What Is The Best Way To Use Pivot Points?
Pivot points are a great way for any trader to improve their trading accuracy and thus trade more accurately, whether you scalp trade in one minute or day trade.However, many new market participants are unaware of pivot points. Even if they are knowledgeable, they are unsure if it is a reliable instrument. In today’s article, we’ll discuss how to use pivot points properly for better trading results.
But before we can learn how to trade using pivot points, we must first comprehend what they are.
What Are Trading Pivot Points?
Pivot points are built-in support and barriers on a chart that can aid you in recognising the trend and straightening out your trading experience. Who chooses these pre-made support and resistance marks on the chart of any financial instrument, you might wonder? Well, it’s always been about the AI…!?
Pivot points are an advanced technological analysis indicator that typically considers the preceding high, low, and close of any financial instrument. When you adjust the timeframe of your chart, the period considered by the pivot points changes.
Now that you understand how pivot points work, it’s time to learn how to use them to your benefit.
Levels of Critical Pivot Points
If you open up your charting apk file now and select pivot point standard, you will notice that this indication has seven levels. The A P level, often known as the pivot level, is perhaps the most significant. S1, S2, S3 and R1, R2, R3 are the different levels of resistance and support.
Traditional and Fibonacci pivot points are three of the most popular sub-types of pivot points. Now, without getting too deep into the complicated area of pivot point computation, let’s look at how to use them in trading. Anyway, a bit of software out there is doing all the math for us!
Pivot Point Breakouts in Long Trades
The chart above shows the Bank Nifty on a five-minute timeframe, which is the most popular trading instrument among many traders.
The price breached the pivot point and found support at the S1 pivot point on the five-minute chart. After analysing the market activity on the critical support level, they initiated a long entry with their initial objective at the pivot level. Traders could trace their stoploss to the pivot point and wait for the price to advance to the next resistance level, R1, once target one is met.
Pivot Points in Short Trades
In much the same way that pivot points may be used to make long trades, they can also be used to make short transactions or short selling.
Look at a graph above – price is getting a clear rejection from Resistance 3 or R3, plus there is a spinning top and another bearish candlestick pattern, so one can confidently short. With the next resistance level, the price action is producing a “M” or double-top pattern.
When the price does not persist at the R2 level, traders that favor pyramiding their strategies might add more shorts.
So far, we’ve covered how to use pivot points to trade a trend, but did you realise that you can also use coordinates to appreciate your capital on semi days?
Selling Options Applying Pivot Points
You will see that the security is consolidating between a couple pivot points in the graphic above. What exactly does this imply? The stock is now moving in a fairly narrow range. If a trader, primarily an option seller, is familiar with pivot points, he or she will sell a noose or straddle to profit on the option premium. Notably, the options would be sold near the pivot points, with a logical or mechanical stop loss in place (till the price breaks the next pivot point).
Now, if you think investing with pivot points is too simple, you are mistaken. When trading with pivot points, many traders make blunders. You must be aware of them in place to evade repeating the same mistakes.
Avoid These Mistakes When Trading With Pivot Points
If you don’t want to blow your account while trading with pivot points, here are some pitfalls to avoid.
Trusting The Pivot Points Without Question
You will almost certainly fail in trading if you simply follow pivot points without comprehending the principles of supply and demand. Furthermore, when trading with pivot points, many traders are unaware of the concept of psychological support and resistance. What exactly does this imply? Assume you’re trading Bank Nifty, and the index is reaching a big psychoBe a trader without fearlogical resistance mark of 38,000 – a round number. And the pivot point or support is close by. Now, some astute traders would wait for the price to cross the critical level, but the rest of us, sensing the presence of the critical level, would start purchasing blindly.
With the assistance of a pivot point and an awareness of a demand zone, we could have taken a multi-confirmation trade, i.e. 37,500 – a substantial round amount, as shown in the accompanying chart.
1.Giving Pivot Points Preference Over Price Action
The white slanting line in the above chart image consistently refused that price, and at the end of the day, it provided a confused breakout, potentially killing anyone who held a long position. Why did some people place too much faith in pivot points and take the wrong stance? People bought call options or took futures when the price rose over the central pivot (resistance on the chart). Another day, the price opens a gap lower and begins to plummet.
Price action should always take precedence over pivot points, as a lesson.
Now you know how to trade using pivot points and how to prevent losses like a pro while trading with an automated trading system.