Pivot point trading is a popular method used by traders in the stock, forex, and commodity markets to identify potential support and resistance levels. It is based on the idea that the prices of these markets tend to move in a predictable way and that significant price levels, such as those established by pivot points, can be used as indicators for market movement.
Here is a basic guide to getting started with pivot point trading:
- Determine the previous day’s high, low, and close prices for the asset you wish to trade. These values are used to calculate the pivot point for the current day.
- Calculate the pivot point by taking the average of the previous day’s high, low, and close prices. This will be your main pivot point.
- Calculate the support and resistance levels based on the pivot point.
- Identify the type of market condition, such as bullish or bearish, by studying the market trends and indicators such as Moving average
- Use the pivot point, support, and resistance levels to make trading decisions. Traders generally look to enter trades on a bullish market when prices are at support levels and exit trades or enter short positions on a bearish market when prices are at resistance levels.
- Keep in mind that the pivot point levels are calculated based on the previous day’s prices and therefore should be used in conjunction with other market analysis techniques to provide a comprehensive picture of the market’s movement.
It’s a good idea to practice with historical data, paper trading, or small size trading to develop your own understanding and comfort level with the technique. It’s also recommended to use it in combination of other indicators, like volume or moving averages, to have a more robust strategy.