Sharekhan Blog

How To Use Pivot Point In Intraday Trading

  • Mar 9, 2024

In this article, we will learn about pivot point fundamentals, breaking down mathematical construction, integration to harness the versatile strengths of this mighty indicator, and unlocking wise intraday opportunities.

Understanding the Concept of Pivot Points

A pivot point represents the average of the high, low and closing prices recorded in the previous trading session. The levels derived act as potential short-term price barriers providing dynamic support and resistance on current day's market movements where reactions may emerge across instruments like stocks, commodities, and currencies depending on sentiment.

By taking into account the previous day's trading range through three key data points condensed into one output, the pivot indicator tries projecting potential turning points, anticipating likely buys and sells rather than just reacting. Computed dynamically daily, these predictive price targets update, reflecting evolving market realities.

Interpreting Pivot Point Levels

Beyond the actual pivot point projecting average, further extensions identify likely areas that could prompt price reversal pivot trading intraday charts. Typically, 7 output levels are displayed on the chart, including:

  • 3 support levels below the pivot point
  • 3 resistance levels above the pivot point

Lower support bands try estimate floors, trapping selling pressures and triggering bounces. Upper resistances similarly indicate ceilings where buying sentiments potentially exhaust and selling emerge subsequently.

These collectively provide actionable short-term references to both bulls and bears in a 50-50 unbiased manner rather than just favouring one direction alone in isolation. Observing price activity around these levels reveals actual market psychology evolution.

The Calculation Methodology

The classic pivot point formula utilises the previous day's open (O), high (H), low (L) and close (C) interpolated as below on Excel for automation:

Pivot Point (P) = (High Low Close) / 3

The nested support and resistance levels after that stand uniformly spaced as under:

  • Resistance 1 = 2*Pivot Point – Low
  • Resistance 2 = Pivot Point (High - Low)
  • Resistance 3 = High 2*(Pivot Point – Low)


  • Support 1 = 2*Pivot Point - High
  • Support 2 = Pivot Point - (High-Low)
  • Support 3 = Low - 2*(High - Pivot Point)

Applicability in Rangebound vs. Trending Conditions

During Rangebound Conditions: Sideways moving markets lacking clear directionality but displaying reasonably fixed high/low trading ranges render ideal pivot signals applicability. Well-defined support and resistance levels witnessed historically form likely reversal points again validated by uniformly placed pivot predictor channels. Trading strictly between identified bands across properly valued instruments insulates against whipsaws.

In Trending Markets: Pivots prove invaluable through pullback trade planning, i.e. momentary dips within bigger actual directional trends offering low-risk entries aligned in the dominant direction itself. For instance, brief bounces from upper bands during an uptrend present recurring buying opportunities rather than a change in actual bullish bias.

Trading Pivot Point Breakouts

Prices piercing past identified resistance or support levels signal an upcoming acceleration in the originating direction itself. The associated volume validation lends greater conviction to true band penetrations. Reactively entering aligned trades when such breaks occur by orders placement near the high/low of the breakout bar insulates against false break whipsaws using precautions like stop loss orders.

Optimising Pivot Trading with Supplementary Indicators

Using oscillators like momentum and RSI to validate true pivot test failures helps prevent false zone break whiplashes. Prices stretching deeply into overbought/oversold conditions before reaching bands offer intuition on exhaustion moves likely ahead.

Additionally, volume surges on pivot penetrations cement conviction on ensuing continuations versus low activity dull moves failing to extend. Combining pivot levels with complementary indicators thus boosts signal accuracy.

Pitfalls to Avoid When Using Pivots

While potent when applied prudently, pivot trading similarly warrants safeguards:

  1. Resist subconscious bias to play bounces from every minor band interaction observed rather than wait for previous swing break validation confirming levels acting as floor/ceiling keys.
  2. Beware false breakouts through levels particularly on volatile news triggers. Let the market settle before reacting despite the compelling breakout appearance.
  3. Mark probable instead of assured price reaction areas. Pivot estimates do not guarantee reversals. Respect stop loss triggers beyond levels to contain whipsaws.

The Benefits of Trading with Pivots

Pivots ultimately inject enhanced structure into pivot trading intraday charts speculating landscapes. Mathematically computed potential areas conducive for high probability price rebounds empower both bullish and bearish trading. Alert traders gain positional advantage by entering ahead of the unsuspecting majority of reactive players.

Unlike lagging indicators chasing trends after confirmation, pivot analysis provides leading nuance sensing swings genesis transforming reactive gambling into calculated probability-based trading when applied prudently. Versatility allows applicability across diverse trading styles, suiting individual psychologies.

Conclusion

Trading is ultimately a probabilities game where winners stack advantageous odds consistently through structural edge alignment and risk circumstance, thus prevailing over purely directional outcome accuracy alone. Pivot points analysis, when assimilated appropriately on chart context, serves as that analytical vehicle generating repeated high probability intraday trade setups.

Team Sharekhan
by Team Sharekhan

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