strategy using pivots

Pivot points are a technical analysis tool used by traders to determine potential support and resistance levels in the stock market. They are primarily used to identify the points of significant change in the direction of the price of a stock. Here’s a basic explanation of how pivot points can be used in stock trading:

Understanding Pivot Points

1. Calculation: Pivot points are calculated using the high, low, and close prices of a stock from the previous trading day. The main pivot point (P) is calculated as:P = (High + Low + Close ) / 3
2. Support and Resistance Levels: Around the main pivot point, additional levels of support and resistance are calculated. These are denoted as S1, S2, S3 (support levels) and R1, R2, R3 (resistance levels). The formulas for these levels involve the pivot point value and the high and low of the previous day.
3. Support Levels (S1, S2, S3):
   • S1 is the most immediate support level.
   • S2 and S3 are further levels of support, usually stronger and harder to break.
4. Resistance Levels (R1, R2, R3):
   • R1 is the initial resistance level.
   • R2 and R3 are higher resistance levels, with R3 being a significant barrier.

Using Pivot Points in Trading Strategy

1. Trend Identification: Pivot points can help identify the overall trend of the market. If the current stock price is above the main pivot point, it suggests a bullish trend. Conversely, if the price is below the pivot point, it suggests a bearish trend.
2. Entry and Exit Points: Traders often use pivot points to determine entry and exit points. Buying near a support level or selling near a resistance level can be a strategy.
3. Breakouts and Reversals: A break above a resistance level may signal a strong upward move and a potential buying opportunity. Similarly, a break below a support level might indicate a significant downward move and a selling signal.
4. Stop-Loss Orders: Pivot points can be used to set stop-loss orders. For instance, when buying, a trader might place a stop-loss order slightly below a support level.
5. Combining with Other Indicators: To enhance the effectiveness, pivot points are often used in conjunction with other indicators such as moving averages, MACD, or RSI.

Limitations

• Not Foolproof: Like all technical analysis tools, pivot points are not foolproof. They work best when combined with other forms of analysis.
• Self-Fulfilling Prophecy: Sometimes, pivot points may seem to work well because many traders are watching and reacting to these same levels.

Conclusion

Pivot points are a valuable tool for traders looking to gauge potential price movements and set clear entry and exit points. However, it’s essential to use them as part of a broader trading strategy and not rely on them exclusively. As with any trading strategy, there’s a risk involved, and one should always be prepared for the possibility that the market may not behave as expected.