Trading in the stock market requires a thorough analysis of stocks and the market as a whole. Traders use various tools in the process, both fundamental and technical. While fundamental tools help compare the stocks and choose the best one, technical tools help determine the profitable positions to enter and exit trades. One such technical tool is pivot points.
Today’s article discusses what pivot points are and how they help strategize intraday trades.
What is a pivot point in trading?
The pivot point is an indicator that determines market trends. It is usually calculated as an average of the previous trading day’s closing price, high price, and low price. Traders compare this value against the current day’s trading price to determine the market direction.
Generally, the stock price moving above the pivot point indicates a bullish market. The stock price stooping lower than the pivot point indicates a bearish market.
Pivot point trading strategy
Pivot point strategies are mainly helpful in intraday trades and other fast-moving trades. The strategy begins with locating five to seven points on a chart. While some traders stop at five points, others plot seven points for deeper strategies.
The first point is the fundamental pivot point and is located at the chart’s centre. It is the average of the previous trading day’s price points. Traders then locate two or three points above the primary pivot point, called resistance points 1,2 and 3. Similarly, they plot two or three points below the primary pivot point, called support points 1,2 and 3.
The stock price’s direction and crossing of these points suggest whether the stock is currently bullish or bearish.
How to Calculate Pivot Points
P = (High + Low + Close) / 3
R1 = (P x 2) – Low
R2 = P + (High – Low)
S1 = (P x 2) – High
S2 = P – (High – Low)
Here, P is the pivot point, R1 is resistance level 1, R2 is resistance level 2, S1 is support level 1, and S2 is support level 2.
The formula to calculate pivot points can vary from one trader to another. The above is one variant and not a standard formula.
Besides the regular method of using pivot points, there are others, such as Fibonacci pivot points, Camarilla pivot points, Woodie pivot points, etc. Such methods recommend using advanced formulas to calculate pivot points while strategising intraday trades.
Pivot point breakout
The pivot point breakout strategy is a common strategy used by intraday traders, combining the concepts of breakout and stop-loss orders.
When the stock price breaks out from the resistance level, the stock represents a bullish trend, signalling the trader to enter a long position, i.e., to buy the stock. Similarly, when the stock price breaks and goes below the support level, it shows a bearish trend, indicating a sell or a short signal.
Setting a stop-loss level while following the breakout strategy helps to limit the loss. Generally, the stop-loss in a bullish trend is set below the breakout resistance point. The stop-loss in a bearish trend is set just above the breakout support point.
Also read: The ABCs of stock market: Consolidation and Breakouts
Pivot point bounce
A bounce in trading is when the stock’s price hits the support or resistance level and swiftly moves in the opposite direction from there. A breakout occurs when stocks move beyond the levels of support and resistance. Bounce, on the other hand, is when the stock touches the resistance level and steeply falls, or when it touches the support level and sharply rises.
In a pivot point strategy, a stock touching resistance and bouncing is a signal to sell. A stock touching the support level and bouncing upward is a signal to buy.
Why pivot points matter in intraday trading
Pivot points simplify complex market data, making it easier for traders to identify trends and potential reversal points. They serve as objective indicators of market sentiment.
These insights assist traders in making informed decisions about entry and exit points, enhancing their ability to manage risks and capitalise on market movements.
Using pivot points to set exit levels
Pivot points are instrumental in determining strategic exit points:
- Profit targets: Traders often set profit targets at the first or second resistance levels (R1 or R2) in a bullish market, and at the first or second support levels (S1 or S2) in a bearish market.
- Stop-Loss orders: Placing stop-loss orders just below support levels in a long position, or just above resistance levels in a short position, helps manage potential losses.
This approach allows traders to define clear risk-reward ratios, enhancing trade management and discipline.
Entry strategies based on pivot point levels
Pivot points can guide traders in identifying optimal entry points:
- Bounce Strategy: Entering a trade when the price bounces off a pivot level, indicating a potential reversal.
- Breakout Strategy: Entering a trade when the price breaks through a pivot level, suggesting a continuation of the trend.
Combining these strategies with other technical indicators, such as moving averages or RSI, can improve the accuracy of entry decisions.
How to Use Pivot Points for Intraday Trading?
Pivot points are essential for identifying potential support and resistance levels in intraday trading. These levels help traders find entry and exit points by predicting price reversals or breakouts.
Pivot Point Breakout
A pivot point breakout occurs when the price breaks above or below a key pivot point level (support or resistance).
- When price breaks above resistance (pivot point + R1, R2), it signals potential for further upward movement.
- When price falls below support (pivot point – S1, S2), it indicates a bearish trend.
Use breakout strategies in conjunction with volume indicators to confirm the move.
Pivot Point Bounce
A pivot point bounce happens when the price touches a pivot level (support or resistance) and then reverses, bouncing off that level.
- Bullish bounce: Price hits support and bounces upwards, indicating a buying opportunity.
- Bearish bounce: Price hits resistance and reverses downward, indicating a selling opportunity.
This strategy works well when combined with candlestick patterns for stronger confirmation.
Which Pivot Points are Best for Intraday?
For intraday trading, Standard Pivot Points are widely used because they are easy to calculate and reliable for day trading. Other variations include:
- Fibonacci Pivot Points (use Fibonacci retracement levels for more accuracy)
- Woodie’s Pivot Points (emphasize more on the previous day’s closing price)
Standard and Fibonacci pivot points are typically preferred for their simplicity and effectiveness in predicting key intraday price levels.
Bottomline
Intraday traders use pivot points trading as they are easy to understand. Since they use multiple price levels, the strategy provides good coverage. These price levels are also fixed throughout the day, making it simpler for traders to plan their trades.
However, it does not assure guaranteed movement of stocks. Like other technical indicators, pivot points can generate false alarms, too. All indicators work better when used in unison, rather than in isolation.
FAQs
Yes, the pivot point is a popular trading strategy. It is used by a large number of traders, especially in fast-moving markets like forex and intraday. The benefit of pivot point over other indicators is that it is simple to calculate and remains fixed, unlike moving averages which can be confusing.
Pivot points suggest the dominant trend in the market. They work better when used with indicators that suggest the strength of the trend, such as the Average Directional Index (ADX) and Relative Strength Index (RSI).
CPR in the stock market stands for Central Pivot Range. It is the primary pivot point that is calculated as an average of the previous day’s price points. The current price going above the CPR suggests a bullish trend, while the price going below the CPR suggests a bearish trend.
The primary disadvantage of pivot points is that they use historical data to compare it with current prices. It does not really help in forecasting future prices. The indicator helps identify the trend but does not guarantee that prices will move in the same direction.
Support and resistance show the minimum and maximum points that a stock’s price can reach. The general observation is that the stock prices reverse their trends upon reaching these points. Support and resistance points are used by a lot of traders to determine their entry and exit points.
A pivot point is a technical indicator used to determine potential support and resistance levels in the market. It’s calculated based on the previous day’s high, low, and close prices. These levels help traders predict price reversals or breakouts.
Buy when the price is above the pivot point and it bounces off support levels (like S1 or S2). This indicates potential upward movement. Additionally, a breakout above resistance levels (like R1 or R2) can also signal a buying opportunity.
For intraday, the good support levels are typically S1 and S2, and the good resistance levels are R1 and R2. These levels help identify potential reversal zones or breakout points. You can also use Fibonacci pivot points for more precise levels.
For intraday trading, pivot point (central level) acts as the primary support/resistance. Levels R1, R2 and S1, S2 are key resistance and support zones. Traders usually focus on R1 for resistance and S1 for support, as these offer reliable reversal points or breakout opportunities.
