Understanding Pivot Points for Support & Resistance Based Trade Management

Pivot Points are a popular method for determining market trends, as well as short-term support and resistance levels using numerical averages of an instrument’s high, low and close.

The term “pivot” is often thought of as reaching a pre-determined point (support or resistance) then reversing course.

Not only can day traders use Pivots to help determine bullish or bearish trends, but they are also commonly used as trade entry and exit guidelines. Different from a number of indicators that update dynamically throughout the trading day, Pivot Points remain static on a chart.

Watch NinjaTrader’s Pivot Point indicator in action:

NinjaTrader plots a total of 7 points based on the previous high, low and close values. Below is a breakdown of how each pivot is calculated:

• PP = (High + Low + Close) / 3
• S1 = 2 * PP – High
• R1 = 2 * PP – Low
• S2 = PP – (High – Low
• R2 = PP + (High – Low)
• S3 = PP – 2 * (High – Low)
• R3 = PP + 2 * (High – Low)

* PP = Pivot Point

While there are many methods of trading Pivots, a prime example of how day traders can possibly use Pivot Points for entry and exit signals is to short an instrument as it nears resistance levels with a stop placed just above the R1 level and a profit target placed at the PP. The opposite strategy might be used in the case of a long trade.

Leveraging the power of NinjaTrader ATM Strategies coupled with the Data Box, Pivot trading can be a simple to follow process. Before entering a buy market order, take the market price less the R1 level to determine the stop loss placement. Next, do the same for the PP level to determine the profit target!

In most scenarios, should price action break a Resistance level, the resistance then (theoretically) turns to a support level. Because the Pivots are static by day, this will not dynamically update should the breach occur.

To demonstrate how a market can react to Pivots, here is a 5-minute E-mini S&P 500 chart from the open at 7:30 MT to market close. One can easily identify the three support and resistance trading channels outlined by the leading Pivot indicator.

As the trading session begins (Yellow), the ES quickly tests the PP level but “Pivots” to R1. Price action then bounces above and below the R1 level before establishing itself as a clear line of resistance around 10:00 AM (Blue). During this period of consolidation, it’s vital to incorporate complementary forms of technical analysis to avoid over-trading, getting stopped out and choppy markets in general.

Just before 11:00 AM, the ES breaks the R2 level, tests it, then goes on a solid bullish run before stopping out at the R3 level (Red).

Because Pivot Points are considered to be predictive in nature as a leading indicator…they are not always 100% accurate. As with any trading methodology, proper risk mitigation efforts are necessary before placing any live trades.

Get Started with NinjaTrader

NinjaTrader supports more than 500,000 traders worldwide with a powerful and user-friendly trading platform, discount futures brokerage and world-class support. NinjaTrader is always free to use for advanced charting & strategy backtesting through an immersive trading simulator.

Download NinjaTrader’s award-winning trading platform and get started with a free trading demo with real-time market data today!

Source: https://ninjatrader.com/blog/understanding-pivot-points-support-resistance-based-trade-management/