Pivot Point Trading: How to Set Profit Targets and Stop Losses

The pivot point (PP) is the average of the high, low, and close prices of the previous period, usually a day, a week, or a month. The PP acts as a reference point for the current period, and traders use it to determine the direction and strength of the market trend. If the price is above the PP, the market is considered bullish; if it is below, it is bearish. In summary, pivot points are a versatile and widely used technical indicator that can help traders identify potential market support and resistance areas. Therefore, traders need to use pivot points in conjunction with other technical and fundamental analysis tools to make informed decisions and manage risk effectively. • Traders use pivot points to identify key price levels that can act as support and resistance.

• In the screenshot below we first see a Pivot Point rejection at point (1) where the price tried to break above it and then fell back below quickly.
• If you can’t point it out, it’s the Fibonacci levels in the upper left of the chart.
• Pivot points can be used with any type of chart, but it is most useful with candlestick charts.
• You may not always achieve these ratios exactly as the trade unfolds; you may offset or reverse a position at any time if conditions change.
• Traders may look for a long position near the pivot point or a short position near the resistance level.
• The other key point to note with pivot points is that you can quickly identify when you are in a losing trade.

They usually sell too quickly when the first pivot point resistance level is reached and buy too soon when the first pivot point support level is reached. Floor traders try to frame the day based on the previous day’s trade. Because of this, pivot points are universal levels to trade off of. When assessing the reliability of pivot points, extensive backtesting and analysis are also crucial. Historical data can be employed to model trades based on pivot points and gauge their performance over time. To make wise judgments based on the data, traders need to understand the usefulness of pivot points within the market and the period they have selected.

How do pivot points work?

Levels are updated daily, allowing traders to react promptly to market changes and adjust their strategies. Pivots are widely used with trend indicators such as moving averages and Fibonacci tools. In the chart below, Fibonacci retracements what are pivot points in trading could be used to identify intermediate levels of support and resistance within widely placed pivots. Originally, pivot points were developed by floor traders who worked in a fast-moving environment in the equity and commodities markets.

In the later part of this article, we will take a look at trading strategies that are based on the central Pivot Point. In the screenshot below, I marked the High, the Low and the Close of the previous week’s price action. The resulting Pivot Point (red line) is the average of those 3 price levels.

Pivot breakout strategy

To create a pivot point trading system, a trader will need the indicator, a market or trading instrument of their choice and a trading strategy. This includes an entry method, as well as a stop-loss and profit target. Once the pivot point indicator is applied to a price chart, you can look for trading opportunities. These levels will often act as support or resistance, so chart pattern breakouts or engulfing patterns will often occur near these levels.