What Are Pivot Points?
(Hint: They Represent Key Support and Resistance Levels)
Pivot points are pre-calculated support and resistance levels used by many traders to indicate high probability reversal or retracement points for intraday price movement in a stock. Pivot points are often reversal levels in a trending price graph, they can be used to pre-plan trade entries and take advantage of market reversals for profit. For example, in an up-trending bullish stock chart, the R1 will likely represent a retracement point, while the R2 level (if reached) has a high probability of being the price high for the day. Day traders can use pivot points to their benefit and go against or “fade” a trend at key pivot levels, taking advantage of the high probability for reversal or retracement. Every single stock, index, and future has daily, weekly, and even monthly pivot points. For those who are aware of their existence and know how to use these pivot points properly, the profit potentials can be extraordinary.
How Do We Calculate Pivot Points?
Pivot points are calculated using several methods, the most common one being taking the average of the previous day’s, week’s, or month’s (depending on which time frame you want pivots for) highs, lows, and closing price. This calculation is explained below:
R3 = R1 + (H – L)
R2 = P + (H – L)
R1 = 2P – L
P = (H + L + C)/3
S1 = 2P – H
S2 = P – (H – L)
S3 = S1 – H – L
H = High of the day, week, or month.
L = Low of the day, week, or month.
C = Closing price of yesterday, last week, or last month.
How To Day Trade With Pivot Points.
The pivot point itself (P) represents the highest level of resistance or support, depending on the overall market condition. The support and resistance levels that are calculated with R1-3 and S1-3 are typically used as exit points for swing trades but can also be used an extremely good entry points for day trades (initiating trades opposite of the trend). Typically, we will see R1 and S1 levels hit on most charts every day, these levels signify key retracement or reversal points in price action and can be used as entry points to fade the trend. For the patient day trader, the R2 and S2 levels increase the probability of a trend reversal and retracement drastically, however because of their distance from the P, price action tests these levels much less frequently than it does the R1 and S1. If you are patient enough to wait for price action to reach a R2 or S2 level, that will typically be the respective high or low of the day and is an extremely profitable trade opportunity.
As mentioned above, there are Daily, Weekly, and Monthly pivot points. The Weekly pivots give a higher probability of reversal than the daily ones do, while the monthly pivots represent major price reversals. Typically, weekly pivot points are used in day trading, as they must only be calculated once a week (versus daily), and they pose a higher probability of reversal than daily pivot point do. To see some pivot point trade setups click below.
The Intelligent Trader
To learn more about basic and advanced uses of Pivot Points check out The Intelligent Trader, which is a book that covers both this trade setup and many more in depth. This book takes readers from the beginner level all the way up to the professional technical analyst level step by step with easy to follow lessons and examples.
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