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A pivot point is one of the many technical indicators used by traders. It tells us about the overall trend of the market over various time windows. At the core, the pivot point is the average that includes closing prices of the previous day and the market’s highs and lows. The next day, if you are trading higher than the pivot point, it is seen as an ongoing bullish sentiment. If you are trading below it, the market has bearish sentiment.
Typical pivot point strategy is based on the pivot point levels, analyzing previous day support and resistance. Traders need to analyze movement through these levels to speculate the trend and its direction.
In certain situations, complex pivot points may also occur. It usually happens when the pivot point formation takes several days.
Pivot Point Reversal Strategy
Pivot point reversal strategy is based on the first support level’s price action during the bullish trend and the first resistance level during the bearish trend. Traders follow the main trend and enter into the trade after reversal analyzing pivot point levels.
Pivot point reversal strategy steps are:
- Determine pivot point levels
- Determine the main trend
- Pivot Point Reversal Strategy Trade execution
- Calculate stop loss and target.
The pivot point focuses more on the closing price, associated with the bar that shows either the highest high or the lowest low. This is how the indicator behaves in the following situations:
When an uptrend has ended:
- The close lies below that day’s Low with the highest High.
When a downtrend has ended:
- The close lies above that day’s High with the lowest Low.
Determine the pivot point level
The standard Pivot point levels formula is:
Pivot point price level (PP) = (High + Low + Close) / 3
First resistance price level (R1) = (2 x PP) – Low
First support price level (S1) = (2 x PP) – High
Second resistance price level (R2) = PP + (High – Low)
Second support price level (S2) = PP – (High – Low)
Third resistance price level (R3) = High + 2(PP – Low)
Third support price level (S3) = Low – 2(High – PP)
Determine the main trend
The main trend can be determined using trendlines on the chart or SMA50, SMA100, or SMA200 moving average. A trader can decide how they will determine the main trend.
Pivot Point Reversal Strategy Trade execution
If the trend is bullish, traders wait for the price to touch the S1 level and bounce upside to enter into BUY trade.
If the trend is bearish, traders wait for the price to touch the R1 level and to bounce the downside to enter into SELL trade.
See an example of how to enter into BUY trade using Pivot Point Reversal Strategy Trade:
For BUY trade, the S2 support level and the target is R1 level.
For SELL trade, R2 is the support level, and the target is the S1 level.
Conclusion
Pivot point reversal is used widely by traders across the globe. Keep in mind that the signals produced by it are the most reliable after a trend has ended. Weak trends lead to weak signals. If you are not sure about this indicator, use it in conjunction with other indicators.
