Short-term trading systems have attracted the attention of individual investors for years. Of course, this is for purely mathematical reasons. The use of compound interest enables the trader to generate high profit in a short time. One such method is the use of Pivot Points . They are determined based on the price behavior, so this strategy can be used on basically any instrument that has sufficient liquidity to allow trading within a single session. Find out what the Pivot Points Day Trading Strategy is .
Tools used in the Day Trading Strategy using Pivot Points
The only tool used in this strategy is the Pivot Points indicator . It draws support and resistance levels based on the equilibrium point.
It is calculated on the basis of the formula:
(maximum price + minimum price + opening price) / 3
On the other hand, the supports and resistances are determined as follows:
- First resistance (R1) : 2 x PP – minimum price
- First support (S1) : 2 x PP – maximum price
- Second resistance (R2) : PP + (maximum price – minimum price)
- Second support (S2) : PP – (maximum price – minimum price)
- Third resistance (R3) : maximum price + 2 x (PP – minimum price)
- Third support (S3) : reserve price – 2 x (maximum price – PP)
Thanks to this, we have significant levels for the next session after the end of the day’s trading. Of course, Pivot Points can also be determined on hourly and weekly intervals, but the basic and most useful version is daily. Having these levels drawn on the chart, you can successfully trade on the M5, M15 and M30 charts.
Entering the position
In the case of a Day Trading strategy using Pivot Points, you should never fight the prevailing trend. Our goal will be to look for the best opportunities to join him. How to evaluate a trend using this method within a single session? Relatively easy, simply on the basis of calculating the current position of the equilibrium point (Pivot Point) in relation to the previous day. If today’s Pivot is above yesterday’s, we are dealing with an uptrend, if below a downtrend.
According to the Day Trading strategy using Pivot Points, it is recommended to open a position:
- Long if the price is close to the support levels S1, S2 or S3, but cannot close below them and there is an uptrend
- Short if the price is near resistance levels R1, R2 or R3, but the closing price is unable to break them and there is a downward trend.
An example of entering a long position:
Here we have an entry that complies with the conditions described above, opening price is 13463.20 (spread costs must be added).
Example of entering a short position:
The above entry according to the previously described conditions, opening price 13570.50.
The most important issue in any successful trading strategy is capital protection. So you should start by setting a stop loss order . It should be located:
- Just below the S1, S2 or S3 level, depending on which the entry was made, in the case of a long position
- Just above the level of R1, R2 or R3, depending on which entry was made, if it is a short position
On the other hand, Take Profit should be:
- For long positions:
- Just below the PP, if the entrance was adjacent to S1
- Just below S1 if the entry was adjacent to S2
- Just below S2 if entry was adjacent to S3
2. For short positions:
- Just above R2 if the entry was near R3
- Just above R1 if the entry was near R2
- Just above the PP if the entry was near R1
This is because the closest level in the trend direction may turn out to be the current support / resistance for the session.
Example of closing a buy position:
The stop loss was at 13449.26 and the position should have closed at 13,510.70.
Example of closing a sell position:
The stop loss was at 13,578.83 and the position should have closed at 13506.60 (spread costs should be added).
Capital management in a Day Trading strategy using Pivot Points
Money management is a key issue in the operation of any strategy. If a trader mishandles his own capital, he is on the way to incur huge, irreversible losses on his own investment account.
However, in the case of the Day Trading method with the use of Pivot Points, the profit to loss ratio (the so-called risk ratio) is usually very favorable for the investor. However, please remember not to risk a potential loss of more than 2% of our deposit on a single position.