PIVOT POINT TRADING
10:32 PM Posted In INTRA DAY TRADING Edit This 0 Comments »
The pivot point is the level at which the market direction changes. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels.
All that is needed is the previous day's high, low and closing price and voila, we have an entire range of supports and resistances that can be found invaluable in day trading. The USP of pivot point trading is that it is predictive in nature i.e. it can forecast the range for the trading day ahead.
The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
FORMULA
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = (2 * Pivot) - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = (2 * Pivot) - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
High stands for the previous day's high.
Low stands for the previous day's low
Close represents the previous day's close.
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day is for long trades as long as price remains above the pivot point. If the market opens below the pivot point then the bias for the day is for short trades as long as the market remains below the pivot point
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.
A perfect set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.
PRICE OPENING ABOVE THE PIVOT
If the price opens above the pivot point and starts moving upward, then a long position can be initiated with a stop just below the pivot point and with the R1 as the target. If the price crosses above R1, that can also be an entry level with a stop just below R1 and R2 as the target. Generally, no buy is initiated near R2, as it is the upper limit of the trading range for the day. In case the price reverses from R1 or R2, it can be the right place to short the stock with a stop just above R1 or R2 with the target being the support just below.
PRICE OPENING BELOW THE PIVOT
In the similar way, if the price opens below the pivot point, it is a bearish signal and a short position can be initiated with a stop just above the pivot point and the target being S1. Price moving below S1 and moving towards S2 would also be a selling level. Selling is generally not done near the S2 as it is the lower boundary of the day's trading range. Price reversing from S1 or S2 can be used for initiating buy calls with the target being the level just above. Traders who peruse charts can use pivot points in association with other technical tools to decide whether to play long or short.
CONCLUSION
Pivot points are yet another useful tool that can be added to any trader's toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the trader, on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis.
PIVOT POINT CALCULATOR :
LINK: http://www.4shared.com/file/43512779/102ede7c/PIVOT_POINT_CALC.html
All that is needed is the previous day's high, low and closing price and voila, we have an entire range of supports and resistances that can be found invaluable in day trading. The USP of pivot point trading is that it is predictive in nature i.e. it can forecast the range for the trading day ahead.
The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
FORMULA
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = (2 * Pivot) - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = (2 * Pivot) - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
High stands for the previous day's high.
Low stands for the previous day's low
Close represents the previous day's close.
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day is for long trades as long as price remains above the pivot point. If the market opens below the pivot point then the bias for the day is for short trades as long as the market remains below the pivot point
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.
A perfect set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.
PRICE OPENING ABOVE THE PIVOT
If the price opens above the pivot point and starts moving upward, then a long position can be initiated with a stop just below the pivot point and with the R1 as the target. If the price crosses above R1, that can also be an entry level with a stop just below R1 and R2 as the target. Generally, no buy is initiated near R2, as it is the upper limit of the trading range for the day. In case the price reverses from R1 or R2, it can be the right place to short the stock with a stop just above R1 or R2 with the target being the support just below.
PRICE OPENING BELOW THE PIVOT
In the similar way, if the price opens below the pivot point, it is a bearish signal and a short position can be initiated with a stop just above the pivot point and the target being S1. Price moving below S1 and moving towards S2 would also be a selling level. Selling is generally not done near the S2 as it is the lower boundary of the day's trading range. Price reversing from S1 or S2 can be used for initiating buy calls with the target being the level just above. Traders who peruse charts can use pivot points in association with other technical tools to decide whether to play long or short.
CONCLUSION
Pivot points are yet another useful tool that can be added to any trader's toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the trader, on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis.
PIVOT POINT CALCULATOR :
LINK: http://www.4shared.com/file/43512779/102ede7c/PIVOT_POINT_CALC.html
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