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How Pivot Trading Could Make You A Better Trader

Pivot trading is a form of trading that makes use of pivot points. Pivot trading is extremely beneficial in both intraday and swing trading.

Pivot points can be used in equity and commodity markets.

Traders use pivot points to determine the support and the resistance area.

However, the pivot point itself acts as the primary support and resistance .

Pivot points are measured using the high, low, and close from previous trading sessions and are used to forecast support and resistance levels for the present or future session.

How to start with Pivot Trading?

In this section, we’ll go over how to measure pivot point levels and apply them in practice.

Calculating the Pivot Point Levels

The five-point method is the most used technique for calculating the pivot points.

This method calculates a pivot point by combining the previous day’s high, low, and close. It also calculates two support and two resistance levels.

Formula to calculate pivot points

Pivot Point = (Previous High + Previous Low + Previous Close) / 3
Support 1 (S1) = (Pivot Point ∗ 2) − Previous High
Support 2 (S2) = Pivot Point − (Previous High − Previous Low)
Resistance 1 (R1) = (Pivot Point ∗ 2) − Previous Low
Resistance 2 (R2) = Pivot Point + (Previous High − Previous Low)

Another method

Pivot Point= (Today’s open + Yesterday’s High + Yesterday’s Low + Yesterday’s Close) / 4
Support 1 (S1) = (Pivot Point ∗ 2) − Previous High
Support 2 (S2) = Pivot Point − (Previous High − Previous Low)
Resistance 1 (R1) = (Pivot Point ∗ 2) − Previous Low
Resistance 2 (R2) = Pivot Point + (Previous High − Previous Low)

I am getting most accurate pivot levels using above formula.

Applying Pivot Points on Chart

In Tradingview, Go to – https://www.tradingview.com/chart/ and click “Indicators tab”, a search box will appear. Search “pivot points” and apply pivot points indicator to your chart.

In Zerodha, You can follow same steps to add pivot point indicator.

7 Levels of Pivot Points

On the chart, there are seven basic pivot levels:

(PP) – This is the chart’s middle and basic pivot level; also called basic pivot level.

(R1) – The first pivot level above the basic pivot level.

(R2) – The second pivot level above the PP and above R1.

(R3) – This is the third pivot level above the PP and the above R1, R2.

(S1) – The first pivot level under the PP.

(S2) – This is the second pivot level below the PP and S1.

(S3) – This is the third pivot level below the PP and S1, S2.

Using Pivot Points for Intraday Trading

  1. The pivot point is actually the average of the previous day’s high, low, and closing price.
  2. If the market opens or maintains above the pivot level (PP), it is considered bullish, whereas prices below the pivot level (PP) signify a bearish move.
  3. If it then breaks resistance 1 or R1, you can buy the stock with a target of R2.
  4. If the opening price is lower than the PP, you may short the stock with a target of S1.

Now that we’ve covered the fundamentals of pivot points, let’s look at two simple pivot trading strategies.

Pivot Trading Strategies

1. Pivot Point Breakout Strategy

When the price breaks out any pivot point level, you should initiate a position with a stop-loss limit order.

The majority of these breakouts will occur in the morning. 

If the breakout is bearish, you can enter a short position.

The trade could be long if the breakout is bullish.

This is the 5-minute chart of Banknifty. The image shows bullish trades executed using our pivot point breakout trading strategy.

2. Pivot Point Bounce Trading Strategy

This time, we will highlight the occasions where the price action bounces from the pivot levels.

If the price reaches a pivot point and bounces in any direction, you can open a position.

If a stock tests a pivot line from the upper side and bounces upwards, you can initiate a long trade.

If the price is testing a pivot line from below and bounces downward, you can initiate a short trade.

If you are short, don’t forget to place your stop loss above the pivot level, and if you are long, place it below the pivot level.

In conclusion

Pivot points are an excellent tool for identifying levels of support and resistance, but they are most effective when paired with other types of technical indicators.

The pivot point indicator is used by many day traders.

This will encourage you to trade in accordance with the market’s overall trend.

The Pivot points on charts offer a lot of information.

As previously mentioned, the indicator provides seven different trading levels.

This is more than enough for a day trader to get through the trading session.

The Pivot points indicator is available on the majority of trading platforms.

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