Do Professional Traders Use Pivot Points?
Pivot points can be found among stock market graphs and patterns. Day and professional traders rely on pivot points to help them make quick, informed decisions about the future value of a certain asset.
These points help dealers determine when to enter and leave the market by establishing a precise price level from which the most prominent price swings will occur. Averages of the day before high, low, and close are shown here.
Floor traders in the volatile equity and commodities markets were the first ones to come up with the concept of pivot points. They would determine the day’s pivot based on the prior trading day’s high, low, and close.
Methods of Calculation
The five-point system is the most common method used by traders for determining pivot points. High, low, and closing prices from the previous day are factored in, as are support and resistance levels. The following formulas are used in the five-point system:
Pivot point = (Previous High + Previous Low + Previous Close)/3
- Support 1= (P x 2) – Previous high
- Support 2 = P – (Previous High – Previous Low)
- Resistance 1 = (P x 2) – Previous Low
- Resistance 2 = P + (Previous High – Previous Low)
To Conduct a Technical Analysis, Use Pivot Points
Price trends can be smoothed out with the help of pivot points. Support and resistance levels will show up near this point, but it is important to show the level where the price is expected to move the most. Pivot points are a key part of technical analysis according to professional traders, who see them as necessary in two ways:
Pivot points are averages that show where prices will rise and fall around a certain area. If the price goes up from the pivot point, the trading security is thought to have a better chance of making money (bullish market). If the price falls below the pivot point and charts on different support levels, the investment is said to have lower returns (bearish market).
A trader needs to know how the market moves to know when to buy a stock and when to stop losing money. For example, a trader might buy 50 shares only if the price goes up to a support level. In the same way, a trader will stop buying shares when the price hits a certain level of resistance.
What Do Pivot Points Tell You?
Professional traders know to start shorting early in the session if the price falls below the pivot point. On the other hand, if the price is above the pivot point, they will buy. S1, S2, R1, and R2 can be used as target prices and stop-loss levels for these trades.
Traders often use pivot points in conjunction with other trend indicators. When a 50-period or 200-period moving average (MA) or a Fibonacci extension level overlaps or comes together with a pivot point, it becomes a more robust support or resistance level.
There are a lot of reasons why professional traders love pivot points. A few of them are mentioned below:
Unique for Day Trading
The pivot point formula uses information from the previous trading day to help predict what will happen on the current trading day. In this way, the levels you are looking at only apply to the trading day you are in. Because of this, pivot points are the best indicator for day trading.
Short Time Frames
Since the pivot point data comes from a single trading day, the indicator can only be used for shorter time frames. The daily and 30-minute charts won’t work because only one or two candles will be shown. The indicator works best on 1-minute, 2-minute, 5-minute, and 15-minute timeframes.
Pivot point indicators are one of the best tools for trading. This is why many professional and amateur day traders use the indicator. Their accuracy will give you the confidence to trade with the market’s flow.
Easy to Use
The PP indicator is a simple trade method available on most trading platforms. You don’t have to figure out the individual levels; the platform will do it for you. Then, your only job will be to trade the indicator’s bounces and breaks.
Limitations of Pivot Points
Pivot points are based on a simple calculation, and while some traders find them useful, others might not. There’s no guarantee that the price will stop, turn around, or even reach the points on the chart. Sometimes the price will move back and forth through a level. As with all indicators, it should only be used as part of a full trading plan.
Both new traders and experienced ones use pivot points. They use the average prices from the day before, making them fair and accurate. With support and resistance levels, traders can better understand how the market is moving. This makes it easier to find entry and exit points.