Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.
The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.
Every day the market you are following has an open, high, low and a close for the day. This information basically contains all the data you need to use pivot points.The reason pivot points are so popular is that they are predictive as opposed to lagging.
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.
A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.
If, after starting the day above the Pivot, the Price crosses back through the Pivot, the Pivot will act as a Resistance area. Pivot Points and Support and Resistance levels behave exactly like any historical Support and Resistance level.
Unfortunately life is not that simple and we have to deal with each trading day the best way we can. Combine these with simple channeling, retracement levels, past critical supports & resistances, SAR will enhance the success rate.
Pivot Points - Trading Methodology:
To make the discussion a bit less abstract, let's take a most superficial look at some simple trading methodology employing Pivot Points.
"In general, if the day's Price Action starts above the Pivot, it will tend to stay above the Pivot.
This simple observation provides the basic rules for two of the simplest Pivot trading systems.
Open is above Pivot: Buy
Open is below Pivot: Sell
Place Buy and Sell stops bracketing the Pivot. Whichever is not filled acts as safety stop for the other.
These "systems" are very much too raw for my tastes. Too much chance of getting whipsawed. Let's take it one step deeper. Let's refine these simple systems just a bit more:
First Fundamental Of Pivot Trading After the opening range (first 15-30 min. to one hour), if price is above/below the Pivot, Price Action will strongly tend to remain above/below the Pivot for the session.
Although this rule bids us to wait out the Opening Range and thus avoid much of the wildness and whipsawing, overlooking the next Fundamental Of Pivot Trading could be disastrous:
If the market opens, or later trades at the extremes (R2, R3 or S2, S3), it will exhibit a tendency to trade back toward the Pivot. Thus, the general rule, 'Avoid buying the High or selling the Low', becomes increasingly more stringent as price moves farther from the Pivot.
I have picked 5 days of last week and what follows are some ideas on how you could have traded those days using pivot points.
.......Week starting 26.10(Mon) to 30.10(Fri).....
Keep those weekly, daily Pivots and fine tune them to perfection.