Introduction
The pivot point is the level at which the market direction changes for the day. Pivot Point trading is the most basic in trading and lots of traders use this so market finds support and resistance at Pivot Levels.
Pivot Points are support and resistance levels that are calculated using the open, high, low, and close, from the previous trading day. Standard pivot points include the pivot point itself, three full support levels, and three full resistance levels.
If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.
Most important points while trading using Pivots are Pivot Level,R1 and S1.
To Trade using Pivots 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.
How to Trade Using Pivots
1.Before the start of trade we should be ready with the pivot levels for a particular stock/Index we want to trade.I have made an auto update sheet which gets update EOD Basis
Click Here
2.Market Open following scenarios Apply:
Open is above Pivot: Buy
Open is below Pivot: Sell
3. First Fundamental Of Pivot Trading After the opening range (first 15-30 min. to one hour), if price is above/below the Pivot, Price Action will strongly tend to remain above/below the Pivot for the session.
Although this rule bids us to wait out the Opening Range and thus avoid much of the wildness and whipsawing,
4.If the market opens, or later trades at the extremes (
R2, R3 or S2, S3), it will exhibit a tendency to trade back toward the Pivot.
Thus, the general rule, 'Avoid buying the High or selling the Low', becomes increasingly more stringent as price moves farther from the Pivot.
Practical Examples
Lets take the Example of Reliance.
Trading Levels for Reliance on 17 Feb were High@ 1037.8 Low@1022 Close@1032
When we calculate the Pivot Levels we get the Following Levels
Pivot:1030.6
R1:1039.6
R2:1046.4
R3:1055
S1:1023.4
S2:1014
S3:1007
Now lets see how the trading goes on next day ie. on 18 Feb
Reliance opens @ 1030 ie. at Pivot Level and makes a high of 1038 that is the R1 as we have already calculated.But we need to see for sustained of levels and as told previously once price touch R1 we need to see whether they reverse from R1 or break it.
In our case price reverses from R1 ie. 1039 in our case and closes below the Pivot levels.
Now we can take short once price moves below Pivot ie 1030 with SL @ R1 and target of S1 1023,now once 1023 breaks than we can carry our short with target@ S2
This was an ideal trade which one can execute with patience and discipline.Using Pivot trading one can make a decent living using trading when market are not much volatile.Do some paper trading with levels given on the sheet for Monday trading.
How To calculate Pivot Levels:
Calculation:
PP = (YHigh + YLow + YClose) / 3
S1 = (PP * 2) - YHigh
S2 = PP - (YHigh - YLow)
S3 = (2 * PP) - ((2 * YHigh) - YLow)
R1 = (PP * 2) - YLow
R2 = PP + (YHigh - YLow)
R3 = (2 * PP) + (YHigh - (2 * YLow))
YHigh = Yesterday High
YLow = Yesterday Low
YClose = Yesterday Close
I have made an autoupdate Google Spreadsheet which Update the Pivot Levels of Nifty 50 Stocks
Click Here to Get it and Bookmark that
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, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis. These other technical indicators can be anything from
MACD crossovers to
candlestick patterns - the greater the number of positive indications, the greater the chances for success.
Golden Rule:
If the days high or low get broken early in the morning trade then go in that direction, period. Don't think!
Labels: Pivot Point, Trading
