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How to Use Pivot Points in Trading

Learn how to incorporate pivot points into your trading strategy to identify potential levels of support and resistance, determine entry and exit points, and confirm market trends.

By Amir Shayan

Pivot points are a widely used technical indicator in trading. They are a popular tool for identifying potential price reversals and levels of support and resistance in the market. Pivot points can be applied to any market, including stocks, commodities, forex, and cryptocurrencies.

In this article, we will explore what pivot points are, how they are calculated, and how to use them in trading.

What are Pivot Points?

Pivot points are technical indicators that are used to determine potential levels of support and resistance in the market. These levels are calculated based on the average price of a stock or asset over a specific time frame. Pivot points are typically calculated using the previous day’s high, low, and closing prices.

There are different types of pivot points, including the standard pivot point, the Fibonacci pivot point, and the Camarilla pivot point. The standard pivot point is the most widely used type of pivot point, and it is calculated as follows:

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

The pivot point is then used to calculate the levels of support and resistance around it. The first level of support is calculated as follows:

Support 1 = (2 x Pivot Point) – High

The first level of resistance is calculated as follows:

Resistance 1 = (2 x Pivot Point) – Low

The second level of support and resistance is calculated as follows:

Support 2 = Pivot Point – (High – Low)

Resistance 2 = Pivot Point + (High – Low)

The third level of support and resistance is calculated as follows:

Support 3 = Low – 2(High – Pivot Point)

Resistance 3 = High + 2(Pivot Point – Low)

Calculate Pivot Points
Calculate Pivot Points

How to Use Pivot Points in Trading

Pivot points can be used in a variety of ways in trading. Here are some of the most common ways that traders use pivot points:

  1. Identifying Levels of Support and Resistance

Pivot points can be used to identify potential levels of support and resistance in the market. When the price of an asset is trading above the pivot point, it is considered to be in a bullish trend, and the pivot point serves as a level of support. Conversely, when the price is trading below the pivot point, it is considered to be in a bearish trend, and the pivot point serves as a level of resistance.

Traders can use the first and second levels of support and resistance as additional levels to watch for potential price reversals. If the price breaks through these levels, it could indicate a significant shift in the market.

  1. Entry and Exit Points

Pivot points can also be used to identify entry and exit points for trades. Traders can use the levels of support and resistance identified by pivot points as potential entry and exit points. For example, if the price of an asset is approaching a level of resistance identified by a pivot point, a trader may decide to sell their position. Conversely, if the price is approaching a level of support, a trader may decide to buy.

  1. Stop Losses

Traders can also use pivot points to set stop losses for their trades. A stop loss is a predetermined price level at which a trader will exit their position to limit their losses. Traders can use the levels of support and resistance identified by pivot points as potential stop loss levels. For example, if a trader has a long position in an asset, they may set a stop loss at the first level of support identified by a pivot point.

  1. Trend Confirmation

Pivot points can also be used to confirm the direction of a trend. If the price of an asset is trading above the pivot point and the levels of support and resistance identified by the pivot points are trending higher, it can indicate that the market is in an uptrend. Conversely, if the price is trading below the pivot point and the levels of support and resistance identified by the pivot points are trending lower, it can indicate that the market is in a downtrend.

  1. Range Trading

Pivot points can be especially useful in range-bound markets, where an asset is trading within a relatively tight range. In these situations, traders can use the levels of support and resistance identified by pivot points to determine potential entry and exit points. For example, a trader may look to enter a long position when the price of an asset bounces off the first level of support identified by a pivot point, and exit the position when the price approaches the first level of resistance.

Conclusion

Pivot points are a useful tool for traders looking to identify potential levels of support and resistance, as well as entry and exit points. By calculating the pivot point and the levels of support and resistance, traders can develop a trading plan and make more informed trading decisions.

However, it’s important to remember that pivot points are just one tool in a trader’s arsenal and should be used in conjunction with other technical and fundamental analysis tools. Additionally, traders should always be aware of the risks involved in trading, and should never risk more than they can afford to lose.