Pivot Point Trading Strategies

Introduction to Pivot Point Trading Strategies

Pivot point trading strategies are popular tools used by traders to identify key price levels that can act as potential turning points in the market. They are calculated using the high, low, and closing prices from the previous trading session. These pivot points can then be used to determine potential support and resistance levels for the current trading session. There are several different pivot point trading strategies that traders can employ, depending on their trading style and the market conditions.

Pivot Point Calculation

Before diving into the strategies, it’s important to understand how pivot points are calculated. The main pivot point (PP) is calculated as follows:

PP = (Previous High + Previous Low + Previous Close) / 3

Once the main pivot point is calculated, it can be used to calculate the other pivot points:

R1 = (2 * PP) – Previous Low

S1 = (2 * PP) – Previous High

R2 = PP + (Previous High – Previous Low)

S2 = PP – (Previous High – Previous Low)

Where R1 and R2 represent the first and second resistance levels, and S1 and S2 represent the first and second support levels.

Classic Pivot Point Trading Strategy

The classic pivot point trading strategy involves using the pivot point and the calculated support and resistance levels to identify potential entry and exit points. Traders look for price to bounce off these levels, indicating a potential reversal.

Step 1: Identify the Pivot Points

The first step is to calculate the pivot points for the current trading session using the high, low, and closing prices from the previous session.

Step 2: Look for Price Reversals at Pivot Points

Traders then watch the price action at these levels. If the price approaches a pivot point and then reverses, this may indicate a potential trading opportunity.

Step 3: Enter and Exit Trades

Traders can enter a long trade if the price bounces off a support level, or a short trade if the price bounces off a resistance level. The opposite pivot point can then be used as a target for exiting the trade.

Pivot Point Breakout Strategy

Another popular pivot point trading strategy is the breakout strategy. This involves looking for price to break through a pivot point, indicating a strong trend.

Step 1: Identify the Pivot Points

As with the classic strategy, the first step is to calculate the pivot points for the current trading session.

Step 2: Look for Price Breakouts at Pivot Points

Instead of looking for price reversals, traders using the breakout strategy look for price to break through a pivot point. This could indicate a strong trend in the direction of the breakout.

Step 3: Enter and Exit Trades

Traders can enter a trade in the direction of the breakout, with the next pivot point serving as a potential target. Stop losses can be placed below the broken pivot point to limit risk.

Conclusion

Pivot point trading strategies are a versatile tool that can be used in a variety of market conditions. Whether you prefer to trade reversals or breakouts, understanding how to calculate and use pivot points can enhance your trading strategy. As with all trading strategies, it’s important to use proper risk management and to backtest your strategy before live trading.