Mastering the Use of Pivot Points in Day Trading
Using Pivot Points for Day Trading
Day trading is a fast-paced, high-stakes game that requires a keen understanding of market trends, patterns, and indicators. One popular tool among day traders is pivot points. This article will delve into the concept of pivot points, how to calculate them, and how they can be used effectively in day trading.
What are Pivot Points?
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, trading above the pivot point is viewed as ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.
Calculating Pivot Points
Pivot points are derived using the high, low, and close prices of the previous trading day. The formula for the basic pivot point is as follows:
Step 1: Calculate the Pivot Point
Pivot Point (P) = (Previous High + Previous Low + Previous Close) / 3
Step 2: Calculate the Support Levels
First Support Level (S1) = (P x 2) – Previous High
Second Support Level (S2) = P – (Previous High – Previous Low)
Step 3: Calculate the Resistance Levels
First Resistance Level (R1) = (P x 2) – Previous Low
Second Resistance Level (R2) = P + (Previous High – Previous Low)
Using Pivot Points in Day Trading
Once pivot points are calculated, they can be used to identify possible levels of resistance and support, which can inform trading decisions.
Identifying Market Trend
The pivot point can be used to identify the market trend. If the current price is above the pivot point, it indicates a bullish trend. Conversely, if the current price is below the pivot point, it suggests a bearish trend.
Setting Stop-Loss and Take-Profit Points
Pivot points can also be used to set stop-loss and take-profit points. For instance, a trader might set a stop-loss at the first support level (S1) and a take-profit at the first resistance level (R1).
Confirming Breakouts and Reversals
Pivot points can also be used to confirm breakouts and reversals. If the price breaks through the first resistance level (R1) with high volume, it could indicate a strong upward trend. Similarly, if the price breaks through the first support level (S1) with high volume, it could suggest a strong downward trend.
Conclusion
Pivot points are a versatile tool that can enhance a day trader’s ability to interpret market trends and make informed trading decisions. However, like all trading strategies, they should be used in conjunction with other indicators and analysis tools to increase their effectiveness.