−(High−Low)|
|Resistance 3 = High + 2(Pivot Point – Low)||Support 3 = Low – 2(High – PivotPoint)|
For trading, other than the commodity margin calculator, you need to know the support and resistance levels to trade profitably. There are 3 pivot points on either side of the main pivot point, which are known as support and resistance levels. Support is the lowest level where a stock hovers over a period and resistance is that of the highest point. Support and resistance trigger buying and selling interests respectively. In short, support lies below the primary commodity pivot point or that of equity, and resistance lies above
How does pivot point works?
- After EOD, find out the day’s high, low, and close prices of a stock
- Add up the three values and divide by 3 to get the equity or commodity pivot point and mark it as P
- Now calculate S1, S2, S3, and R1, R2, R3.
Technology makes these values available in the charts in broker’s trading apps
Uses of Pivot point
It is used for tracking short-term price movements valid for intra-day trading. This helps traders in understanding the price range over which the stock trades for entry or exit or profit-booking.
5 Ways to trade using pivot points
- If the stock rises above the equity or commodity pivot point at the opening market, it could be a bullish trend. Once the stock crosses the R1 in the chart, then this is the entry point and your target should be R2. If the stock is opening below the primary pivot point, then it is a bearish trend. Once it breaks the first support S1, you can sell or short the stock and buy back at the next support S2.
- Pivot point Breakout strategy:- Mostly used in morning trades when there are frequent breaks in trading. Here, the trader makes use of the stop-limit order to open a position, once the stock moves past the pivot point. When the breakout happens, you should see whether it is above or below the pivot point. Try to understand the nature of the trade, ie strong or weak.
If it is a strong bullish trend, go for a short and if it is a strong bearish trend, it should be a long position. The main point of consideration here is knowing and using the stop loss effectively. Always try to put stop loss at the point before the breakout, be it top or bottom. This could cover you from price fluctuations. The position should be held till the stock breaches the next level.
- Pivot Point Bounce:- This method focuses on the bounce in stock prices at the pivot points. Once the stock reaches a pivot point and immediately bounces, then that is an indication for trading. At this point, you have to open a position depending upon the trend. If it is an uptrend in the stock followed by an upward bounce, then buy the stock. On the contrary, if the reverse happens, ie., a downtrend followed by the downward bounce, then sell the stock.
Care should be taken to set stop loss above the pivot point for short positions and below the pivot point for long positions. The position should be held till the stock breaches the next level.
- Watch the price movement. If new lows are touched by the stock as it moves closer to the pivot point, go long. If new highs are touched, while the stocks move close to the pivot point, then go short. Once the price touches the pivot point, watch whether the previous high breaches the new low. Start trade at this point.
- There is also a tricky scenario in which after breaking a resistance level, the stock quickly revert to lower levels. If the stock is near the breakout level, exit immediately without re-thoughts.
These are some of the ways that you could use pivot points for intraday trading. However, no indicator is perfect and is prone to errors. So, always use commodity market live two or more indicators together.