How to Use Pivot Points in Intraday Trading?

Pivot points are a common tool in technical analysis. Traders use them to find possible support and resistance levels in the market. They're handy for intraday trading, where traders must decide quickly based on short-term market changes.

What Is Pivot Point In Intraday Trading?

A pivot point is a technical indicator calculated using the previous day's high, low, and closing prices. It determines the market's potential direction for the current trading day. The basic idea behind pivot points is that if the market trades above the pivot point, it is considered bullish. If it trades below the pivot point, it is considered bearish.

In intraday trading, pivot points are used to identify key support and resistance levels. The pivot point acts as a level of support or resistance, depending on the market's direction. Additionally, there are three support levels below the pivot point and three resistance levels above it, forming a total of seven pivot levels.

These levels help intraday traders determine where the price may find support (a level where buying pressure could push the price back up) or resistance (a level where selling pressure could push the price back down). By identifying these potential turning points, traders can make more informed decisions about when to enter or exit a trade.

Why Is Pivot Point Trading Important?

Pivot point trading is important for intraday traders for several reasons:

● Calculated daily: Pivot points are calculated fresh daily, making them relevant and effective for short-term trading strategies within those 24 hours.

● Identifies support and resistance levels: Pivot points provide traders with potential areas of support and resistance, which can help identify potential reversals and optimise entry and exit points.

● Gauges market sentiment: By analysing the price action around pivot points, traders can gauge the overall market sentiment and adjust their strategies accordingly.

● Universal application: Pivot points can be applied to various financial instruments and markets, making them a versatile tool for intraday traders.

● Risk management: Pivot points can help traders manage risk by setting stop-loss orders near support or resistance levels.

Which Pivot Points Are Best For Intraday Trading?

There are several types of pivot point calculations, each with strengths and suitabilities for different trading styles. Here are some of the most commonly used pivot point calculations and their characteristics:

● Classic Pivot Points: This foundational method provides a balanced view of the market. It suits many traders and is often considered a good starting point.

● Woodie's Pivot Points: This method emphasises the closing price, potentially providing a different perspective on market sentiment. It can be useful for traders who place greater importance on this.

● Camarilla Pivot Points: This method produces more pivot levels, making it suitable for traders who execute multiple daily trades for quick profits.

● Fibonacci Pivot Points: As the name suggests, this method incorporates Fibonacci levels into the pivot point calculation. It may appeal to traders who incorporate Fibonacci retracement strategies into their analysis.

● Central Pivot Range (CPR): This newer calculation offers a range rather than a single line, providing a more defined support or resistance area. It can be helpful for traders who focus on range-bound markets.

How To Use Pivot Point In Intraday Trading?

There are two main strategies for using pivot points in intraday trading: the pivot point bounce strategy and the pivot point breakout strategy.

● Pivot Point Bounce Strategy: This strategy uses the pivot point as a key indicator for asset price movements. Traders assess whether the price bounces off the pivot point or breaks through it to determine their trading decisions.
○ Buying: Traders look to enter a long position when the price touches the pivot point from above and reverses direction. They anticipate a bounce off the pivot point as a signal to buy the asset.
○ Selling: Conversely, traders aim to sell when the price tests the pivot point from below and bounces off it. This indicates a potential downward movement, prompting traders to sell the asset to avoid losses.
○ Utilising support and resistance: Traders can capitalise on the support and resistance levels identified by pivot points. Buying just before the price touches the support level can maximise profit potential while selling before reaching the resistance line can mitigate potential losses.

● Pivot Point Breakout Strategy: This strategy involves anticipating price movements beyond the pivot points, signalling a continuation of the trend in either direction.
○ Bullish breakout: Traders anticipate upward price momentum when the price surpasses a pivot point, typically opening long positions to capitalise on the positive market sentiment.
○ Bearish breakout: Conversely, if the price breaks below the support line, traders initiate short positions, anticipating a downward trend as indicated by the breakout.
○ Risk management: Traders can employ stop-loss or stop-limit orders slightly above or below the pivot points to protect against sudden price fluctuations. This ensures their interests are safeguarded during volatile market conditions.

How To Calculate Pivot Points?

Here's a step-by-step guide on how to calculate pivot points using the standard pivot points method:
 

Step 1: Gather the necessary data
● High: The highest price during the previous trading session.
● Low: The lowest price during the previous trading session.
● Close: The closing price of the previous trading session.

Step 2: Calculate the pivot point (PP)
● PP = (High + Low + Close) / 3

Step 3: Calculate the first resistance (R1) and first support (S1)
● R1 = (2 x PP) - Low
● S1 = (2 x PP) - High

Step 4: Calculate the second resistance (R2) and second support (S2)
● R2 = PP + (High - Low)
● S2 = PP - (High - Low)

Step 5: Calculate the third resistance (R3) and third support (S3)
● R3 = High + 2 x (PP - Low)
● S3 = Low - 2 x (High - PP)

Different Types Of Pivot Points Used In Intraday Trading

While the standard pivot point calculation is widely used, there are several other variations that traders can consider:

● Classic Pivot Points: These are calculated using the previous trading day's high, low, and closing prices. They generate the pivot point, two resistance, and support levels above and below.

● Woodie Pivot Points: Developed by trader Ken Woodie, these pivot points are calculated using the open, high, low, and close of the previous trading day. They aim to simplify analysis by framing trades between key support and resistance zones.

● DeMark Pivot Points: These unique pivot points incorporate data from the previous two trading days, utilising the open, high, low, and close prices. They generate clusters of potential turning points around the open price rather than a central pivot point.

● Camarilla Pivot Points: Developed by Nick Scott, these pivot points divide the range between the high and low prices into eight equal parts, identifying more potential pivot levels than classic pivots.

● Fibonacci Pivot Points: As the name suggests, these pivot points incorporate Fibonacci ratios into the calculations, aiming to plot potential reversal points at areas that adhere to Fibonacci theory.

Each type of pivot point calculation has strengths and may resonate with different trading styles and preferences. Traders can experiment with various methods to find the one that best suits their approach and provides the most reliable signals.

Conclusion

Pivot points are a valuable tool for intraday traders. They provide insight into potential support and resistance levels, market sentiment, and trading opportunities. By understanding how to calculate and interpret different types of pivot points, traders can develop strategies that align with their risk tolerance and trading style.