When I ventured into day trading in 2004, I had no knowledge of charts, technical analysis, or even the importance of setting a stop loss (SL). My trading strategy was unconventional and risky—buying stocks that opened gap down and selling stocks that opened gap up. Little did I know that gap-down stocks could continue to decline and gap-up stocks could keep rising.
If a position moved against me, I would keep averaging it until my broker notified me that my funds were exhausted. Sometimes, these trades worked, and I was content with small profits. However, one catastrophic day changed my approach forever.
The Turning Point: Lessons from a Major Loss
One fateful day, I shorted a stock that opened with a 5% gap up. As its price kept climbing, I increased my short positions. When it reached a 10% rise, I couldn’t close my position. The broker informed me that the stock hit the upper circuit and was frozen. I had to wait until the next day when it went to auction. The result? I lost almost half of my savings in that single trade.
This devastating loss prompted me to learn technical analysis. Like many beginners, I started with popular indicators such as RSI, MACD, Bollinger Bands, moving averages, and stochastic oscillators. Unfortunately, these tools didn’t yield consistent success.
Discovering Price Action and Pivot Points
Eventually, I heard about price action trading and decided to explore it. Over time, I became convinced that price action was the ultimate trading method. Then, about three to four years ago, I came across a book titled Secrets of a Pivot Boss. It introduced me to pivot points & CPR.
I often wondered why prices reversed despite no visible support or resistance. The answer lay in pivot points & CPR. Since then, I haven’t looked back. Pivot points & CPR and price action became integral to my trading strategy.
Understanding Pivot Points
Pivot points are essential tools for traders, offering clear levels of support and resistance based on the previous day’s price action. They are particularly useful for intraday trading in stocks, forex, and commodities. Let’s explore their calculation and application.
Types of Pivot Levels
Pivot Point (PP)
Resistance 1 (R1)
Resistance 2 (R2)
Resistance 3 (R3)
Support 1 (S1)
Support 2 (S2)
Support 3 (S3)
When plotted on a chart, these levels appear as parallel horizontal lines.
Pivot Point Calculation
The formula for calculating the primary pivot point (PP) is:
PP = (Daily High + Daily Low + Close) / 3
Based on the PP, you can calculate the support and resistance levels as follows:
R1 = (2 × PP) – Daily Low
R2 = PP + (Daily High – Daily Low)
S1 = (2 × PP) – Daily High
S2 = PP – (Daily High – Daily Low)
Modern trading platforms typically calculate and display these levels automatically, eliminating the need for manual computation.
Why Pivot Points Stand Out
Pivot points are unique because they are leading indicators, unlike lagging indicators such as moving averages. They offer several advantages:
Static Levels: Pivot points remain constant throughout the trading session, regardless of the time frame.
Widespread Use: Many institutional traders and high-net-worth individuals rely on pivot points, making them significant support and resistance levels.
Predictive Power: Their popularity ensures that price action around pivot points often aligns with trader behavior, enhancing their reliability.
Effective Pivot Point Trading Strategies
Here are some practical ways to incorporate pivot points into your trading:
Reversals at Pivot Levels:
When the price approaches a pivot point and hesitates before reversing, enter a trade in the opposite direction.
Breakouts:
If the price consolidates near a pivot point and then breaks out with a strong candle, trade in the direction of the breakout.
Zone-to-Zone Trading:
Trade from one pivot zone to the next. For instance, if the price breaks above R1, target R2, placing your stop loss below R1.
Advanced Pivot Point Concepts
Beyond daily pivots, traders can use weekly, monthly, and even yearly pivot points. Combining these levels creates stronger zones of support and resistance. Additionally, the Central Pivot Range (CPR) is another powerful tool that complements pivot points in day trading.
When multiple pivot levels align across different time frames, they form high-probability trading zones. Advanced strategies include:
Combining daily, weekly, and monthly pivots.
Using pivot points with moving averages.
Integrating pivot points with price action techniques.
Conclusion: The Power of Pivot Points & CPR
After years of backtesting and real-world application, I can confidently say that pivot points & CPR are indispensable for day trading. They provide clear, actionable levels that enhance decision-making. However, traders must backtest these strategies thoroughly before applying them.
While my focus has been on indices like Nifty and Bank Nifty, pivot points are equally effective for stocks and commodities with good liquidity. If you backtest them on other instruments and gain unique insights, sharing your observations could benefit the trading community.
Pivot points & CPR, combined with price action, can transform your trading journey. They offer simplicity, precision, and reliability, making them a must-have tool for any serious trader. Start exploring their potential today, and take your trading to the next level!
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