How to Use Pivot Point in Intraday Trading

Intraday trading involves staying updated with the current market trends and exploring any possibility of making a profit before the trading day ends. Intraday traders use multiple analyses and strategies to identify entry and exit points to generate maximum profits. One of the most efficient intraday trading tools is the pivot point trading strategy while making trading decisions. A pivot point is used extensively in technical analysis that helps traders assess the current price trends. Let us begin by understanding pivot point meaning.

To compute the value of a pivot point, you must identify the previous day's high, low, and closing prices of the specific security. An average of these prices gives the value of the pivot point. If the security trades higher than the last day's pivot point value, it represents a bullish sentiment. Conversely, the bearish sentiment prevails if the security price is less than the pivot value of the previous day.

Traders also use pivot points to calculate support and resistance levels. Intraday traders may typically use seven pivot levels, comprising three resistance and three support levels. These are also primary pivot points displayed in the chart. The different levels of pivot points help traders determine where a security's price would face resistance or support.

Bringing you a complete guide on pivot point trading strategy with a study of which pivot points are best for intraday trading.

Day Trading Using Pivot Points

Intraday traders widely use the pivot trading strategy to assess entry and exit points. Suppose a day trader wants to purchase security; the ideal time would be when the stock follows a bearish trend and drops to support level R1. The support levels are below the basic pivot levels, and traders may place a buy order as the price reaches support level R2. Let us understand two of the most crucial concepts employed by day traders using pivot points.

  1. Pivot Point Bounce - Suppose the security price reaches the pivot point and bounces; it cues the trader to open a trading position. If the stock seems to test the chart from the upper side, following an upward bounce, traders seek to buy those stocks. Conversely, traders may be willing to sell their stocks during a down-ward bounce. Traders who aim short set their stop loss above the pivot point, and those targeting long may set their stop loss below the pivot point.
  2. Pivot Point Breakout - Pivot point breakout is a technique whereby traders use stop-limit orders. Traders may typically open their positions when prices go beyond a pivot price level. Such breaks generally are expected to occur during the morning hours. If the breakout suggests a bearish trend, it may be time to enter into a short trade. Conversely, a long trade is initiated when the breakout suggests a bullish run.

How to enter a trade using pivot points

Step 1: Open the chart

Once you have calculated the pivot points, open the OHLC chart (Open, High, Low, Close) chart and add pivot points to it.

Step 2: Observe

Look for instances when the price closes at the pivot point. For long trades, as the prices get closer to the pivot point, they will touch new lows. Conversely, look out for prices touching new highs while nearing the pivot point in a short trade.

Step3: Let prices reach the pivot point

Stay on standby as the price reaches the pivot price.

Step4: Enter the trade

You may enter the trade in scenarios such as when the high of the first price bar does not touch a new low has been broken.

What do Pivot Points indicate?

ETraders may use the pivot point trading technique with other trend indicators while trading in stocks, commodities, and futures. Traders can identify stop losses and target prices utilizing this technique. Unlike other indicators, such as oscillators and moving averages , pivot points remain stagnant at the same prices during the day. It, therefore, becomes convenient for traders to plan their trades based on these levels.

How to calculate pivot points?

Traders use the previous day’s data to calculate pivot points that help predict the market trend. There are seven pivot point levels to plot the OHLC pivot level graph. Let us understand how these values are calculated.

Basic Pivot Level (PP) = (High + Low + close) / 3
R1 (2*PP) - Low
S1 (2*PP) - High
R2 (PP - S1) +R1
S2 PP - (R1 - S1)
R3 (PP - S2) + R2
S3 PP - (R2 - S2)

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