What are Pivot Points?
As a technical analysis indicator, a pivot point uses a previous daily high, low, and close price for a specific period to define future support and resistance. In addition, other small calculations determine the “outside” points.
Be VERY carefull when calculating “The Pivot Point”. If the pivot point is wrong, all other levels will be wrong.
If you take a look at the chart above, we need Day 1 data for Day 2 Pivot Points.
This is how the following acronyms work:
R1 (Resistance 1)
R2 (Resistance 2)
R3 (Resistance 3)
S1 (Support 1)
S2 (Support 2)
S3 (Support 3)
PP (Pivot Point)
Below are the calculations for getting a Pivot Point:
Pivot Point (PP) = (Prior Daily High + Low + Close) / 3
R1 = (2 x Pivot Point) – Prior Daily Low
R2 = Pivot Point + (Prior Daily High – Prior Daily Low)
R3 = Daily High + 2 x (Pivot Point – Prior Daily Low)
S1 = (2 x Pivot Point) – Prior Daily High
S2 = Pivot Point – (Prior Daily High – Prior Daily Low)
S3 = Daily Low – 2 x (Prior Daily High – Pivot Point)
How can we trade Pivot Points?:
Breakout usually happens earlier in the morning, depends on if the pivots are being calculated with Weekly High, low and Close or Daily High, Low and close.
Break above R1 (Resistance 1) we know that the trend is up so we chase R2 (Resistance 2). In thi time we only try and stick to triggers for Long positions because market is bullish above the Pivot Point and R1.
By trading breakout you must have a good stop loss placement. If price breaks above R2 (Resistance 2), we put the stop half way between R1 and R2
2) Rejection (Bounce):
If during the trading day the market has established a strong bias above (below) the central pivot point we should expect any retest of the central PP to provide a rejection.
Let’s assume the market traded above the central pivot point for the most part of the day. Maybe a piece of bad news hits the market and the price starts to fall and retest the central pivot point.
At this point, we would expect the buyers to show up again and defend their position in the market. So, if the buyers were really in control, we can expect a bounce.
Why use Daily Pivot Points?:
The daily pivot points are one of the most accurate PP levels because they incorporate the end of day closing prices.
The close of the day is regarded as the most important price of all OHLC prices. The closing price is basically the settlement price that shows who won the bull-bear battle.
Daily pivot points are more reliable than intraday pivot points.
Stochastic Strategy for Pivot Points:
Calculate the Pivot Point using the Previous Daily High, Low and Close
Scale down to 5 min timeframe to enter trades
As long as price is moving below the Pivot Point you can use the Stochastic to give you Trend Riding opportunities to the downside and the other way around.
When price is moving below PP, make sure 50 Stochastic is below 38.2 for you to be able to ride the trend down.
You have to keep an eye on the signal line, as long as the signal line is following through to the downside you should keep you position.
If we break the PP to the upside, wait for 50 Stochastic to follow through 61.8 to confirm the uptrend, and also keep an eye on the signal line following the Stochastic to the upside.
If Stochastic and Signal line are pointing in 2 different directions you should stay out. Also make use of the 8 an 21 EMA for potential turn arounds along the way for better exits.
When to get out of a trade?:
When in a short with Stochastic being below 38.2, you start to see price turn around a bit while you are in profit.
If stochastic crosses 50 to the upside while you are still in a short, you exit the trade. Break of 38.2 you can enter again if signal line is also following down with Stochastic.