Top Trader_3. Pivot Points In Stock Trading

Lesson 3: Pivot Points In Stock Trading

It is strongly recommended to create an alert system to get your attention when an
event occurs in the markets and you happen to be elsewhere.
Plenty of platforms, finviz included, allow the creation of alerts.

For many years, traders and market makers have used pivot points to identify critical
support and/or resistance levels.
A pivot point is a technical analysis indicator used to determine the overall trend of
the market over different time frames. The pivot point itself is simply the average of
the high, low and closing prices from the previous trading day. On the subsequent
day, trading above the pivot point is thought to indicate ongoing bullish sentiment,
while trading below the pivot point indicates bearish sentiment.
A pivot point is a reactionary price level. A pivot point is considered a price support
level if the underlying financial instrument is trading higher than the pivot point. A
pivot point at a higher price than the underlying financial instrument is considered a
price resistance level. Prices tend to pause or deflect when a pivot point is initially
tested. This can explained by the widely followed nature of pivot points from retail
traders, floor traders to professionals and institutions.
Pivots are also frequently used in the forex market and can be an extremely useful
tool for range-bound traders to identify points of entry and for trend traders and
breakout traders to spot the key levels that need to be broken for a move to qualify
as a breakout.

How do you calculate pivot points?
By definition, a pivot point is a point of rotation. The input prices used to calculate the
pivot point are the previous period's high, low and closing prices for a security. These
prices are typically taken from a stock's daily charts, but the pivot point can also be
calculated using information from hourly charts. Many traders prefer to take the
pivots, as well as the support and resistance levels, off of the daily charts and then
apply those to the intraday charts. If a pivot point is calculated using price
information from a shorter time frame, this tends to reduce its accuracy and
significance.

The following calculations may be done using a program such as excel to create
your pivot point tables.

The textbook calculation for a pivot point is as follows:
The central pivot point (P) equals the sum of the high, low and closing prices divided
by 3.
Support and resistance levels are then calculated off of this pivot point using the
following formulas:

The first level resistance equals P times two minus the low price.
The first level support equals P times two minus the high price.
The second level resistance equals P plus high minus low.
The second level resistance equals P minus high minus low.

In this image we can see a simple 3 level pivot point calculation, made on the
Euro-Dollar pair in the hourly time frame.
Common practice is to calculate two support and resistance levels, but it's not
unusual to derive a third support and resistance level as well. It's also possible to go
further into pivot point analysis - for example, some traders go beyond the traditional
support and resistance levels and also track the mid-point between each of those
levels.
Generally speaking, the pivot point is seen as the primary support or resistance
level. The
A key point to understand when trading pivot points in the forex market is that breaks
tend to occur around one of the three market opens. The main reason for this is the
immediate influx of traders entering the market at the same time. These traders all
go to the office at roughly the same time, take a look at what happened overnight
and then adjust their portfolios accordingly. During the quieter time periods, such as
between the U.S. close (4pm EST) and the Asian open (7pm EST) (and sometimes
even throughout the Asian session, which is the quietest trading session), prices
may remain confined for hours between the pivot level and either the support or
resistance level. This provides the perfect environment for range-bound traders.

Let’s examine two strategies using pivot points.
Several strategies can be developed using the pivot level as a reference point, but
the accuracy of using pivot lines increases when Japanese candlestick formations
can also be identified. For instance, if prices traded below the central pivot (P) for
most of the session and then made a foray above the pivot while simultaneously
creating a reversal indication (such as a shooting star, doji or hanging man), you
could sell short in anticipation of the price resuming trading back below the pivot
point.

Another strategy traders can use is to look for prices to obey the pivot level,
therefore confirming the level as a valid support or resistance zone. In this type of
strategy, you're looking to see the price break the pivot level, reverse and then trend
back toward the pivot level. If the price proceeds to drive through the pivot point, this
is a sign that the pivot level is weak and likely not useful for trading decisions.
However, if prices hesitate around that level or "validate" it, then the pivot level is
much more significant and suggests that the move lower is an actual break, which
indicates that there may be a continuation move.

The volume may act as another indicator, particularly the volume price trend
indicator, or VPT.
This is a technical indicator consisting of a cumulative volume line that adds or
subtracts a multiple of the percentage change in share price trend and current
volume, depending upon their upward or downward movements.
This indicator is used to determine the balance between a stock's demand and
supply. The percentage change in the share price trend denotes the relative supply
or demand of a particular security, while volume indicates the actual size of the
forces.