HOW TO TRADE USE PIVOT POINTS

 i am going to show you the way to trade Nifty future using Pivot points. We will calculate Pivot points on daily basis using daily charts and then use those Pivot levels on 15 minute charts — our main charts — where we will look for entries, stops and exits. We will use 15 minute time frame because it allows catching the best entry and exit opportunities. With hourly charts, for example, when the signal is there it is quite often already too late to react / enter.

We know we have to calculate Pivot points every single day, so that each morning we start with new fresh daily Pivot points, calculated from last trading day's High, Low and Close. Let's look at today's Nifty future 15 minutes chart to see how Pivot points were found. As you can see we use only 5 major Pivot point levels: R2, R1, PP, S1 and S2.

After Pivots are in place traders should start taking notes. First, they should note where the market has opened today in relation to the Pivot Point (PP): above the Pivot Point or below it. The answer to this question provides the first clue about traders' biases for the day, e.g. if the market has opened above Pivot Point, traders will be bias towards taking long positions, on the contrary, opening below the Pivot Point would suggests shorting for the day.

Then traders should look at how far the price opened from the Pivot (PP), and make extra notes when it opened below S1 or above R1 level which is considered to be a quite distant open.

With some small distance away from the Pivot Point it is considered to be a good morning for trading. It is very much suggested to wait for a pull back towards the Pivot line before taking a position. 15 minute charts in this case help to catch the right moment for entry.

With the second — distant opening (below S1 or above R1) — we have very high expectations that the price will try to correct such "distant irregularity" and thus instead of progressing further away from Pivot Point it will try to move back towards the Pivot — the gold-middle point of the day. As a result, we will typically see a ranging market which does not produce much of the trading opportunities. The expectations are that the price will revolve around Pivot Point for the rest of the day — nothing to do for us, we should stay out. (Some of the writings are excerpts from Pivot Points Strategy by Jeff Boyd Authors & Publishers Inc.)


Why do pivot points work? The whole Pivot point trading technique is based on two main market concepts: existence of support and resistance. These two tendencies form the core of the market moves and therefore receive full attention from the vast majority of professional traders who trade on behalf of all kinds of large, medium, small financial institutions, funds as well as for themselves.

Because Pivot points are easy to calculate, millions of automated trading systems in the world automatically execute buy / sell orders analyzing the market moves in relation to the Pivot points. Also, there are very little variations that can take place when calculating Pivot points (those are only timing factors, but even then pivot points can quite often suggest the same data).

These precision in targets and mutual "agreement" among traders on certain key levels for the day cause the market to really shift, turn and move as huge percentage of traders pull in the same direction using basic Pivot points trading rules.

With EMAs crossing, for example, every trader can set different indicators and thus timing and reaction will not be so well coordinated. Also take Fibonacci, where for each time frame traders pull their own Fibonacci levels, same for trend lines — there are as many opinions out there as traders trading Nifty future. But when it comes to Pivot points, no matter what chart you use your Pivots will be the same = levels of support and resistance, where everyone hits the same button at the same time. Pivot points outperform other trading techniques and indicators also because they are predictive as opposed to lagging.

Because so many traders worldwide use Pivot points for trading, all major indices and stocks react at these levels in a quite predictable manner, respecting support and resistance levels and creating a lot of trading opportunities. (Courtesy - Jeff Boyd for a part of this writings)

Now lets see, was there any trading opportunity today using Pivot points in Nifty future. Nifty future opened above the pivot level of 4641. So, the bias for the day was positive and one could only buy near pivot point if the pivot point is respected in the 15 minutes chart (see my earlier post) for a target of R1 (4701), or one can buy for a target of R2 (4741) if R1 is penetrated and sustained. Nothing of them happened, and so it was a no trade day for Pivot Point traders and my god, you are saved from being whipsawed in comparison to other trade methods as Nifty future moved the whole day in narrow ranges.


We already now know what are PivotPoints. We already know the basics of how to trade them. Now of utmost importance to know, daily pivot point values tend to be touched or traded through roughly 75% of the time. In other words, seven out of every ten sessions for any liquid market will see the daily pivot point come into play at some point during live trading.

Isn’t that amazing! To know that a certain spot on most any chart will be touched more often than not can be a powerful tool. Unfortunately, unless one knows what to do with that information it is worthless at best or harmful at worst. Believe me, more traders LOSE money with this knowledge than actually makemoney. Some of the worst trading sessions touch their pivot points several times (sideways choppy session) while some of the best trading sessions miss touching the daily pivot at all (gap & go trend sessions).

In general, a market trading above its pivot point value is acting bullish while a market trading below its pivot point is bearish. That's the most general rule for using these price measures, and it holds true most of the times. Fact is, the same trend filter applies to all charts and trading timeframes: intraday charts or even daily and weekly charts.

Pivot point values are not exclusive to day trading at all. We can use them in swing trades and even position trades for long-term stockholds in DP accounts. Depending on our time horizon of trading chart, the applicable pivot value works there too.

Using daily charts for swing trades in any liquid market would mean we want to keep track of the weekly and the monthly pivot points. That much is easy: once a week we calculate the previous week's price values for a weekly pivot point. The beginning of each month we calculate previous month's price action for monthly pivot points. Simple as that!