Article: Trading With Pivot Points

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Mar 31, 2023

Trading With Pivot Points

Trading Pivot Points

Trading chart Pivot Points are a commonly used technical indicator in financial markets. They are calculated based on the previous day's high, low, and close prices, and are used to determine potential levels of support and resistance for the current trading day.

Types of Pivot Points

There are several types of Pivot Points, including the Standard Pivot Points, Fibonacci Pivot Points, and Camarilla Pivot Points. The most commonly used are the Standard Pivot Points, which involve calculating the Pivot Point (PP) as the average of the previous day's high, low, and close prices.

Support & Resistance Levels

The support and resistance levels are then calculated based on the Pivot Point. The first level of support and resistance is calculated by subtracting and adding the previous day's high and low prices from the Pivot Point. The second level of support and resistance is calculated by adding and subtracting the previous day's high and low prices from the Pivot Point. The third level of support and resistance is calculated by adding and subtracting the previous day's high and low prices from the second level of support and resistance. There are several methods for calculating Pivot Points, but the most commonly used is the Standard Pivot Points method.

Calculating Pivot Points

The calculation of Standard Pivot Points involves the following steps:

Calculate the Pivot Point (PP) by taking the average of the previous day's high, low, and close prices:
PP = (High + Low + Close) / 3
Calculate the first level of support and resistance:
First Support (S1) = (2 x PP) - High
First Resistance (R1) = (2 x PP) - Low
Calculate the second level of support and resistance:
Second Support (S2) = PP - (High - Low)
Second Resistance (R2) = PP + (High - Low)
Calculate the third level of support and resistance:
Third Support (S3) = Low - 2 x (High - PP)
Third Resistance (R3) = High + 2 x (PP - Low)

Once these values are calculated, traders can use them to determine potential levels of support and resistance for the current trading day. These levels can then be used to identify entry and exit points, as well as to set stop loss and take profit levels for trades.

Trading Using Pivot Points

There are several ways to trade using Pivot Points such as Breakout Trading, Bounce Trading method, Range Trading and the Trend Following methods.

Breakout Trading involves entering a trade when the price breaks above or below a Pivot Point level. For example, a trader might enter a long position if the price breaks above the Pivot Point or R1 level, or enter a short position if the price breaks below the Pivot Point or S1 level.

Bounce Trading involves entering a trade when the price bounces off a Pivot Point level. For example, a trader might enter a long position if the price bounces off the Pivot Point or S1 level, or enter a short position if the price bounces off the Pivot Point or R1 level.

Range Trading involves entering a trade when the price is trading within a range of Pivot Point levels. For example, a trader might buy at the S1 level and sell at the R1 level if the price is trading within that range.

Trend Following method involves using Pivot Points to identify the trend direction and entering trades in the direction of the trend. For example, a trader might buy if the price is above the Pivot Point and the trend is bullish, or sell if the price is below the Pivot Point and the trend is bearish.

Pivot Points Strategy

Traders can make money using Pivot Points by incorporating them into their trading strategies and using them to identify potential entry and exit points for trades. Pivot Points can help traders identify potential levels of support and resistance for the current trading day. Traders can use these levels to determine where to enter and exit trades, as well as where to set stop loss and take profit levels. Pivot Points can also be used to determine the trend direction for the trading day. This information can be used to enter trades in the direction of the trend and increase their chances of making a profit. Traders can use Pivot Points to trade breakouts and bounces. For example, a trader might enter a long position if the price breaks above the Pivot Point or R1 level, or enter a short position if the price bounces off the Pivot Point or R1 level. By entering trades at these key levels, traders can take advantage of potential price movements and make a profit. Pivot Points can also be used to trade range-bound markets. Traders can buy at the support level and sell at the resistance level if the price is trading within a range. This allows traders to take advantage of potential price movements within the range and make a profit.

It's important to note that Pivot Points should not be used in isolation and should be used in conjunction with other technical indicators and fundamental analysis to make informed trading decisions. Additionally, traders should always manage their risk and use proper money management techniques to protect their trading capital.

Conclusion

Traders use Pivot Points to help identify potential levels of support and resistance, which can be used to determine entry and exit points for trades. They can also be used to set stop loss and take profit levels, as well as to gauge the overall market sentiment.