Introduction to Pivot Points in Day Trading

Pivot points are a popular method used by day traders to quickly determine potential support and resistance levels. They are calculated using the previous trading session’s high, low, and closing prices. This technique, while simple, can be incredibly effective in identifying potential points of entry and exit. This article will delve into the intricacies of using pivot points for day trading.

Understanding Pivot Points

Before we delve into how to use pivot points, it’s important to understand what they are. Pivot points are technical analysis indicators used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low, and closing prices from the previous trading day. On the subsequent day, any trading above the pivot point indicates ongoing bullish sentiments, while trading below the pivot point suggests bearish sentiments.

Calculating Pivot Points

The pivot point is calculated using the following formula:

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

Traders also calculate additional levels of support and resistance which may act as potential entry and exit points. These are calculated as follows:

First level support and resistance:

Support 1 (S1) = (P x 2) – High

Resistance 1 (R1) = (P x 2) – Low

Second level support and resistance:

Support 2 (S2) = P – (High – Low)

Resistance 2 (R2) = P + (High – Low)

Using Pivot Points in Day Trading

Once the pivot points are calculated, they can be used to identify potential levels of support and resistance. These levels can be incredibly useful for day traders looking to make quick decisions.

Identifying Market Direction

One of the key uses of pivot points is to identify the direction of the market. If the price opens above the pivot point, this is seen as a bullish signal, and the trader may consider entering a long position. Conversely, if the price opens below the pivot point, this is seen as a bearish signal, and the trader may consider entering a short position.

Setting Stop Losses and Profit Targets

Pivot points can also be used to set stop losses and profit targets. For example, a trader might set their stop loss at the first level of support or resistance, and their profit target at the next level of support or resistance.

Conclusion

Pivot points are a simple yet effective tool for day traders. They provide a quick way to identify potential levels of support and resistance, and can help traders make informed decisions about market entry and exit points. However, like any trading strategy, pivot points should be used in conjunction with other technical analysis tools to increase the chances of success.