How to trade Pivot Point
You are going to love this lession.Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders.This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.
Every day the market you are following has an open, high, low and a close for the day(some markets like forex are 24 hours but generally use 5pm EST as the open and close).This information basically contains all the data you need to use pivot point.
How the Pivot Point are calculated? Stocks traded at the market at the end of the day, gives us four inportant data. They are open, high,lo,and close.These data is sufficient for us to calculate mathematically the Pivot Point that we need.
As you can see from the
above formula, just by having the previous day’s 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 long trades. If the market opens below the pivot point then the bias for the day is for short trades.
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot point’s are 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 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.
You are going to love this lession.Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders.This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.
Every day the market you are following has an open, high, low and a close for the day(some markets like forex are 24 hours but generally use 5pm EST as the open and close).This information basically contains all the data you need to use pivot point.
How the Pivot Point are calculated? Stocks traded at the market at the end of the day, gives us four inportant data. They are open, high,lo,and close.These data is sufficient for us to calculate mathematically the Pivot Point that we need.
I have given below the most common and
widely used formula
Pivot Point = ( High + Close + Low )/3
Resistance 1 = 2 * Pivot - Low
Resistance 2 = Pivot + (R1 - S1)
Resistance 3 = High + 2*(Pivot - Low)
Support 1 = 2 * Pivot – High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
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.
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot point’s are 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 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.
Advance traders use other
indicators to confirm the strength of the stock before taking a look at Pivot
Points. The MACD (Moving Average Convergence Divergence) and RSI (Relative
Strength Index) can give the trader some ideas to take a call.
Pivot Points can be
applied to commodities and Forex market also. The calculations are same for all
types of market. The most important part of it is it works.
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