The triggering points to enter into trade and taking up positions form the “pivot points”. Even though the pivot points are mostly employed in the forex market, they can also be useful in equity trading. Estimating pivot points is a straightforward task which once done sets you up fora couple of good trading opportunities making the traders days worthwhile provided that the calculations made are not inaccurate.
Pivot point is in fact the point in a day when the market alters its trend (direction of currency values). To estimate the pivot points we have a number of formulas. Traders should make sure to get them right.
Pivot point (today) = [High (yesterday) + Low (yesterday) + Close (yesterday)] / 3
The above formula in fact depicts the pivot point for today as the average of yesterday’s high, close and low values. After estimating the pivot point, we determine the derivatives of today which is achieved by evaluating three supporting (major) and three resistance (minor) levels of today through the following formulae.
R1 (today) = 2 * Pivot (today) – Low (today)
S1 (today) = 2 * Pivot (today) – High (today)
R2 (today) = Pivot (today) + [R1 (today) – S1 (today)]
S2 (today) = Pivot – [R1 (today) – S1 (today)]
R3 (today) = High (today) + 2 * [Pivot (today) – Low (today)]
S3 (today) = Low (today) – 2 * [High (today) – Pivot (today)]
These seven points (pivot point, 3 major and minor points each) assist the traders in making trading decisions. Mostly the decisions shall be dominated by the present days’ R1, S1 and pivot point values. This is due to the fact that purchase or sale would have been made by the time the market reaches to R2 and S2 or R3 and S3 values.
If the market opens under the pivot point then moving forward would be like requesting your own self of going short on a position. Considering the market opens above the pivot point, moving forward would set one up for a long position. Nevertheless, actual plans may be extremely different from the proposed ideal scenario.
See Pivot points video with instructions :
Using Pivot Points in Trading Strategies
Many strategies exist for the day-traders who choose to employ the pivot point in his trades. A few of these strategies are very simple while there are some that may prove to be advanced to the extent that the trader might be required to seek aid from extra indicators like MACD.
Essentially, if the trend takes a u-turn then at each supporting (major) level as well as resistance (minor) level there is an opportunity of entering long position by setting up a stop loss at a preceding low or entering a short position by setting a stop loss at a preceding high. At times it so happens that the market draws back from a supporting level. This is an indication for a short entry position. At this point, the mode of MACD is set to selling, provided the trend carries on for considerable period of time.
Thus it is rather wise for the trader to relate back to the MACD during decisive stages prior to entering into positions.