Introduction
Pivot Points are one of the widely used technical analysis indicators that traders use to identify key levels of support and resistance in the market. Standard Pivot Points are calculated based on the high, low, and closing prices of the previous day, and the resulting levels are used as reference points for the current trading day.
The creator of Standard Pivot Points is not clear as it is a widely used concept in technical analysis and trading. Pivot Points have been used by traders for decades and are believed to have originated from floor traders in the futures markets who used them to identify potential levels of support and resistance. However, the specific calculation methods for Pivot Points, such as the Standard Pivot Points, have been refined and adapted over time by different traders and technical analysts. The use of Pivot Points has since expanded beyond the futures markets and is now used by traders across different asset classes and timeframes.
Computing the Standard Pivot Points
The most common form of Pivot Points is the Standard Pivot Points, which involves the calculation of five levels – the Pivot Point, two support levels, and two resistance levels.
The formula for calculating Pivot Points is as follows:
PP = Pivot Point = (High + Low + Close) / 3
S1 = Support 1 = (2 * PP) - High
S2 = Support 2 = PP - (High - Low)
R1 = Resistance 1 = (2 * PP) - Low
R2 = Resistance 2 = PP + (High - Low)
Using Pivot Points in trading
Some common ways of using Pivot Points in trading are:
Identifying key levels
Traders use Pivot Points to identify potential areas of buying and selling pressure. When the market is trading above the Pivot Point, traders tend to look for bullish opportunities and consider the Pivot Point as a support level. Conversely, when the market is trading below the Pivot Point, traders tend to look for bearish opportunities and consider the Pivot Point as a resistance level.
Trend identification
Traders use Pivot Points to identify current trend in the market. If price is consistently trading above the pivot point, this can be an indication of a bullish trend, while if price is trading below the pivot point, this can be an indication of a bearish trend.
Trading breakouts
Traders also use Pivot Points to identify potential breakout opportunities. If the price breaks above a Pivot Point level, traders consider it as a bullish signal and may look for opportunities to buy. Similarly, if the price breaks below a Pivot Point level, traders consider it as a bearish signal and may look for opportunities to sell.
Intraday trading
Pivot Points are particularly useful for intraday traders, as they provide a framework for identifying potential price movements throughout the trading day. Traders can use pivot points to identify potential support and resistance levels for the day and adjust their trading strategy accordingly.
Combine with other TA tools
Pivot Points can also be combined with other technical analysis indicators, such as Moving Averages or Relative Strength Index (RSI), to improve their effectiveness. For instance, traders may use Pivot Points in conjunction with Moving Averages to confirm trend direction or with RSI to identify potential overbought or oversold conditions.
Risk management
Pivot Points can also be used as a tool for risk management. Traders can use pivot points to set stop-loss levels, which can help limit losses if the trade goes against them.
In summary, Pivot Points are a popular technical analysis indicator that traders use to identify key levels of support and resistance in the market. They are easy to calculate and can be used in various trading strategies to improve trade timing and risk management. However, like all technical analysis tools, Pivot Points are not foolproof and should be used in conjunction with other analysis techniques and risk management strategies.
Using Standard Pivot Points for intraday trading
Standard Pivot Points can be used for intraday trading by calculating the levels based on the high, low, and closing prices of the previous day and using them as reference points for the current trading day. Here are some steps to use Standard Pivot Points for intraday trading:
Calculate the Pivot Point
The Pivot Point is calculated by adding the high, low, and closing prices of the previous day and dividing the result by three.
Calculate the Support and Resistance Levels
Using the Pivot Point, calculate the support and resistance levels for the day. The first level of support and resistance is calculated by subtracting and adding the difference between the high and low prices of the previous day from the Pivot Point. The second level of support and resistance is calculated by adding and subtracting the difference between the high and low prices of the previous day from the first level.
Identify Potential Entry and Exit Points
Use the Pivot Points and support and resistance levels to identify potential entry and exit points for trades. If the price is trading above the Pivot Point and is approaching a resistance level, traders may look for a short entry opportunity or take profits on long positions. Conversely, if the price is trading below the Pivot Point and is approaching a support level, traders may look for a long entry opportunity or take profits on short positions.
Use Other Technical Analysis Indicators
Pivot Points can be used in conjunction with other technical analysis indicators to improve their effectiveness. For instance, traders may use Moving Averages or Relative Strength Index (RSI) to confirm trend direction or identify potential overbought or oversold conditions.
It’s important to note that Pivot Points are not always reliable, and traders should use them in conjunction with other analysis techniques and risk management strategies. Intraday traders should also be cautious of sudden market movements, news announcements, and other events that could cause sudden price changes and invalidate Pivot Point levels.
Also see: Trader’s Routine – Real-time Trader’s Routine
Advantages and Limitations of Pivot Points in trading
Advantages
- Easy to use: Pivot Points are straightforward to calculate and use, which makes them popular among traders of all levels of experience.
- Provide clear levels of support and resistance: Pivot Points can help identify clear levels of support and resistance, making it easier for traders to determine entry and exit points.
- Can be used across different timeframes: Pivot Points can be used across different timeframes, from intraday trading to longer-term investments.
- Help identify potential price movements: Pivot Points can help traders identify potential price movements and trend reversals, which can be useful for making informed trading decisions.
- Can be used with other technical indicators: Pivot Points can be used in conjunction with other technical indicators, such as moving averages or oscillators, to enhance their effectiveness.
Limitations
- Not always reliable: Pivot Points are not always reliable and may not work in all market conditions.
- Can be influenced by large price movements: Pivot Points can be influenced by large price movements, which can make them less effective in volatile markets.
- Not useful for all markets: Pivot Points may not be useful for all markets or asset classes, such as currencies or commodities.
- Need to be adjusted for different timeframes: Pivot Points need to be adjusted for different timeframes, which can be time-consuming and may require more frequent updates.
- Can be subjective: Pivot Points may be subjective, as traders may use different methods to calculate them, which can lead to different results and interpretations.
Overall, Pivot Points can be a useful tool for traders, but they should be used in conjunction with other technical and fundamental analysis tools and risk management strategies. Traders should also be aware of their limitations and use them in the appropriate market conditions.
Standard Pivot Points are a widely used tool in technical analysis that can help traders identify levels of support and resistance, potential price movements, and trend reversals. They are easy to calculate and can be used across different timeframes, making them popular among traders of all levels of experience.
However, it’s important to note that Pivot Points are not a guarantee of future performance or success in trading. They should be used in conjunction with other technical and fundamental analysis tools, as well as risk management strategies, to make informed trading decisions. Additionally, past performance is not indicative of future results, and traders should always exercise caution and conduct their own research and analysis before entering any trades. Finally, Pivot Points may not be reliable in all market conditions and may need to be adjusted for different timeframes, which can be subjective and require frequent updates.
