Pivot point trading is an important investment strategy that incorporates complex financial calculations. Traders are predicting the opportunities that can arise between periods of fluctuations or pivots. Essentially, traders are trying to understand whether the asset will remain on course or pivot in a certain direction. While predicting comes with market risks, there is great foresight that is obtained when working with a pivot point trading strategy.
Ideal for currency and day trading
Forex investors work with pivot points regularly, as they can track multiple currency fluctuations at the same time. This also helps them visualise movements better while calculating their next move in their portfolio. They can then add new options within their tables, while incorporating the information from the pivot points.
Technical components to Pivot Points
There are critical technical details that traders should be familiar with when dealing with pivot point trading. Daily pivot points can be calculated using these tools, so as to provide a more comprehensive picture of regular pivoting:
PP (Pivot point) – This is the base level pivot point or the middle point in the table.
R1 (Resistance) – This is the first pivot level above the base level.
R2 – This is the first pivot level above R1 and the second pivot level after PP.
R3 – This is the first pivot level above R2 and the third pivot level after base PP.
S1 (Support) – This is the first level below the base PP level.
S2 – This is the first pivot level below S1.
S3 – This is the first pivot level below S2.
Upon adding all the inputs from these 7 points, traders can see a clearer picture.
The resulting graph can provide all the information needed to review the market fluctuations on a regular basis. Plotting these points on the chart can uncover nuanced pivot point trading opportunities that may arise regularly.
Calculating the points to plot
To understand where you should plot your levels, traders can use the following formulae.
Pivot Point (PP) = (Daily High + Daily Low + Close) / 3
R1 = (2 x PP) – Daily Low
R2 = Pivot Point + (Daily High – Daily Low)
R3 = Daily High + 2 x (Pivot Point – Daily Low)
S1 = (2 x PP) – Daily High
S2 = Pivot Point – (Daily High – Daily Low)
S3 = Daily Low – 2 x (Daily High – Pivot Point)
Traders should calculate PP first, and then move on to other formulae for R and S calculations.
With all the points calculated, traders can then review the information on a graph. As these metrics can become increasingly complex, it’s ideal to work within these parameters. If the PP number is incorrect, it may throw off all other numbers.
Insights from trading movements
The key to understanding these market fluctuations is to gauge the market sentiment at that time. As a price action reaches a pivot level, it can be supported, resisted, and extended. The situation can be assessed as normal if these levels are reached within the pivot point. If the price hesitates when reaching the level, a trading opportunity opens up in the other direction. If the price action breaks through, then the expected action can continue in the direction of the fluctuation.
Traders can use a stop limiting order when the price approaches a pivot point level. Using a stop loss is also advisable to maximize the potential of your trade. Since the market fluctuates significantly in either direction, it’s recommended to study movements from the morning. Traders should know when to place a stop loss order to protect their investments.