Using and Interpreting Intra-day Pivot Points

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Pivot Points

Pivot Points Explained

While originally developed by floor traders to indicate static support and resistance price levels based on the prior day’s trading range, pivot points are also regularly used with intra-day trading of stocks. Using the prior day’s open, high, low and close as the data inputs, a pivot point is derived through this formula:

P = Pivot Point = (Prior Day’s High + Low + Close) / 3

Once the pivot point is calculated, then two levels of resistance and two levels of support are calculated with the following formula:

R1 = (P x 2) – L ow
R2 = P + (High- L) = P + (R1 – S1)

S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)

This results in 5 horizontal lines on the intra-day chart, the original pivot point and then two resistance and two support pivot points. This is the standard pivot point set-up. Some traders may opt to extrapolate up to 10 pivot points composed of five resistance and five supports.

While the pivot point levels are labeled as R1, R2 and so forth, the reality is each level is considered a support or resistance based on where the stock is trading in relation to the level. When the stock is trading above a pivot level, it acts as a support. When the stock is trading below the pivot level, it acts as a resistance. This is regardless of whether it is a R1 labeled support. Pivot points are static throughout the day.

Fortified Pivot Point Levels

Pivot point levels become even more useful when they overlap with other support/resistance levels like moving averages, PSAR or Fibonacci price points. A pivot point that overlaps with a 200-period moving average is a more fortified support/resistance level than just a simple pivot point. Add in a .618 fib level as well and it becomes a very key price level to watch. The more layers of overlapping price levels, the more fortified that specific pivot point becomes. It is prudent to spot triple fortified pivot point levels when possible.

Since so many traders follow pivots, they become significant inflection points that need to be followed just because everyone else is following the. Pivot points are often factored into algorithm and high frequency trading programs. Traders often place stop orders at or near pivot points. Most trading platforms have pivot point studies that can be added onto any chart. These are a static price tool, which can and should be combined with a dynamic trending tool like moving averages and a momentum indicator to pinpoint more precise entries and exits.

How to Use Pivot Points for Trading

As a price-based tool, pivot points commonly serve two functions. First to provide multiple price support and resistance levels (ahead of time) and secondly as a simple trend monitoring gauge. The main pivot point (P in the formula) should theoretically get the most action when tested. When the price is trading above the main pivot point, it is assumed to be in an uptrend and vice versa for a downtrend when trading below the main pivot point. Once trader’s resistance is another trader’s target. Therefore, a bullish trader may target the next pivot point level R2 for a profit target. A bearish trader may place a short-sell limit order at R2 anticipating a reversion at the resistance level.

Pivot points can be used to pinpoint significant price lvels.

Support/Resistance and Target/Stop-Loss

Like any support and resistance area, pivot point levels should be monitored closely when prices approach those levels. They will result in either a deflection or break through the pivot point. These levels help to simplify limit orders on targets and stop-losses. When a stock breaks out through the R1 pivot point, the next resistance area is represented by R2. Traders can use R2 as a price target to place limit orders to exit their long position and use trail a stop-loss under R1.

Limitations of Pivot Points

Since pivot points are re-calculated daily using the prior days high, low and closing values, they are only effective for the current trading day. Therefore, only intraday traders will be able to utilize them as swing and long-term traders generally can’t. Wider time frame traders can try to calculate pivot points based on prior candle period closes if they desire. This will have to be done manually by hand since most charting platforms only calculate them based on the prior days data.

What is the difference between pivot point & Camarillo point trading?

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A pivot point is a technical analysis indicator used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.

Pivot point analysis is often used in conjunction with calculating support and resistance levels, similar to a trend line analysis. In a pivot point analysis, the first support and resistance levels are calculated by using the width of the trading range between the pivot point and either the high or low prices of the previous day. The second support and resistance levels are calculated using the full width between the high and low prices of the previous day.

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Pivot points are commonly used intra-day indicators for trading futures, commodities, commodities and stocks. Unlike moving averages or oscillators, they are static and remain at the same prices throughout the day. Data from the prior day’s trading range is run through a formula to generate five pivot point levels. These is composed of a pivot point and two higher pivot point resistances known as R1 and R2 and two lower pivot point supports known as S1 and S2.

Each level is considered a pivot point. Some traders add additional pivots points to expand the range to include up to four additional support and resistance pivot points. Pivot points are often factored into algorithm and high frequency trading programs. Traders often place stop orders at or near pivot points. Most trading platforms provide these are indicators or studies that can be placed on a chart.

Using a Pivot Point

A pivot point is a reactionary price level. A pivot point is considered a price support level if the underlying financial instrument is trading higher than the pivot point. A pivot point at a higher price than the underlying financial instrument is considered a price resistance level. Prices tend to pause or deflect when a pivot point is initially tested. This can explained by the widely followed nature of pivot points from retail traders, floor traders to professionals and institutions. When a pivot point price breaks, it may form a trending price move towards the next pivot point and so forth. Combining pivot points with other trend indicators is a common practice with traders. A pivot point that also overlaps or converges with a 50-period or 200-period moving average becomes a stronger price support or resistance level.

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A pivot price is a price level established as being significant either because the market fails to penetrate it or because a sudden increase in volume accompanies a move through that price level. As a technical indicator , the pivot price is similar to a resistance or support level. If the price is exceeded, a breakout is expected to occur.

BREAKING DOWN ‘Pivot’

Calculating a pivot point is a methodology of price determination. Floor traders originally used a pivot point to establish important stock price levels, although an investor with any time frame may now utilize a pivot point. After analyzing data from the stock’s historical price, a pivot point is used as a base. This base is used for further calculations to set multiple support and resistance levels. These are all used for trading throughout the day. Once set, a pivot point is not altered throughout the day.

Professional traders always are in search of key levels that either repel price or, after trading through it, accelerate price action in a predictable direction. The Camarilla pivot point trading strategy is a technique that has an astounding accuracy in both regards, with particularly reliable performance for day-trading equities. Camarilla pivot points were discovered in 1989 by Nick Scott, a successful bond trader. The basic thesis for this strategy is a common one: That price, as most time series, has a tendency to revert to its mean, right up until the point it doesn’t.

As compared to classic pivots where traders look for Resistance 1 and Support 1 levels, the most important levels for the Camarilla pivot point variation are the third and fourth levels. Examples of each level, along with what might be considered an appropriate trade action, are shown here:

Level Price Action

Resistance 41422.82 Long breakout

Resistance 31419.16 Go short

Support 1 1414.29

Support 2 1413.07

Support 3 1411.86 Go long

Support 4 1408.20Short breakout

Camarilla pivot point calculations are rather straightforward. We need to input the previous day’s open, high, low and close. The formulas for each resistance and support level are:

R4 = Close + (High – Low) * 1.1/2

R3 = Close + (High – Low) * 1.1/4

R2 = Close + (High – Low) * 1.1/6

R1 = Close + (High – Low) * 1.1/12

S1 = Close – (High – Low) * 1.1/12

S2 = Close – (High – Low) * 1.1/6

S3 = Close – (High – Low) * 1.1/4

S4 = Close – (High – Low) * 1.1/2

The calculation for further resistance and support levels varies from this norm. These levels can come into play during strong trend moves, so it’s important to understand how to identify them. For example, R5, R6, S5 and S6 are calculated as follows:

Why pivot point is my favourite indicator

By VIKRAM

When I started day trading in 2004, I was not aware of anything about charts or technical analysis, I was so novice that I didn’t even know about stop loss(SL).

My strategy was very weird one, I would buy stocks which opened gap down and sell stocks which opened gap up….without knowing that gap down stocks can keep going down and gap up stocks can keep going up…..If position is going against me, I would keep averaging it until I get a message from the broker that I don’t have sufficient funds to buy any more stocks….

Sometimes it worked for me and I was happy with the small profits…..but one day it happened that I shorted one stock which opened gap up at around 5 % and as it started going up, I started shorting more and more, when it reached 10 %, I was not able to square off the position when I called my broker he said stock has hit upper circuit and its freezed, and I have to wait next day until it goes for auction…My position was huge, lost almost half of my savings in that one trade.

Name of the stock which hit the upper circuit and responsible for my loss was SESA GOA (Which is known as Vedanta now)

Only after that big loss, I decided to learn technical analysis.Like most of you, I have also started with indicators like RSI,MACD,Bollinger Bands, moving averages, stochastic etc without any luck.

Then I heard a lot about price action, so I started learning it and believed that price action is ultimate in trading.

Then around 3-4 years back I saw this book called “secret of pivot boss” on some online portal and decided to give it a try, I was already happy with my price action method and when I started applying pivot points on my chart it was an ‘Aha” moment for me.

Sometime I would wonder why price reverses even though there are no support or resistance, and the reason is pivot points.

I never looked back after that, now I don’t look at any chart without pivot points, I have never tried any more indicators after this.

Price action and pivot points are my bread and butter in trading, it has become part of my life now.

Now let’s see what these pivot points are and how one can take benefit of it,

Types of pivots

Pivot Level (PP) Resistance 1 (R1) Resistance 2 (R2) Resistance 3 (R3) Support 1 (S1) Support 2 (S2) Support 3 (S3)

Same calculation applies for weekly,monthly and yearly as well.

When you add all these seven pivot levels, you will see five parallel horizontal lines on your chart.

Pivot Points Calculation

Pivot points are calculated on previous day price movement

Below is the formula you can use to know the PP level on your chart:

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

Now you know how to calculate the PP level, let’s proceed with calculating the R1, R2, S1, and S2 pivot levels:

R1 = (2 x Pivot Point) – Daily Low

R2 = Pivot Point + (Daily High – Daily Low)

S1 = (2 x Pivot Point) – Daily High

S2 = Pivot Point – (Daily High – Daily Low)

Nowadays most of the software’s have pivot point readily available in their system and automatically plots on your chart so no need to calculate it manually to see pivots for the next day.

Pivot points are an ideal intra-day indicator for trading Stocks, Forex and commodities.

Why I love using Pivot points?

a) Unlike other indicators, they are not lagging indicators, instead leading indicators.

b) They are static and remain at the same prices throughout the day at all time frames.

That means Nifty PP (pivot point) at 11100 and R1(R1 Pivot) at 11140, then on all time frame(3 min,5 min,15 min,1 hour etc.) it is same, it doesn’t change, unlike VWAP and other day trading indicators.

d) Many big institutes and HNIs use pivot points for their day trading, many big traders keep a watchful eye on daily pivot points, as they are considered to be key levels at the intraday timeframe.

e) Because so many people are looking at those levels, they almost become powerful support or resistance in day trading.

Some of the strategies commonly used in pivot points trading.

a) If price approaches a pivot point, and if price starts hesitating and consolidating at that pivot level and suddenly cracks in the opposite direction, you can take the trade in the direction it bounces.

b)But if the price consolidates around that pivot for a very long time and then breaks out with a big green candle, that means it’s a breakout.

c) One more way I use pivot is trading from one zone to another, if there is a breakout from one pivot, I go long for the target of next pivot and vice versa,keeping SL below the entry pivot.

Along with daily pivots, there are weekly pivots, monthly pivots and even yearly pivots, all these pivots are very important and can be plotted on the chart and can day trade effectively.

Along with these daily pivots, there is something called CPR (Central pivot range) which is equally powerful in day trading.

When there is a confluence of daily, weekly and monthly pivots it becomes much more powerful.

There are many other strategies which I developed over the period of time like, combining daily pivots with weekly & monthly pivots, combining pivots with moving averages, combining pivots with price action etc

CONCLUSION

Now it has been more than 2 years I am using Pivot Points, for me Pivot Points works very well in day trading, if someone wants to use it then it’s advised to do enough backtesting and then use it.

I backtested pivot points only on Nifty and Bank Nifty, so I don’t know how it works on Stocks or commodities, but I read in many trading books that Pivots works very well on any instruments or stocks provided it has good liquidity.

If anyone of you backtest it on stocks and come with your own observation then it will be a great help

(Whatever information I shared here is just an over view, to discuss entire pivot point trading method will take almost a Day)

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