Pivot point trading method is widely used technique across the globe. This trading method is mostly used by the intraday traders to see the support and resistance level for a particular stock. Pivot point (PP) is calculated based on the previous day’s data i.e High, Low and Close for that stock.
Below is the formula for the PP and support/resistance levels.
- Pivot Point (PP) = (Prev High + Prev Low + Prev Close)/3
- Support 1 (S1) = (PP x 2) – Prev High
- Support 2 (S2) = PP – (Prev High – Prev Low)
- Resistance 1 (R1) = (PP x 2) – Prev Low
- Resistance 2 (R2) = PP + (Prev High – Prev Low)
Once all the above levels are calculated then check the opening price of the stock. If the stock is trading at the level above the PP, then upwards move can be expected for that stock, but if it trading at level below the PP then downwards move can be expected.
Pivot point levels give more reliable result when used with Candlestick charts. For example if the stock is trading at level below the PP but above the S1. Now at level near S1 if candlestick chart shows (15 Min) shows reversal, then can buy the stock keeping PP as the target and S2 as the Stoploss. This is how Pivot point levels are used normally.
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