How to Use Pivot Point in Intraday Trading?

Intraday trading is a strategy where traders aim to profit from short-term price fluctuations within a single trading day. To navigate the dynamic nature of the markets, traders often rely on various technical analysis tools, one of which is the pivot point.

Intraday traders widely use pivot points to identify potential support and resistance levels, gauge market sentiment, and make informed trading decisions. Read on to know the concept of pivot points and explore how they can be effectively utilized in intraday trading strategies.

Pivot Point Meaning

Pivot points help find out potential levels for a stock‘s price movement. They help traders make informed decisions based on these levels. Pivot points are calculated based on the previous day's high, low, and closing prices, providing you with potential levels of support and resistance for the current trading day.

The calculation derives several vital levels, including the pivot point itself (PP), as well as support levels (S1, S2, S3) and resistance levels (R1, R2, R3). These levels can be reference points to identify potential price reversals or breakouts.

If the calculated average price exceeds the pivot point, it indicates a bullish market sentiment. Conversely, if the average price is lower than the pivot point, it means a bearish market sentiment.

Understanding Pivot Point

Now that you know the pivot point meaning, let’s see how to understand pivot point indicators.

1. Identifying Key Levels

Pivot points help traders identify significant levels where price reversals or breakouts may occur. The pivot point (PP) itself is often seen as a neutral zone, while the support levels (S1, S2, S3) below the pivot point may act as potential buying zones, and the resistance levels (R1, R2, R3) above the pivot point may act as potential selling zones.

2. Trading Strategies

a. Pivot Point Bounce Trading Strategy You can look for price bounces off the support or resistance levels. If the price appears close to the support level, it may indicate a potential buying opportunity, while approaching a resistance level may show a selling opportunity. Confirming these bounces with additional technical indicators or candlestick patterns can increase the probability of successful trades.

b. Pivot Point Breakout Trading Strategy You can also watch for price breakouts above a resistance level or below a support level. A breakout above resistance suggests a potential buying opportunity, whereas a breakout below support suggests a possible selling opportunity. Before getting into trade, it is essential to wait for confirmation signals, such as increased volume or strong candlestick patterns.

Combining Pivot Points With Other Indicators

Pivot points work best when used in conjunction with other technical analysis tools. Successful intraday traders often combine pivot points with indicators like moving averages, trendlines, and oscillators to strengthen their trading decisions. This combination provides a more comprehensive market view and increases the probability of successful trades.

How to Calculate Pivot Point?

Calculating pivot points is a straightforward process, and they utilize data from the previous day to assist traders in predicting market trends. While software exists that can plot pivot points using OHLC (Open, High, Low, Close) bar charts for longer periods like weeks or months, it is more appropriate to plot them daily using the previous day's values.

This is due to market volatility, requiring rapid assessments where older data may need to be adequate. To determine the average pivot point, a straightforward pivot point calculator formula is used:

Pivot Point (PP) = (High + Low + Close) / 3

Suppose a stock’s closing price on Monday is ₹50. The high and low for the day was ₹55 and ₹45 respectively. Thus pivot point as per the formula is (55+45+50)/3 = 50

Entering a Trade Using Pivot Point

To incorporate the calculated pivot points for the day, begin by opening an OHLC bar chart and adding the pivot points. After this:

• Observe Attentively and be Patient: Monitor the market closely, focusing on the price as it approaches a pivot point. For long trades, pay attention to the price bars touching new lows as they draw nearer to the pivot point. Conversely, observe the price bars touching new highs for short trades as they approach the pivot point.

• Allow Price to Reach Pivot Point: At this stage, it is advisable to exercise patience and wait until the price touches the pivot point, indicating that the stock is trading at the pivot price.

Initiate the trade when you observe that the high of the first price bar, which failed to touch a new low, has been surpassed or broken. This signifies a potential entry point for the trade. Breaking the high of this particular price bar indicates a shift in momentum, suggesting a possible upward movement in the price.

By waiting for the high initial price bar to be breached, you can confirm that the price has gained strength and will likely continue moving in a positive direction. This breakout signals to enter the trade, suggesting an increased probability of upward momentum and potential profit.

Note that entering the trade based on the breakout of the high of the specific price bar confirms the stock's upward movement, enhancing the reliability of your trade decision. Due to the nature of pivot points being derived from data applicable to a single trading day, their applicability becomes highly specific. As a result, pivot points are most suitable for short time frames in trading. Short time frames, such as 1-minute, 2-minute, and 5-minute intervals, are particularly well-suited for utilizing the pivot point indicator.

In Conclusion

Pivot points are powerful tools that can significantly enhance the decision-making process for intraday traders. By identifying key support and resistance levels, pivot points offer valuable insights into potential price reversals or breakouts.

When used in conjunction with other technical analysis tools and confirmed by additional indicators, pivot points can be a valuable addition to any intraday trading strategy. As with any trading tool, combining pivot points with sound risk management principles and thorough market analysis is essential. Remember to practice and refine your strategy before implementing it with real capital.