As of
now there are no technical trading forum for Indian Stock traders other than a
few sites offering tips and some good sites like BuzzingStocks.
An
attempt is made to offer a few lessons for the benefit of Indian Stock traders
for short term, long term and day trading equities and futures keeping the
Indian context in mind.
Pivot
point is a middle level point and any price action above the point indicates
bullishness and below the point bearishness. Market changes direction at the
pivot point. Expert market analysts calculate Support levels and
Resistance levels of stock prices from pivot points only. Floor and pit traders
have used Pivot points as a trading strategy since long just to have some idea
where the market is heading during the course of a day. They also help us
to understand the entry and exit points of price action in respect of a stock.
The calculation of pivot points is simple. We can use the High, Low and Close price of a stock in the previous session (yesterday) and 70% of market action the next day is captured in these calculations. The formulas are given below
Resistance
3 R3
=
High + 2*(Pivot - Low)
Resistance 2 R2
=
Pivot + (R1 - S1)
Resistance 1 R1
=
2 * Pivot - Low
Pivot Point PP
=
(High + Close + Low)/3
Support 1
S1 =
2 * Pivot - High
Support 2
S2 =
Pivot - (R1 - S1)
Support 3
S3
= Low - 2*(High - Pivot)
You
may be able to calculate the same by giving the data inputs by clicking
here. Pivot points are used extensively and popular among professional
traders especially in the West because of the ease of calculation and they are
able to predict the market trend, price action and turning points. Since
most of the traders follow such technical indicators, market reacts at these
levels.
When
calculating pivot points, the pivot point itself is the primary
support/resistance. This means that the largest price movement is expected to
occur at this price. The other support and resistance levels are less
influential, but may still generate significant price movements.
Pivot points can be used in two ways. The first way is for determining overall
market trend: if the pivot point price is broken in an upward movement, then the
market is bullish,
and vice versa. Keep in mind, however, that pivot points are short-term trend
indicators, useful for only one day until they need to be recalculated. The
second method is to use pivot point price levels to enter and exit the markets.
For example, a trader might put in a limit
order to buy 100 shares if the price breaks a resistance level.
Alternatively, a trader might set a stop-loss
for his active trade if a support level is broken. Generally if the market opens
above the pivot point and the price action is above this point, the long trades
will be preferred and if the market opens below the pivot, short trades will be
predominant.
The
three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points is to look for a reversal or break
of R1 or S1. By the time the market reaches R2, R3 or S2, S3 the market will
already be overbought or oversold and these levels should be used for exits
rather than entries.
A
perfect set up would be for the market to open above the pivot level and then
stall slightly at R1 then go on to R2. You would enter on a break of R1 with a
target of R2 and if the market was really strong close half at R2 and target R3
with the remainder of your position.
Another
common variation of the five-point system omitting R3 and S3 levels, is the
inclusion of the opening price in the formula:
P =
((Today's O) + Yesterday's (H + L + C)) / 4
You can see an example of how this works in real-time situation here.
Here,
the opening price, "O", is added to the equation. Note that the
opening price for foreign exchange markets is simply the last period's closing
price. The supports and resistances can then be calculated in the same manner as
the five-point system, except with the use of the modified pivot point.
Yet Tom DeMark, a famous technical analyst and president of Market Studies, Inc,
developed another pivot point system. This system uses the following rules:
 |
As you
can see, there are many different pivot-point systems available. Some popular
ones include as many as nine different price levels; meanwhile, others predict
only one pivot point, and no additional levels of support or resistance.
Weekly
and Monthly Pivot points can be obtained and studied for knowing the current
levels of a stock price for short term trading.
See the
Example here.
A
desktop version of Pivot Point Calculator can be downloaded HERE
for free.
