Learn How to Day Trade Using

Pivot Points
Today we will dive deep into the significance of Pivot Points
for day trading. When you finish reading this article, you
will understand the 5 reasons why day traders love using them
for entering and exiting positions, and how you can employ
them as a part of your overall trading plan.

Feel free to watch our free tutorial on Pivot Points by in-

house daytrading expert, Al Hill. Al is a 20-year trading
veteran.

What Are Pivot Points

As a technical analysis indicator, a pivot point uses a
previous period’s high, low, and close price for a specific
period to define future support. In addition, other small
calculations determine the “outside” points.

Together, these can determine the bounds of a stock price over

different time periods giving traders an edge on the market.

7 Pivot Point Levels Explained

There are seven basic pivot levels on the chart:
7 key Pivot Points explained

History of Pivot Points

Pivot points were originally used by floor traders on stock
exchanges. They used the high, low, and close prices of the
previous day to calculate a pivot point for the current
trading day.

This calculation helped them notice important levels

throughout the trading day. Pivot points have predictive
qualities, so they are considered leading indicators to
traders.

The main pivot point is the most important price level for the
day. Essentially, it represents the balance between bullish
and bearish forces.

In other words, when prices are above the pivot point, the
stock market is considered bullish. If prices fall below the
pivot point, the market is considered bearish.

While pivot points were originally used by floor traders,

they’re now used by many retail traders, especially in
equities and forex.

5 Reasons Why Day Traders Love

Pivot Points
1) Unique for Day Trading
The pivot points formula takes data from the previous trading
day and applies it to the current trading day. In this manner,
the levels you are looking at are applicable only to the
current trading day. This makes the pivot points the ultimate
unique indicator for day trading.
2) Short Time Frames
Since the pivot points data is from a single trading day, the
indicator can only be applied to shorter time frames. The
daily and the 30-minute chart will not work, because it will
show only one or two candles.

The best timeframes for the pivot point indicator are 1-

minute, 2-minute, 5-minute, and 15-minute. Hence, its use for
day traders.

3) High Accuracy
The pivot point indicator is one of the most accurate trading
tools. The reason for this is that the indicator is used by
many day traders, professional and retail alike.

This will allow you to trade with confidence and the flow of
the market.

4) Rich Set of Data

Pivot points on charts provide a rich set of data. As we
discussed above, the indicator gives seven separate trading
levels. This is definitely enough to take a day trader through
the trading session.

5) Easy to Use
The PP indicator is an easy-to-use trading tool. Most of the
trading platforms offer this type of indicator. This means
that you are not required to calculate the separate levels; in
fact, the Tradingsim platform will do this for you. Your only
job will then be to trade the bounces and the breakouts of the
indicator.
Pivot Point Calculation
Daily pivot points are calculated based on the high, low, and
close of the previous trading session.

When you add the seven pivot levels, you will see 7 parallel
horizontal lines on the chart.

Pivot Points
The above chart is zoomed out in order to show all 7 pivot
levels.

Let’s now discuss the way each of the seven pivot points is
calculated. First, we need to start with calculating the basic
pivot level (PP)– the middle line.

PP Calculation
[1]
Below is the formula you should use to determine the PP
level on your chart:

Pivot Point (PP) = (Prior Daily High + Low + Close) / 3

R1 R2 S1 S2 Pivot Levels Calculation

Now that we know how to calculate the PP level, let’s proceed
with calculating the R1, R2, S1, and S2 pivot levels:

R1 = (2 x Pivot Point) – Prior Daily Low

R2 = Pivot Point + (Prior Daily High – Prior Daily Low)

S1 = (2 x Pivot Point) – Prior Daily High

S2 = Pivot Point – (Prior Daily High – Prior Daily Low)

R3 S3 Pivot Levels Calculation

We are almost done with the pivot point calculation. There are
two more levels to go – R3 and S3.

R3 = Daily High + 2 x (Pivot Point – Prior Daily Low)

S3 = Daily Low – 2 x (Prior Daily High – Pivot Point)

See that the formulas for R1, R2, R3, S1, S2, and S3 all
include the PP value.

This is why the basic pivot level is crucial for the overall
pivot point formula. Therefore, you should be very careful
when calculating the PP level. After all, if you incorrectly
calculate the PP value, your remaining calculations will be
off.
Pivot Points 2
You are now looking at a chart, which takes two trading days.
Each trading day is separated by the pink vertical lines. We
use the first trading session to attain the daily low, daily
high, and close.

Daily High = 14.39

Daily Low = 14.28
Close = 14.37

Then we apply the three values in the formulas above, and we

get the following results:

PP = 14.35
R1 = 14.42
R2 = 14.46
R3 = 14.53
S1 = 14.31
S2 = 14.24 (not visible)
S3 = 14.20 (not visible)

5 Different Kinds of Pivot Points

Here are five types of the most popular pivot points.
1. Standard pivot points
Standard pivot points are the most basic pivot points that day
traders can calculate. First, traders start with a base pivot
point. That’s the average of the high, low, and close from a
previous period.

Below is the complete calculation for standard pivot points.

To calculate the Base Pivot Point:

(P) = (High + Low + Close)/3 calculate the First
Support Level: Support 1 (S1) = (P x 2) – High
When calculating the Second Support Point:
Support 2 (S2) = P – (High – Low)
To calculate the First Resistance Level:
Resistance 1 (R1) = (P x 2) – Low
When calculating the Second Resistance Level:
Resistance 2 (R2) = P + (High – Low)

2. Fibonacci Pivot Points (The Most

Popular)
The Fibonacci pivot point is perhaps the most popular among
traders.

Fibonacci extensions, retracements, and projections are

commonly used in forex, but are used with equities as well.
The Fibonacci retracement levels are named after a
mathematical sequence.

Ken Ribet is professor of mathematics at the University of

California, Berkeley. He points out that a Fibonacci number
started out having a simple formula.

“A lot of things in mathematics and probably in the real

world are governed by simple recursive rules, where each
occurrence is governed by a simple formula in terms of the
previous occurrence. And a Fibonacci number has the simplest
 possible formula, just the sum of the previous two.”

Ken Ribet

Katie Stockton is the founder and managing partner of the

technical analysis firm Fairlead Strategies, LLC in Stamford,
Connecticut. She has an interesting speech about the impact of
the Fibonacci on gold.

In the her speech, Stockton points out that Fibonacci levels

can become so “widely followed level that…there becomes some
self-fulfilling property to it.”

The Key Levels

On that token, the main Fibonacci levels that traders monitor
are the 38.2% and the 61.8% retracement levels.

Here is the calculation for the Fibonacci pivot point.

To calculate the Base Pivot Point:

Pivot Point (P) = (High + Low + Close)/3
When calculating the First Support Level:
Support 1 (S1) = P – {.382 * (High – Low)}
To calculate the Second Support Level:
Support 2 (S2) = P – {.618 * (High – Low)}
When calculating the First Resistance Level:
Resistance 1 (R1) = P + {.382 * (High – Low)}
To calculate the Second Resistance Level:
Resistance 2 (R2) = P + {.618 * (High – Low)}
When calculating the Third Resistance Level:
Resistance 3 (R3) = P + {1 * (High – Low)}

3. Woodie’s Pivot Point

Woodie’s pivot points place more weight on the closing price.
However, the calculation is similar to the standard pivots
formula.
The calculation is as follows:

R2 = PP + (High – Low)

R1 = (2 X PP) – Low

PP = (High + Low) + (2 x Closing Price) / 4

S1 = (2 X PP) – High

S2 = PP – (High + Low)

4. Camarilla Pivot Points

Another pivot point that traders use are Camarilla pivot
points. Nick Scott invented the Camarilla pivot point in the
1980s.

It’s similar to the Woodie’s pivot point. However, there are

four resistance levels and four support levels. In contrast,
the Woodie pivot point has two Resistance levels and two
Support levels.

This is the calculation for the Camarilla pivot point:

R4 = Closing + ((High -Low) x 1.5000)

R3 = Closing + ((High -Low) x 1.2500)

R2 = Closing + ((High -Low) x 1.1666)

R1 = Closing + ((High -Low x 1.0833)

PP = (High + Low + Closing) / 3

S1 = Closing – ((High -Low) x 1.0833)

S2 = Closing – ((High -Low) x 1.1666)

S3 = Closing – ((High -Low) x 1.2500)

S4 = Closing – ((High-Low) x 1.5000)

5. Demark Pivot Points
Demark pivot points have a different relationship between the
opening and closing prices. Noted trader Tom Demark
introduced this version.

The Demark pivot point uses the number X to calculate the

lower level line and the upper resistance level. It also
emphasizes recent price action. The calculation is as
follows:

If Close > Open, then X = (2 x High) + Low + Close

If Close < Open, then X = High + (2 x Low) + Close

If Close = Open, then X = High + Low + (2 x Close)

Pivot Point = X/4

Resistance 1 = X/2 – Low

Support 1 = X/2 – High

How to Draw the Pivot Point Stock

Market Indicator
The pivot point stock market indicator should be applied to
the chart as follows:

PP level
R1 and S1
R2 and S2
R3 and S3

When you follow this order there is a small chance that you
might mistakenly tag each level. To avoid this potential
confusion, you will want to color-code the levels differently.

For example, you can always color the PP level black. Then the
R1, R2, and R3 levels could be colored in red, and S1, S2, and
S3 could be colored in blue. This way you will have a clear
idea of the PP location as a border between the support and
the resistance pivot levels.

Thankfully, these days many charting platforms have a built-in

pivot point indicator. This means that the indicator could be
automatically calculated and applied on your chart with only
one click of the mouse.

This will definitely save you a ton of time.

How Pivot Points Work

Pivot points provide a standard support and resistance
[2]
function on the price chart.

When price action reaches a pivot level it could be:

Supported/Resisted
Extended (breakouts)

All things considered, if you see the price action approaching

a pivot point on the chart, you should treat the situation as
a normal trading level. Nonetheless, if the price starts
hesitating when reaching this level and suddenly bounces in
the opposite direction, you might then trade in the direction
of the bounce.

However, if the price action breaks through a pivot, then we

should expect the action to continue in the direction of the
breakout. This is called a pivot point breakout.

Day Trading with Pivot Points

Now that we understand the basic structure of pivot points,
let’s now review two basic trading strategies – pivot level
breakouts and pivot point bounces.
1. Pivot Point Breakout Trading
To enter a pivot point breakout trade, you should open a
position using a stop limit order when the price breaks
through a pivot point level. These breakouts will mostly occur
in the morning.

If the breakout is bearish, then you should initiate a short

trade. If the breakout is bullish, then the trade should be
long.

Always use a stop loss when trading pivot point breakouts.

A good place for your stop would be a top/bottom which is

located somewhere before the breakout. This way your trade
will always be secured against unexpected price moves.

You should hold your pivot point breakout trade at least until
the price action reaches the next pivot level.

How it works:

Pivot Point Breakout Strategy

This is the 5-minute chart of Bank of America from July 25-26,
2016. The image illustrates bullish trades taken based on our
pivot point breakout trading strategy.
The first trade is highlighted in the first red circle on the
chart when BAC breaks the R1 level. We go long and we place a
stop loss order below the previous bottom below the R1 pivot
point. As you see, the price increases rapidly afterwards.

For this reason, we hold the trade until the price action
reaches the next pivot point on the chart. When this happens,
the price creates a couple of swing bounces from R2 and R1.

After bouncing from R1, the price increases and breaks through
R2. This creates another long signal on the chart. Therefore,
we buy BAC again.

There is a long lower candlewick below R2, which looks like a

good place for our stop loss order.

The price then begins hesitating above the R2 level. In the

last hours of the trading session, BAC increases again and
reaches R3 before the end of the session.

This is an exit signal and we close our trade.

2. Pivot Point Bounce Trading

This is another pivot point trading approach. Instead of
buying breakouts, in this pivot point trading strategy we
emphasize the examples when the price action bounces from the
pivot levels.

If the stock is testing a pivot line from the upper side and
bounces upwards, then you should buy that stock.

Conversely, if the price is testing a pivot line from the

lower side and bounces downwards, then you should short the
security.

As usual, the stop loss order for this trade should be located
above the pivot level if you are short and below if you are
long.
To be clear, pivot point bounce trades should be held at least
until the price action reaches the next level on the chart.

How it works:

Pivot Point Bounce Strategy

Above is a 5-minute chart of the Ford Motor Co. The image
shows a couple of pivot point bounce trades taken according to
our strategy.

Our pivot point analysis shows that the first trade starts 5
periods after the market opening. The price goes above R2 at
the opening bell. Then we see a decrease in supply and a
bounce from the R2 level. This creates a long signal on the
chart and we buy Ford placing a stop loss order below the R2
level.

Immediately following, the price enters a bullish trend.

Because of this, we stay with the trade until Ford touches the
R3 level.

At this point, we close the trade.

However, the price bounces downwards from the R3 level after

the second test. This is another pivot point bounce, so we
short Ford security as stated in our strategy.
A stop loss order should be placed above the R3 level as shown
on the chart.

After a short consolidation and another return and a bounce

from the R3 level, the price enters a bearish trend. We hold
the short trade until Ford touches the R2 level and creates
our exit signal.

5 Common Mistakes when Trading with

Pivot Points
Trades that Clear S4 or R4
These are the setups you really want to hone in on.

Think about it, why buy a stock that has resistance overhead.
You can just as easily invest in a stock that has the wind to
its back and you can ride the wave higher.

If there is no one looking to sell at a pivot point resistance

level and there are no swing highs – that equals odds in your
favor.

Even when things go wrong, you are still likely to come out
even or at least have a fighting chance.

This going with the trend, of course, works just as well with
shorts that clear S4 support.

Here is a real example of this pivot point trading strategy

with Advanced Auto Parts (AAP).

Pivot Points and Fibonacci Levels

Is there anything different on the chart that you weren’t
expecting to see?

If you can’t point it out, it’s the Fibonacci levels in the

upper left of the chart.
Fibonacci Levels
Once a stock has cleared all of the daily pivot points, the
next thing you need to look for are the overhead Fibonacci
extension levels and swing highs from previous moves.

These levels can be used as your target areas for your trades.
You can then use these levels to calculate your risk-reward
for each trade.

After purchasing the stock on the break of both the pre-market

and intra-day high, it’s now about holding on and riding the
trend up to the next Fibonacci level at around 261.8% (2.618)
retracement.

At this point, you do not want to get greedy. You should

always look to clean off your trade slightly below that level.

Try applying these techniques to your charts to identify the

levels tracked by professional traders.

Pivot Points and High Float Stocks

Nowadays many gurus are talking about low float, momo stocks
that can return big gain. There may be a place for trading
those stocks if you are highly experienced and accustomed to
volatility and high risk.

However, when it comes to Pivot Points, high float stocks are

[3]
still in vogue .

The beautiful thing about higher float stocks is that these

securities will adhere to and trade in and around pivot point
levels in a predictable fashion.

If you are a trader just starting out with pivot points and
want to get a handle on things, you will want to start with
these large-cap stocks. Once you get a handle on things, you
can always progress to the penny stocks.
How Pivot Points Help Build
Consistency
Do you find yourself obsessing about when to exit your trades.
Maybe your entries are solid but you always have sellers
remorse.

You either regret getting out too early or holding on too

long.

This is something many traders struggle with for years.

To this point, including pivot points in your trading could be

like going from the dark and stepping into the light. The
beauty of using pivot points is that you have three clear
levels:

1. where to enter the trade

2. when to exit the trade
3. how to place your stop

If you are the type of person that has trouble establishing

these trading boundaries, pivot points can be a game-changer
for you.

To further illustrate this point, check out the below charts

Entry, Exit, Stops
Entry, Exit, Stops – 2
Do you see the beauty of the pivot points on the chart?

If you struggle with where to place your stops, entries and

profit targets, pivot points take care of all of that for you.

You do not need an expensive trading system or AI program to

accomplish this goal.

The other major point to reiterate is that you can quickly

eyeball the risk and reward of each trade. Therefore over
time, you will inevitably win more than you lose, and the
winners will be larger.

This, my friend, is how you build wealth – one trade at a

time.

Knowing When You are In a Losing

Trade with Pivot Points
The other key point to note with pivot points is that you can
quickly identify when you are in a losing trade.

Cannot Hold Pivot Level

If you are going long in a trade on a break of one of the
resistance levels and the stock rolls over and retreats below
this level – you are likely in a bad spot.

Cannot Hold the Level

This should give you pause for concern when it doesn’t pan out
the way you had planned.

This does not mean you need to run for the hills, but it does
mean you need to give the right level of attention to price
action at this critical point.

Time Lapse
The other point is to consider the amount of time that passes
after you have entered your position.
If your position is sitting below or right around the breakout
level 30 minutes after entering the trade – the stock is
screaming warning signals.

Too Much Time

Do not over think exiting bad trades. If you find yourself in
a trade that is stalling or not holding a level, just exit the
trade. Waiting around for something to happen can lead to more
losses.

Beyond the money, the major issue you will face is the
emotional turmoil of tacking such a loss. Remember, do not
think – just close the trade!

Pivot Points from Prior Days

Most charting software will allow you to select whether you
want to see the current day’s pivot points or if you would
like to see pivot points from prior days.

At first glance, it’s easy to want to focus on the current day

levels as it provides a clean chart pattern; however, prior
days levels can trigger resistance on your chart.
R4 Level Cleared
In the above chart of NANO you can see that the R4 level was
cleared. The next question you are likely to ask yourself is
where will NANO stop?

Unfortunately, simply looking at the pivot points for one day

gives you no way of making that determination.

Multiple Days of Pivot Point Levels

Now, let’s take another look at that example with more than
one day’s worth of pivot point data.

Multiple Days of Pivot Points

As you can see in the chart, there are a number of resistance
levels near our closing price on the day. Like any other
indicator, there is no guarantee the price will stop on a dime
and retreat.

The point of highlighting these additional resistance levels

is to show you that you should be aware of the key levels in
the market at play.

You will need to look at the level 2 or time and sales to see
which level you need to focus on. This is the real challenge.
If you immediately sell you might possibly forego big profits.

As an option, you could sell out at the next resistance level

up. You might be leaving money on the table, but there is a
greater risk of being greedy and looking for too much in the
trade.

Placing Stops
Trading with pivot points allows you the ability to place
clear stops on your chart. What you do not want to do is
simply place your stops in line with the next level up or
down.

You have to take more care when identifying your stop

placement.

Remember, you are not the only one that is able to see pivot
point levels.

Anyone with a charting application can know the R1, R2 and R3

levels.

So, how do you still protect your trade but without risking
too much?

Beyond Key Psychological Price Levels

For starters, you could place your stop just beyond the
levels. In other words, you will want to hide the stop behind
logical price levels.

For example, if you have an S1 level at $19.65, then you will

want to place your stop at $19.44. Why at this level? 50 cents
is a big mental price level for stocks under $20 bucks.
Therefore, you will likely have a large number of stops right
at the level. Therefore, if you place your stop slightly
beyond this point, you might avoid being stopped out of the
trade as a shake out.

Volume at Price
Another method is to look at the amount of volume at each
price level. If you are long and are eyeing an S1 level to
stop the selling pressure, you can also see how much volume
has been traded at a certain price level.

The idea is to then place your stop slightly below or above

these levels. Let’s look at a chart to illustrate this point.

Volume at Price – Pivot Points

In the above example, notice how the volume at the support
level was light. This shows you that there was not a lot of
selling pressure at this point and a rebound was likely to
occur at this level.

Next, notice how the price barely breached the S3 level and
then reversed higher. For this type of setup, you want to see
the price hold support and then set your target at a
resistance level that has accompanying volume.
After BLFS bounced, it ran up to the R1 resistance before
consolidating which coincidentally had a decent amount of
volume at the $19.15 price level.

If you were long, a stop directly below the S3 level would

have kept you in the trade.

How to Practice with Pivot Points

Hopefully you now have an intimate knowledge about Pivot
Points: their formulas, strategies, and usefulness for day
traders.

As with any trading strategy, it takes time and practice to

really gain the upper hand on the market. For this reason,
there is no better way to practice Pivot Points than in a
simulator.

We suggest trying at least a 20-trade sample of this strategy

and analyzing those trades before putting real money to work.

External References
1. Pivot Points. Wikipedia
2. Aspray, Tom. (2012). The Most Powerful Pivot Point
Level. Forbes
3. Miller, Terin. (2019). What are Blue Chip Stocks and Why
Should You Invest in Them?. thestreet.com