How to Use Pivot Points in Intraday Trading?

Intraday or day trading is a fast-paced investment method where traders capitalise on small price movements for quick profits. Day traders must be highly skilled, able to focus intently, make quick decisions and remain calm under pressure. They must also be familiar with price charts, patterns and technical indicators. 

Pivot points are technical analysis tools used to determine overall trends in the market through different time frames. They provide clear intraday trading signals used to identify continuations and reversals in different markets. Read on to learn how to use pivot points in intraday trading and more.

What is Pivot Point in Trading?

A pivot point is a point plotted on a price chart using an asset's historical prices. It represents the average of the intraday high and low and closing prices from the previous trading day. Pivot points on a daily price chart show the anticipated support and resistance levels in the current session.

Essentially, pivot points summarise the key points of the previous day in a single output. Traders use pivot points to determine entry and exit points and overall market trends and for stop-loss and take-profit orders. When a stock price trades above its pivot point at opening hours, it indicates bullish market sentiments. On the other hand, when it trades lower, it indicates bearish sentiments for the day. 

Pivot points should not be used alone but with other technical indicators for more accurate trading signals. 

Why are Pivot Points Important?

Pivot points are one of the most useful indicators for intraday trading as they provide the important price points of the previous day. Unlike other indicators like oscillators and moving averages, these points remain fixed for the day, unaffected by price movements and time. 

Pivot points are also leading indicators, unlike most momentum indicators, which are lagging indicators. This makes them better suited for confirming market trends and price directions for day traders. Traders who know how to use pivot points in day trading can use this tool for different markets, including equities, derivatives and commodities. 

How to Calculate Pivots in Intraday Trading?

There are several ways to calculate pivot points. The most common system, called the five-point system, uses the previous day’s low, high and closing prices and two additional support and resistance levels to plot all the points. According to this system, pivot points are calculated using the following formulas:

1. P = H + L + C / 3

Where H is the previous day's highest price, L is the lowest price, and C is the closing price

1. S1 = (P x 2) - H
2. S2 = P – (H – L) 
3. R1 = (P x 2) - L
4. R2 = P + (H – L)

Where S1 is the first support level, S2 is the second support level, R1 is the first resistance level, and R2 is the second resistance level

Interpreting Pivot Points from a Price Chart

Pivot points assist day traders, helping them analyse price action and forecast price movements with a simple-to-read indicator. The largest price movements tend to happen around these price points. 

The main pivot point (P) allows traders to determine support and resistance levels based on the previous day’s data. If the price rises above this point, day traders usually take long positions and vice versa if the price falls below the central pivot point. Besides determining bullish and bearish markets, traders can use pivot points to enter and exit trades. 

The other key points can also offer valuable insights into the strengths or weaknesses of the market. A break upwards or downwards from these price points can indicate trend continuation, while a bounce-off can indicate a potential retracement. 

Step-by-Step Guide to Use Pivot Points in Intraday Trading

Here are the steps you can follow to use pivot points:

• Open a Chart: Many trading platforms allow you to add the pivot point indicator. The levels are automatically calculated and shown. You can also create them manually using the above formula. 

• Wait for Clear Trading Signals: Watch the market closely and wait for the price to rise above or fall below a pivot point. You can go long if the price bounces off a support level and short if it reverses from a resistance level. 

• Confirm the Trading Signal: You can use pivot points with trend indicators like 50-day or 200-day moving averages or Fibonacci extensions to better identify support/resistance levels. Other frequently used indicators include RSI, MACD, etc. 

• Place Stop-Loss and Profit Target Orders: Once you have decided where the price will move, place stop-loss orders above resistance levels if you want to go short or below support levels for a long position. Finally, place take-profit orders to ensure you can exit with profits. 

Pivot Point Intraday Trading Strategies

Here are the two main pivot point strategies used by day traders:

• Pivot Point Breakout: In this strategy, traders try to capitalise on sharp price movements, such as a breakout above a key resistance level or a breakdown below a key support level. The pivot points help to determine the position to take.

• Pivot Point Bounce: Here, traders place their entry and exit points at support and resistance levels where pivot points are present. 

The Bottomline 

If you want to become an expert day trader, you need to learn how to use pivot points in intraday trading. Pivot points let you identify key resistance and support levels. They are easy to calculate, need only widely available data and can be used across different periods and markets. Try to avoid using them alone, as they can give false signals.

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.