Using Pivot Points for Day Trading

Day trading is a fast-paced and often stressful method of making money in the stock market. However, with the right tools and strategies, it can also be highly profitable. One such tool that many day traders use is pivot points. This article will delve into what pivot points are, how they are calculated, and how they can be used in day trading.

What are Pivot Points?

Pivot points are technical analysis indicators used to determine the overall trend of the market over different time frames. They are used by traders to identify potential support and resistance levels, which are the price levels at which the stock is predicted to start changing direction.

Support and Resistance Levels

Support levels represent the price level where the stock price seldom falls below for a certain period, while resistance levels indicate the price level the stock price rarely goes above. These levels are used by traders to make decisions about buying and selling stocks.

How are Pivot Points Calculated?

The pivot point itself is simply the average of the high, low, and closing prices from the previous trading day. From this pivot point, various support and resistance levels are calculated.

Pivot Point Formula

P = (High + Low + Close) / 3

Where P is the pivot point, High is the highest price, Low is the lowest price, and Close is the closing price from the previous trading day.

Support and Resistance Levels Formula

R1 = (2 * P) – Low

R2 = P + (High – Low)

S1 = (2 * P) – High

S2 = P – (High – Low)

Where R1 and R2 are the first and second resistance levels, and S1 and S2 are the first and second support levels.

Using Pivot Points in Day Trading

In day trading, pivot points can be extremely useful for determining entry and exit points for trades.

Identifying Entry Points

If the price of a stock opens above the pivot point, this is generally seen as a bullish signal, and the trader might consider entering a long position. Conversely, if the price opens below the pivot point, this is seen as a bearish signal, and the trader might consider entering a short position.

Identifying Exit Points

Traders often use the resistance levels to determine potential exit points for long positions. If the price reaches the first resistance level (R1), the trader might consider selling the stock. Similarly, the support levels can be used to determine potential exit points for short positions.

Conclusion

Pivot points are a valuable tool for day traders, helping to identify potential entry and exit points and providing insights into the overall market trend. However, like all trading tools, they should be used in conjunction with other indicators and strategies to maximize trading success.