Introduction to Pivot Point Trading Strategies
Pivot Point trading strategies are widely used by day traders to gauge the market sentiment and generate trading signals. This strategy involves identifying pivot points in the market, which are specific price levels that are likely to trigger significant price movements. These pivot points are calculated using the high, low, and closing prices of the previous trading day.
Understanding Pivot Points
Pivot points are essentially price levels at which the direction of price movement is expected to change. They are calculated using the high, low, and closing prices from the previous trading day. The pivot point itself is the average of these three prices, and other levels (support and resistance) are derived from this main pivot point.
Calculating Pivot Points
The main pivot point (PP) is calculated as follows:
PP = (Previous High + Previous Low + Previous Close) / 3
Two levels of support (S1 and S2) and resistance (R1 and R2) are also calculated using the pivot point:
S1 = (PP x 2) – Previous High
S2 = PP – (Previous High – Previous Low)
R1 = (PP x 2) – Previous Low
R2 = PP + (Previous High – Previous Low)
Pivot Point Trading Strategies
There are several trading strategies that utilize pivot points, each with its own unique approach and methodology. Here are some of the most popular pivot point trading strategies:
1. Pivot Point Bounce
The pivot point bounce strategy involves buying or selling securities when the price touches the pivot point level. Traders expect the price to bounce off these levels rather than break through them.
2. Pivot Point Breakouts
In contrast to the bounce strategy, the pivot point breakout strategy involves trading breakouts and breakdowns of the pivot point level. Traders expect the price to break through the pivot point level and continue moving in the same direction.
3. Pivot Point Confluence
The pivot point confluence strategy involves identifying areas where multiple pivot points converge. These areas are considered to be stronger levels of support or resistance, and traders expect the price to react more significantly at these levels.
Conclusion
Pivot point trading strategies provide traders with a framework for understanding market sentiment and identifying potential trading opportunities. By understanding how to calculate pivot points and how to apply them in different trading strategies, traders can make more informed decisions and potentially increase their chances of success in the market. However, like all trading strategies, pivot point strategies should be used in conjunction with other tools and indicators to confirm signals and manage risk.
