Pivot Points Technical Analysis

By | February 21, 2010
Introduction

The pivot point is the level at which the market direction changes for the day. Pivot Point trading is the most basic in trading and lots of traders use this so market finds support and resistance at Pivot Levels.

Pivot Points are support and resistance levels that are calculated using the open, high, low, and close, from the previous trading day. Standard pivot points include the pivot point itself, three full support levels, and three full resistance levels.

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.

Most important points while trading using Pivots are Pivot Level,R1 and S1.

To Trade using Pivots 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.

How to Trade Using Pivots

1.Before the start of trade we should be ready with the pivot levels for a particular stock/Index we want to trade.I have made an auto update sheet which gets update EOD Basis Click Here

2.Market Open following scenarios Apply:
Open is above Pivot: Buy
Open is below Pivot: Sell

3. 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,

4.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.

Practical Examples

Lets take the Example of Reliance.

Trading Levels for Reliance on 17 Feb were  High@ 1037.8 Low@1022 Close@1032


When we calculate the Pivot Levels we get the Following Levels


Pivot:1030.6

R1:1039.6

R2:1046.4
R3:1055
S1:1023.4
S2:1014
S3:1007


Now lets see how the trading goes on next day ie. on 18 Feb


Reliance opens @ 1030 ie. at Pivot Level and makes a high of 1038 that is the R1 as we have already calculated.But we need to see for sustained of levels and as told previously once price touch R1 we need to see whether they reverse from R1 or break it.


In our case price reverses from R1 ie. 1039 in our case and closes below the Pivot levels.


Now we can take short once price moves below Pivot ie 1030 with SL @ R1 and target of S1 1023,now once 1023 breaks than we can carry our short with target@ S2

This was an ideal trade which one can execute with patience and discipline.Using Pivot trading one can make a decent living using trading when market are not much volatile.Do some paper trading with levels given on the sheet for Monday trading.


How To calculate Pivot Levels:
Calculation:
PP = (YHigh + YLow + YClose) / 3
S1 = (PP * 2) – YHigh
S2 = PP – (YHigh – YLow)
S3 = (2 * PP) – ((2 * YHigh) – YLow)
R1 = (PP * 2) – YLow
R2 = PP + (YHigh – YLow)
R3 = (2 * PP) + (YHigh – (2 * YLow))

YHigh = Yesterday High
YLow  = Yesterday Low
YClose = Yesterday Close


I have made an autoupdate Google Spreadsheet which Update the Pivot Levels of Nifty 50 Stocks
Click Here to Get it and Bookmark that

Conclusion
Pivot points are yet another useful tool that can be added to any trader’s toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the trader, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis. These other technical indicators can be anything from MACD crossovers to candlestick patterns – the greater the number of positive indications, the greater the chances for success.

Golden Rule:

If the days high or low get broken early in the morning trade then go in that direction, period. Don’t think!

4 thoughts on “Pivot Points Technical Analysis

  1. Bramesh

    Hi,

    As i told previously that pivot should be mixed with other indicator and as mentioned in last line if days low break down we need to short,even if u went long above pivot ur sl must have triggred and as s1 was broken yoou should have taken short and ur losses would have recovered.

    use pivot with other indicators i will post on them soon RSI FIBO levels

    Rgds,
    Bramesh

  2. Anonymous

    Bhandariji,
    What happened on 22nd feb? where was the pivot and resistance?
    nifty opened above the pivot but those who went long on ur advise are drowned!!!!
    though looks good write up, looks like u need more skill in using pivots.
    GOOD LUCK AND KEEP IT UP.

  3. Bramesh

    Thanks govind for appreciating my efforts will surely make it give me some time

  4. govind

    Sir,
    An excellent analysis you have given. Now sir, may i request you to send the same on auto excel sheet with formula bar so that it would be helpful for others like me to use the table do some research.
    I once again congratulate you for the tedious exercise you have done
    with regards
    govind
    govindkgd@yahoo.com

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