Pivot Point Trading Strategy

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Technical analysts use pivot point to determine the overall trend of the market over different time frames. They are calculated using the high, low, and closing prices of previous trading sessions and predict support and resistance levels in the current or upcoming session. Thus, they can be a handy tool for range-bound traders to identify entry points and spot the critical levels that need to be broken for a move to qualify as a breakout for trend traders and breakout traders.

It allows a trader to determine the general trend of the market at different times. For example, if the trading is over the pivot point of the previous session, it indicates a current bullish sentiment. Alternatively, bearish sentiment is indicated if the trading is over and below the pivot point.

Traders can detect the points where the price of that stock could face support or resistance with the help of the different levels in the pivot point. The price movement direction can also be detected when the price moves through some of these levels. These levels are valid only for intraday trading. There are a variety of formulas you can use to find out the pivot levels.

Calculation of Pivot Points

There are various ways to calculate Pivot Points. They can be calculated for various time frames. The Five-Point system that is totaling five price points to derive a pivot point is most commonly used. 

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

The first level Support and Resistance

Support 1 (S1) = (Pivot Point∗2)−Previous High

Resistance 1 (R1) = (Pivot Point∗2)−Previous Low

The Second Level Support and Resistance

Support 2 (S2) = Pivot Point−(Previous High−Previous Low)

Resistance 2 (R2) = Pivot Point + (Previous High−Previous Low)

Calculating Pivot Points Using Excel

With the help of MarketXLS, you can generate the Pivot Points in your Excel Sheet efficiently. For instance, here, we have taken Microsoft (Nasdaq: MSFT) and generate the historical data of Open, High, Low, and Close. For this example, we have taken a weekly time frame.

Once the data is generated, we can calculate the Pivot Points by entering the formula and calculate the Support, Resistance, and Pivot Points. 

Interpretation and Application of Pivot Point Strategy

Pivot points are excellent tools for timing the entries and exits in any market. The pivot point is the primary focus and the level ofoff which everything else is calculated. Support and resistance levels can also be forecasted using the pivot point calculation. The pivot levels placed on the chart are the basic ones. There are two resistances and two supports. Now that we have generated the Pivot Points, let us understand them with the help of the previous example.

Since it is a weekly chart, we can conclude that the pivot point lies at $260 and the first support at $256.86, with resistance at $265.96. Similarly, the second support and resistance are at $248.6500 and $251.0900, respectively.

If the market has confirmed a strong bias above the pivot point during the trading period, traders should expect any retest of the Pivot Point to provide a rejection. Assuming the market traded above the pivot point for most of the day, and then maybe a bit of bad news hits the market, and the price begins to fall and retest the pivot point. At this point, it is expected that the buyers would again show up and defend their position in the market. We can expect a bounce if the buyers were really in control. This is a great chance to re-enter the market if you have missed the initial start during the day.

Pivot Point Strategy in Intraday Trading

Active attention to market trends is required in Intra-day Trading. There are several strategies that the traders may use to make intraday trading much easier with a concrete decision. Pivot Point Strategy is a useful strategy for Intraday traders that helps them to calculate the expected point from where the prices can soar and find resistance and the expected point from where the prices can dip and find support.

When the correct analysis is done, the pivot levels play an essential role when the market opens each day. For example, if a particular stock opens above the basic pivot level, it is expected to follow a bullish nature; conversely, if the same particular stock opens below the basic pivot level, it should follow a bearish nature. 

Pivot Bounce and Pivot Level Breakout

Pivot Point Bounce is one of the critical strategies, and it helps the trader understand when to buy the stocks and when to sell them. It focuses on finding the bounce in prices at pivot points in the chart. If the price reaches the pivot point and bounces back, it indicates opening the trade.

Pivot Level Breakout is constructed with the stop-limit order strategy, and the trader opens the position when the price passes the pivot level. The short trade is performed when the trend shows a bearish performance and has a long position when the trend shows a bullish performance.

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References

https://www.daytrading.com/pivot-points

https://www.investopedia.com/articles/forex/05/fxpivots.asp

https://www.investopedia.com/trading/using-pivot-points-for-predictions/