How To Use Pivot Points Effectively?
Whether you scalp trade on the one-minute timeframe or day trade, pivot points is an excellent strategy for any trader out there to make their trading more accurate and hence more accurate. But many new market participants don’t know about pivot points. Even if they know, they don’t know if it’s an instrument to rely upon. In today’s post, we go about how to use pivot points effectively for better trading results.
But before we learn how to trade using pivot points, you need to know what are Pivot Points.
What Are Pivot Points In Trading?
Pivot Points are ready-made support and resistance on a chart that can help you identify the trend and make your trading experience smooth as well. You might wonder, who identifies these ready-made support and resistance points on the chart of any financial instrument? Well, it’s all the AI, always have been…!! ????
As the modern-age technical analysis indicator, pivot points consider any financial instrument’s previous high, low, and close. The period that is considered by the pivot points changes when you change the timeframe of your chart.
So now you know how pivot points work, it’s about time to understand how to use them for your benefit.
Important Pivot Point Levels
If, right now, you open up your charting app and choose pivot point standard, then you would get to know that there are seven levels in this indicator. The major one is a P level or the Pivot level. Resistance and Support levels are segregated into S1, S2, S3 and R1, R2, R3.
There are many different sub-types of pivot points, but the most popular are Traditional and Fibonacci. Now, without diving deep into the complex world of calculating pivot points, let’s better understand how to use them in trading. Anyway, a software out there is calculating them for us…!!
Long Trades With Pivot Point Breakouts
The above is the five-minute timeframe chart of Bank Nifty, the most favourite trading instrument of many traders.
The five-minute chart shows that the price broke the Pivot point and took support at the S1 pivot point. After observing the price action on the crucial support level, keeping their first target at the pivot level took a long entry. When the target one is achieved, traders could trail their stoploss to the pivot point and wait for the price to move to the next resistance level, R1.
Short Trades With Pivot Points
Just like you can take long trades with pivot points, you can also do short trades or short selling with the efficacy of pivot points.
In the above chart, have a look – price is getting a clear rejection from the Resistance 3 or R3, with a spinning top and another bearish candlestick pattern, one can short with conviction. The price action is making an “M” pattern or double-top pattern on the next resistance level.
Those traders who love pyramiding their position could also add more shorts when the price is not sustaining at the R2 level.
So above were the ways to trade a trend using pivot points, but do you know, you can also use pivot points to appreciate your capital on non-trending days. Here’s how.
Option Selling With Pivot Points
In the above reference, you can see that the security is consolidating between a few pivot points. What does this mean? Well, the stock is trading into a very tight range. If a trader, mainly, option seller, knows pivot points well, they would be selling a strangle or straddle to gain the option premium. Notably, the options would be sold near the pivot points, keeping a slight stop loss, either logical or technical (till the price breaks the next pivot point).
Now, if you think it’s too easy to trade with pivot points, you are not right. Many traders make mistakes while trading with pivot points. You need to be aware of them, so you don’t make the same ones.
Mistakes To Avoid While Trading With Pivot Points
Here are some mistakes to avoid if you don’t want to blow your account while trading with pivot points.
- Blindly Trusting The Pivot Points
If you just blindly follow pivot points without understanding the concept of supply and demand, then you are sure to fail in trading. Moreover, many traders also don’t understand the concept of psychological support and resistance when they are trading with pivot points. What does this mean? Suppose you are trading Bank Nifty, and the index is approaching a major psychological resistance level – round number – 38,000. And the support or pivot point is nearby. Now, some intelligent traders would wait for the price to cross the critical level, but the monkeys among us would start blindly buying, seeing the presence of pivot points. You shouldn’t do that. Understand where supply and demand zones are created in the market, and then take confirmation from pivot points.
Now in the above chart, you can see that we could’ve taken a multi-confirmation trade with the help of pivot point and understanding of a demand zone, i.e. 37,500 – a significant round number.
- Giving Weight To Pivot Points Over Price Action
In the above chart image, you can see the white slanting line continuously rejected that price, and at the fag end of the day, it gave a confused breakout, and whoever carried a long position might have been killed. Now, why did some people believe too much in the pivot points and carried the wrong position? The price went above the central pivot (resistance on the chart), and people brought the call option or took futures. Another day, the price opens gap down and start falling like anything.
Lesson – you should always give weightage to price action over pivot points.
Now you know about how to trade with Pivot Points and how you can avoid losses like a pro while trading with an indicator along with the confirmation from Price Action. Do you want to learn more of such advanced techniques? Then join TCI’s pro mentorship program.
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