Consider pivot point is the level at which the market direction changes for the day. Using some simple arithmetic, on previous day’s high, low and close, a series of points are derived. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.
Pivot Points and Support and Resistance levels behave exactly like any historical Support and Resistance level.
These points can be critical support and resistance levels especially due to their popularity and simple calculations. The second reason why pivots are so popular is because they are predictive as opposed to lagging.
Even if the markets don’t necessarily reverse at these levels, it is often seen that the market reacts at these levels. As a result they give you an opportunity to trade.
The three most important pivot points are R1, S1 and the actual pivot point (P).
The opening range could have wild moves and many whipsaws. To avoid whipsaws, better to wait for market to show its mood through the opening session. If after the opening session, the price remain above or below the pivot point, it is likely to remain that way for the session. After the opening range,
– If the price is above the pivot point then the bias for the day is for long trades.
– If the price is below the pivot point then the bias for the day is for short trades.
If, market opens above the pivot but then Prices fall below the ‘Pivot’ then the ‘Pivot’ would act as resistance area.
1) Unless the market is strongly trending, R2, R3 or S2, S3 levels should be used for exits rather than entering the market since it will already be overbought or oversold and these levels.
2) The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. A consolidating market will usually hover between R1 and S1. In a trending market, look for break of R1 with a target of R2 and R3. Partially booking at R2 could be a good idea and trail remaining position with a tight stop loss.
For profitable trading, it is best not to rely on Pivot points alone. They work better if combined with pattern formation, channeling, previous support and resistance, moving averages and Fibonacci levels.
Open Interest Analysis could also give clues for the market direction. If the OI data and pivot are pointing in the same direction, we have a base building for high probability scenario.
– Aggressive Put writing and price staying above pivot: “Bias for Long”
– Aggressive Call writing and price staying below pivot: “Bias for Short”