# Pivot Point Trading Strategies
Pivot point trading is a popular method among traders to determine critical support and resistance levels, helping them make more informed trading decisions. This strategy is widely used not only in forex but also in commodities, stocks, and futures markets. It leverages mathematical calculations to predict points of turnaround in the market. This article delves into the core of pivot point trading, offering insights into how traders can implement this strategy to potentially enhance their trading outcomes.
Understanding Pivot Points
Before delving into strategies, it’s crucial to understand what pivot points are. In essence, pivot points are indicators derived from the previous trading period’s high, low, and close prices. These points serve as a guide for determining potential support and resistance levels in the market for the current trading period.
Calculating Pivot Points
The most common method to calculate pivot points is the ‘Standard Pivot Point’ formula. Here’s a quick look at how it’s done:
– **Pivot Point (PP)** = (High + Low + Close) / 3
– **First Level Support and Resistance**:
– **Support 1 (S1)** = (2 * PP) – High
– **Resistance 1 (R1)** = (2 * PP) – Low
– **Second Level Support and Resistance**:
– **Support 2 (S2)** = PP – (R1 – S1)
– **Resistance 2 (R2)** = PP + (R1 – S1)
This formula sets the foundation for most pivot point trading strategies, calculating key levels that are likely to influence market movement.
Trading Strategies Using Pivot Points
Pivot points can be used in various trading strategies to pinpoint entry and exit points, manage trades, and set stop losses.
Breakout Trading
One effective strategy is to trade price breakouts from the pivot levels. Traders watch how the price reacts to the pivot points at the start of the trading day. A push beyond a pivot level with significant volume can signal a strong trend and a potential trading opportunity.
– **Buying on a Breakout**: Traders might consider entering a long position when the price breaks above a resistance level.
– **Selling on a Breakout**: Conversely, entering a short position when the price falls below a support level can be a strategic move.
Reversal Trading
Another strategy involves trading potential reversals at pivot points. This method relies on entering trades as prices bounce off support or resistance levels.
– **Buying on a Dip**: When the price touches the first support level and shows signs of reversing (e.g., a bullish candlestick pattern), it may be a good opportunity to go long.
– **Selling on a Rally**: If the price reaches a resistance level and starts to decline, it might be an ideal time to open a short position.
Combining Pivot Points with Other Indicators
For increased effectiveness, traders often combine pivot points with other indicators, such as moving averages, MACD, or RSI. This approach can help validate pivot point signals and refine entry and exit points.
– **Trend Confirmation**: A moving average can help confirm the overall trend direction, providing a backdrop for pivot point signals.
– **Momentum Confirmation**: Oscillators like RSI or MACD can confirm the momentum behind a pivot point breakout or reversal, increasing the probability of a successful trade.
Conclusion
Pivot point trading strategies offer traders a mathematical framework to analyze market trends and make informed decisions. By calculating pivot points and incorporating them into breakout or reversal strategies, traders can potentially identify profitable entry and exit points. Combining pivot points with other technical analysis tools can further refine these strategies, leading to more robust trading decisions. As with any trading strategy, it’s essential to practice sound risk management to protect against unforeseen market movements.
