Using Pivot Points for Effective Day Trading
Using Pivot Points for Day Trading
Day trading involves buying and selling financial instruments within the same trading day. One popular tool used by day traders to determine potential support and resistance levels is pivot points. Pivot points are calculated based on the previous day’s high, low, and close prices, and can help traders identify potential entry and exit points for their trades. In this article, we will discuss how to use pivot points effectively for day trading.
Calculating Pivot Points
To calculate pivot points, you will need the high, low, and close prices from the previous trading day. The formula for calculating pivot points is as follows:
Pivot Point = (High + Low + Close) / 3
Support 1 = (2 * Pivot Point) – High
Support 2 = Pivot Point – (High – Low)
Resistance 1 = (2 * Pivot Point) – Low
Resistance 2 = Pivot Point + (High – Low)
Using Pivot Points for Day Trading
- Identify Pivot Points: Once you have calculated the pivot points, plot them on your trading chart. These levels will act as potential support and resistance levels for the trading day.
- Look for Price Reversals: Pay attention to how the price reacts when it approaches a pivot point. If the price bounces off a pivot point, it could indicate a potential reversal in the trend.
- Set Entry and Exit Points: Use pivot points to set your entry and exit points for trades. For example, you may consider entering a long position when the price breaks above a pivot point and setting your exit point at the next resistance level.
- Manage Risk: Always use stop-loss orders to limit your losses in case the trade goes against you. Consider placing your stop-loss order below the nearest support level when entering a long position, and above the nearest resistance level when entering a short position.
- Monitor Price Action: Continuously monitor the price action around pivot points throughout the trading day. This will help you make informed decisions about when to enter or exit trades based on market conditions.
Conclusion
Pivot points can be a valuable tool for day traders looking to identify potential support and resistance levels in the market. By calculating pivot points and using them to set entry and exit points for trades, traders can make more informed decisions and improve their chances of success in day trading. Remember to always practice proper risk management and adapt your trading strategy based on market conditions.