How to trade using Pivot Points

The art of Pivot Point Trading 

In this article I would like to write a short note on Pivot Point Trading. In this blog I have mentioned on several times Pivot Points, R1 (Resistance1), R2 (Resistance2), R3 (Resistance 3), S1 (Support 1), S2 (Support 2) and S3 (Support 3). Knowledge of Pivot Points is a must for any day trader. Pivot Points can be applied in day trading very effectively. There are weekly Pivot Points, monthly Pivot Points. Pivot Points can give a trader an idea which direction the market is moving. Pivot Points have become a very reliable method of trading. If one observes the market movement during a day session, it could be seen price movements and reversals along the predicted Pivot Points. Since many traders are using Pivot Points to trade, we too can find opportunities to enter trade at correct levels.

How the Pivot Points are calculated? Stocks traded at the market at the end of the day, gives us four important data. They are open, high, low and close. These data is sufficient for us to calculate mathematically the Pivot Points that we need.

 I have given below the most common and widely used formula 

Pivot Point = ( High + Close + Low )/3

Resistance 1 = 2 * Pivot - Low

Resistance 2 = Pivot + (R1 - S1)

Resistance 3 = High + 2*(Pivot - Low)

Support 1 = 2 * Pivot – High

Support 2 = Pivot - (R1 - S1)

Support 3 = Low - 2*(High - Pivot)

The Pivot Point occupies the center stage. If a stock opens above the Pivot Point then we can expect it to touch R1. If there is no reversal at R1, then R2 can be a target. If the stock surpasses R2 then R3 becomes the final target. Traders going long usually follow this method of trading.

On the other hand, if a sock opens below the Pivot Point, that signals a weakness traders look for support at S1.fi the S1 is broken, S2 becomes the next support. If S2 fails to halt the decline of the sock the third support point of S3 becomes the anticipated target. Traders going short look for these levels.

Traders also keep an eye on reversals. If a stock finds support at S1, and reverses itself to surpass  the  Pivot level, this means the stock has strength it and there is a good chance of R1 becoming the target. If a stock meets stiff resistance at R1, it signals that it is weak. Traders wait to see the stock coming down to the level of Pivot Point, and any further downing of the stock gives the trader an opportunity to short it and expect it to touch S1.

Advance traders use other indicators to confirm the strength of the stock before taking a look at Pivot Points. The MACD (Moving Average Convergence Divergence) and RSI (Relative Strength Index) can give the trader some ideas to take a call.

Pivot Points can be applied to commodities and Forex market also. The calculations are same for all types of market. The most important part of it is it works.