Those of you who have been trading for a while will be familiar with Pivot Points. During this lesson I want to go over how to find a Pivot Point and also a slightly different method of using them. First let's look at how you calculate a Pivot Point.

Using a bar chart you will observe that each bar has an Open, High, Low and Close. This information represents all price activity during that particular period. In the case of the following example we shall use a daily bar for XYZ. To calculate the pivot point all you need to do is add the High, Low and Close. Once this has been done you next divide the total by three to get the Pivot Point.

OK, so far so good, but what do you do with this information. Well, one technique I like to use intraday is to use the pivot point as a trend indicator. If we already know that the Pivot Point for XYZ was 64.10, we will use this the next day as an intraday trend indicator. If the price is above 64.10, then we would only be long and if it were below 64.10, we would only be short.

As price can fluctuate around any given point we also add a further proviso. If we have support close to 64.10 we will first wait for the price to pass through 64.10 and support before entering short. If we have resistance close to 64.10 we will first wait for the price to move through the Pivot Point and resistance before entering long. This method becomes even more powerful when the Pivot Point is close to the opening price. If for example the opening price is 74.10, the Pivot Point is 64.10 and we eventually go short at 63.55 we can stay short the whole day as long as it does not go above the Pivot Point. Once in a position we normally have a very tight stop to begin with and then will follow the market with a trailing stop to lock in profits.

Another way we like to add Pivot Points to our analysis is for more long-term projections. We will use the Pivot Point of a Yearly, Monthly and Weekly chart. In this case it would be the High, Low and Close of the previous Year, Month and Week. We like to think of the weekly Pivot Point as the short-term trend, the monthly as the medium term trend and the Yearly as the long-term trend. If we are below the yearly, monthly and weekly Pivot Point we know we are in a strong down trend and we can scale into multiple positions over time. The same holds true for long positions.

The point is there are many ways to determine trend. Experiment with Pivot Points and see if it suits your trading style. At the very least it is always handy to know where they are and it may help you decide which side of the market you should be trading from.

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