Pivot Points are a popular method for determining market trend & short-term support/resistance levels using numerical averages of an instrument’s high, low & close.
The term “pivot” is often thought of as reaching a pre-determined point (support & resistance) then reversing course.
Not only can day traders use Pivots as leading indicators to determine bullish or bearish trends, they are also utilized for entry & exit points and they can act as a guide for profit target & stop loss placement. Different from a number of indicators that update dynamically throughout the trading day, Pivot Points remain static on a chart.
Watch NinjaTrader’s Pivot Point indicator in action:
NinjaTrader 8 plots a total of 7 points based on the previous high, low and close values reported by the data provider connected to NinjaTrader. Below is a breakdown of how each pivot is calculated:
- PP = (High + Low + Close) / 3
- S1 = 2 * PP – High
- R1 = 2 * PP – Low
- S2 = PP – (High – Low
- R2 = PP + (High – Low)
- S3 = PP – 2 * (High – Low)
- R3 = PP + 2 * (High – Low)
* PP = Pivot Point
While there are a number of methodologies to trade Pivots, a prime example of how day traders can possibly use Pivot Points for entry and exit signals is to short an instrument as it nears resistance levels with a stop placed just above the R1 level and a profit target placed at the PP. Or, conversely, a enter into long position as price action nears support.
Leveraging the power of NinjaTrader ATM Strategies coupled with the Data Box, Pivot trading can be a simple to follow process. Before entering a buy market order, take the market price less the R1 level to determine the stop loss placement. Next, do the same for the PP level to determine the profit target!
In most scenarios, should price action break a Resistance level, the resistance then (theoretically) turns to a support level. Because the Pivots are static by day, this will not dynamically update should the breach occur.
To demonstrate how a market can react to Pivots, showcased below is a 5-minute E-mini S&P 500 chart from the open at 7:30 MT to market close. One can easily identify the three support and resistance trading channels outlined by the leading Pivot indicator.
As the trading session begins (Yellow), the ES quickly tests the PP level but “Pivots” to R1. Price action then bounces above and below the R1 level before establishing itself as a clear line of resistance around 10:00 AM (Blue). During this period of consolidation, it’s vital to incorporate complimentary forms of technical analysis to avoid over trading, getting stopped out and choppy markets in general.
Just before 11:00 AM, the ES breaks the R2 level, tests it, then goes on a solid bullish run before stopping out at the R3 level (Red).
Because Pivot Points are considered to be predicative in nature as a leading indicator…they are not always 100% accurate. As with any trading methodology, poper risk mitigation efforts are necessary before placing any live trades.
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