Pivot Point IndicatorLast Updated Date: Nov 17, 2022
Understanding the overall market movement is crucial for every trader, irrespective of the asset class he is trading or the duration of the trade.
While there are multiple technical indicators to find out the overall market trend, one of the most sought-after trend indicators is Pivot Point.
This article will help you understand all the intricate details of this indicator. We will begin with the basic understanding of the indicator, how to use it, why it is so popular, and many such aspects.
Stock Analysis using Pivot Point Indicators
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What are Pivot Points?
A Pivot Point indicator determines the market trend for different periods. Picot Points are the averages of the previous day’s high, low, and closing prices, and this average price is plotted on a chart.
When the market is above the pivot point, then the market can be referred to as bullish, and if it is below the pivot point, then it can be referred to as a bearish market.
While the Pivot Point indicator is mainly used for technical analysis, it also has certain important support and resistance levels.
With the use of this indicator, especially intraday traders analyze the entry and exit from the market and also determine the profit-taking and stop-loss points.
How did Pivot Point Indicator help in intraday trading?
To understand how the Pivot Point indicator helps in intraday trading, we first need to understand how it is determined.
P = (High + Low + Close)/3
Here, P stands for the Pivot Point.
R1, which is the Resistance Level 1 is determined by using (P*2) – Low
R2, which is the Resistance Level 2 is determined by using P + (High – Low)
S1, which is Support Level 1 is determined by using (P*2) – High
S1, which is Support Level 2 is determined by using P – (High – Low)
Highs, Lows, and Closing prices are taken from the most recent previous trading day. For instance, if you are calculating the Pivot point for Tuesday, and Monday, you will take the High, Low, and Closing price of Monday.
If Monday was a holiday (maybe a national or trading holiday) then you have to take the last Friday’s prices as Saturday and Sunday markets remain closed.
The Pivot Point indicator is a static indicator unlike the oscillators and they do not move from one price to another but stay at one throughout the day.
So, if you are using this indicator, you can plan your trading strategy well in advance using the indicator. For instance, if the price of the asset you are trading falls below its pivot point, it’s time to exit the market or go ‘short’ in the first hours of the trading session and if the price is above the Pivot point, then you can go ‘long’.
The S1, S2, R1, and R2 levels can be used for placing stop-loss orders. These levels can be your target prices.
Day traders often combine the Pivot point indicator with other indicators such as 200-day moving average or 50-day moving average or Fibonacci extension level to get a more powerful indication and support and resistance levels.
Now day traders usually use these two below-mentioned strategies when they use the Pivot point indicator for day trading.
Pivot Point Breakout
Traders use this Pivot Point strategy by opening their position when the price exceeds the pivot point level. These breakouts are quite common in the early hours of trading sessions.
So, if the trader anticipates a bearish trend in the market, he can go ‘short’ while going ‘long’ upon predicting bullish sentiment in the market. This strategy is made with stop loss and it plays a crucial role in the strategy.
Thus, figuring out the exact stop loss is necessary. Usually, traders using this strategy choose the top or the bottom of the price level which is achieved just before the breakout.
This will also secure the traders from sudden shifts in prices and you can and should hold the position until the price goes to the next level.
Pivot Point Bounce
The next strategy using pivot point indicators that traders use is Pivot Point Bounce. When the price bounces to the pivot points, those are the prime target of the traders.
The trader can open a trade when the price of the asset bounces after touching a pivot point. A buy signal can be considered when the trader founds that security testing the technical chart from above and there is a bounce on the upper side.
When there is a bounce downward, then it is a signal for selling the stocks. The stop loss is crucial in this strategy as well.
You should place the stop loss below the point of bounce if you are planning to go ‘long’ and above the point if you want to go ‘short’.
Here, also, you should hold the position and continue trading until the price of the security reaches the chart’s next level.
Why use Pivot Points for Intraday Trading?
There are five primary reasons for which Pivot Points are so popular amongst the day traders –
- While most indicators are developed for different types of trading, Pivot Point is one such indicator that is developed for intraday trading only. The reason is Pivot points are derived from the previous day’s prices and thus, the points apply to the current day only making it the ultimate intraday indicator.
- Due to its particular nature, and accurate predictions and signals, intraday traders are fond of this indicator.
- With this indicator, you do not need to go through any complicated calculations and analyses. The indicator itself will take care of all, from generating Pivot points to support and resistance levels and providing buy and sell signals.
- The indicator works best with shorter timeframes for instance 1-minute, 2-minute, 5-minute, or 15-minute. Since you are using this for day trading, these are the most common timeframe to look for.
- With support and resistance levels, along with the pivot points, this indicator helps in planning trading strategies better. Moreover, the indicator can be combined with other indicators as well for advanced-level analysis.
Limitations of Pivot Point Indicator
While many factors make this indicator one of the top indicators for day trading, there is a bit of limitation as well.
Since this indicator is static, and the pivot point derived for the day is the single price, there is no assurance that the market price will reach the very same level or not, and even if it reaches, whether it will stop there or reverse.
So, this indicator can be used as a part of the trading and investment strategy but your trading strategy shouldn’t be based solely on this indicator. You must combine it with other indicators to get complete results.
To conclude, pivot points are easy to use, simple yet powerful technical indicators which are highly in demand by the day traders.
These indicators offer quite accurate trading signals based on overall market trend analysis however, you can achieve the best results when the indicator is combined with others.