Last Updated on November 7, 2023 by BFSLTeam BFSLTeam
Intraday trading is a go-to strategy for many in search of quick profits. But suppose you’re looking to trade successfully. In that case, it pays to pay attention to Pivot Points – an essential tool that helps traders get ahead!
Pivot points can provide valuable insight into potential resistance intervals allowing traders to make savvy decisions at just the right moments and helping them pocket maximum gains.
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How does one use Pivot Point in Intraday Trading
Traders can use pivot points to decide whether to enter or exit a trade. Many traders use a Pivot Point Analysis to elevate their intraday trading strategy. When trading with pivot points, traders typically plot them on a chart to get an idea of where to enter or exit their position.
Traders usually execute sell orders when the price moves into an area of resistance and initiate buy orders when the price retraces to an area of support.
Pivot points act as support or resistance levels based on the trading range of the previous day, week, or month. To derive these support and resistance levels from the market’s open, close, high, and low figures for a defined period. By studying the Pivot Point levels, traders anticipate when a security’s price may break out of its current range and move into the more favorable (or unfavorable) trading territory.
Pivot points in intraday trading
At the start of the day’s trading, we use a pivot point as the base price. We calculate the levels of support or resistance using the base price.
- When the market rises above this base, it indicates a bullish (upward) trend.
- When the price falls below this baseline, it suggests a bearish (downward) trend.
Formula to calculate Pivot Point in intraday trading
To calculate the first level of support and resistance, use the formula below:
Pivot Point (PP) = (High + Low + Close)/3
To calculate the remaining support and resistance levels as follows:
First Resistance (R1) = (2 x PP) – Low
First Support (S1) = (2 x PP) – High
Then calculate the remaining support and resistance levels as follows:
Second Resistance (R2) = PP + (High – Low)
Second Support (S2) = PP – (High – Low)
Traders can use these pivot points to predict when there might be a change of trend, known as a pivot point bounce or pivot point breakout. A pivot point bounce occurs if the market price drops to a support level and rebounds back. Conversely, if the market price rises to a resistance level and then breaks through this level, it is known as a pivot point breakout – indicating that the trend may be reversing.
Pro Tip: If the price of a stock breaks above the pivot point, it signals that bullish momentum has entered the market and buyers are dominating over sellers. Similarly, if the price breaks below the pivot point, it indicates bearish strength and may suggest that sellers have taken control of the market.
What do pivot points indicate?
Traders use pivot points to identify critical support and resistance levels in the market. When the price reaches a pivot point, it may indicate that a reversal is about to occur. As such, traders can use these levels as entry/exit points for their trades. Traders should also consider whether the price breaks above or below the pivot point, indicating how the market will likely move. If the price breaks above, it may signal a bullish trend, while if it breaks below, it could signal a bearish trend.
Pivot Points provide a practical starting point for calculating potential support and resistance intervals. It is beneficial in intraday trading, as traders constantly look to capitalize on momentary price fluctuations. In addition, pivot points can also be used alongside other analytical techniques, such as trend lines or Fibonacci retracements.
Why is pivot point trading important?
Pivot point trading can be the ace up your sleeve regarding outsmarting market direction.
- The technique offers a glimpse of potential support and resistance areas and equips traders with valuable information to help them quickly make financial decisions.
- It is an all-inclusive approach that adds precision to reasoning your entries and exits.
- It allows traders to gauge market sentiment, which is essential for successful day trading. By understanding the underlying trends of the market, traders are better equipped to anticipate future price movements and make profitable trades.
Conclusion
Pivot Point is a powerful tool that helps streamline decision-making. It is instrumental in scenarios where time is of the essence and the stakes are high. Not only does Pivot Point save time by allowing users to analyze numerous elements of a situation quickly, but it also enhances accuracy since it provides logical and precise recommendations on what course of action to take for any given experience. By leveraging a systematic process like Pivot Point to make decisions, businesses can trust their judgments and act confidently in even the most complex scenarios.
