The pivot point is a powerful tool when it comes to day trading, stocks, options, future, forex, crypto whatever it is! In this case, we’re going to talk about overall pivots and how to use them on basic stocks throughout this article.
You will find multiple examples on how to use pivot points as a day trader, all of which will be showcased on TradingView. Futures traders also use order flow pivots which are a little more advanced than your basic pivots and are extremely effective.
We will hold off on that in this article. Throughout the article we will cover the following:
- What are pivot points?
- How to use pivot points?
- Which pivot points are important?
- Final thoughts
What are pivot points?
A pivot point is a technical tool or indicator that is calculated on a daily basis from the values of the prior session. The calculation is the average of the closing price (prior day session), the high & the low of the prior session.
Based on this you come up with the pivot, associated with the pivot point (PP) are the s1, s2, s3, etc, and r1, r2, r3, etc levels that can be indefinite. Usually, we don’t see the break of r3/s3 in a single trading session. The “r” and “s” are simply supported and resistance levels.
The pivot point acts as a sentiment gauge. Above the pivot, sentiment is bullish, below its bearish. The levels also act as support and resistance naturally. As price gets into a pivot point area, whether it’s the pivot or an s1 or r1 for that matter it will act as a support/resistance based on where the price has come from. Meaning that if the price comes from beneath one of the levels it will be held as a resistance point. (Not a guarantee) However, you are expecting to see a stall at that level. If the price comes into one of those levels from above, then you expect to see the pivot area act as support.
In the image below you will see the orange and white lines. These are simple pivots on TradingView. The Orange lines are s1/r1 areas and so forth. The white line is the pivot point. The point where sentiment changes if breached.
How do we use pivots?
We talked about how we use pivot points in the above paragraph, but there is a little more to it. At TRADEPRO Academy we like to look at trading qualifies as “confluence” meaning that you need multiple pieces to the puzzle in order to take the trade.
Pivot points are a large part of that and the simple answer to “how do use them to trade” is Sentiment & support or resistance.
First off is the overall market sentiment. You should know that above the pivot point the bulls are in control. We expect the name in question to start rallying to the upside. If the price is above r1 we expect even stronger bullish sentiment, and so on.
On the flip side, if we are under the pivot point there is bearish sentiment in the market and we expect to see a move lower. Under s1, s2, and so on the market sentiments bearishness increases that much more. Each level on the pivot points is to be used as a target on the intraday as well. For example, moving back above the pivot point or holding its support. We would target the r1 area on the day session.
Take UPST (UpStart) as an example (below). We started the day off under the pivot point. Once we crossed it and held support we bounced off aggressively, after using resistance time and time again. The Blue arrow is the cross of the pivot point. The purple arrow is target 1. Which is where we got, the next target would be r2 above, nearly hit!.
This can be seen in a different light as well. You don’t have to be above the pivot to be bullish. Use your confluence and market structure. This brings us to the next point, think of all of these pivots as support and resistance levels. No matter where you are in the overall trend of the market (above or below pivot) the pivot areas are going to be seen as support and resistance levels to a playoff.
A quick rule of thumb: if you’re above support (s1, s2) or resistance (r1, r2) you use either as support. If you are below support (s1, s2) or resistance (r1, r2) you use either as resistance.
That means that if the market structure and everything is the point to the upside but we’re below the pivot point, there is still an opportunity to use some of those support zones as buy areas if you can identify some qualifiers.
If you want to learn more about qualifiers, check us out at TRADEPRO Academy. (link to options page). To give you a sneak peek, we’re going to use the following:
- Price action (5-min chart)
- Moving averages (20 EMA)
Below is the QQQ (Nasdaq ETF) 5-min chart. We have a few key things that we should explain.
- In the chart below you see the pivots, labeled.
- We have 3 moving average bands
- (5/12 which is red and green)
- (34/50) Which is purple and blue)
- (100/150 which is burgundy)
1 EMA (blue line 20 EMA)
In each arrow, you will find a super tip on how to use the pivots.
Purple Arrow: You will find that we are well below the pivot point, so why would anyone want to buy? Remember our confluence trading rules. We are showing signs of the upside holding out, higher highs and higher lows. This is also confirmed with the price being above the 20 EMA and holds it as support. Finally, to confirm this, we break above the s2 pivot area and hold it support. This shows us that we don’t have to just be above the pivot to buy. From that buy zone, we want to see a move into s1 above, which is the target. Which is then hit!
Green Arrow: At this point, we are at the s1 area which is a key resistance zone where the price is expected to get to from a move above s2. It’s also an area where we expect to see price rejection before breaking through. Which is the case here. If we would breakthrough that level aggressively then the upside is really strong.
Yellow Arrow: We are still not above the pivot point, however, based on our structure and confluence trading we are evidently bullish. The area where we are interested is not only the prior broken top for longs, it’s the s1 support area that was one resistance. The next target from there is the pivot point, which is very far away so don’t forget to grab some profit on the way up!
Which Pivot Points are Important?
There are different pivot points in two respects, different time frame pivots and the pivot point levels.
First the pivot point levels. The pivot point, s1, s2, s3, r1, r2, r3, etc levels. Are some more important than others? The pivot point is the most important level and the rest would be less important in comparison. They’re equally important in relation to one another. S1 is not more important than s2. Once you start getting past s3, or r3 there’s a slight decrease in importance in the next support/resistance levels.
There are also different time-framed pivot point levels. Meaning you can have a daily pivot, a weekly pivot, a monthly, etc. On TradingView in the “Input” setting of the pivot points, you can choose which Pivot timeframe you want. Usually left as “Auto” On an intraday basis (15 mins or less) It’s wise to keep it at a daily pivot point. Which would result in a weekly pivot on a 1 & 4-hour chart and a month on a daily chart. When Swing trading using the monthly or weekly pivots can provide you with larger support/resistance points.
Pivot point trading is super powerful if you understand how to use each pivot point. Remember it’s not enough to find a pivot point whichever it is and think “ this is support or this is resistance” let me get long or get short of the level. Navigate through the market and make sure you know what your trading plan is. Remember: Have 3 criteria to qualify a trade. Pivot points work really well as one of those qualifiers.
If you want to learn more about the above pivots and how we use them on a daily basis in our live trading rooms when we trade stocks and options check out our options trading room. (Link for options trading room)
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.