An Introduction to Pivot Trading

Pivot trading is a type of trading that utilizes technical indicators in order to trade stocks and other securities. This system also utilizes pivots in order to provide support and resistance lines for a particular security. Here are the basics of pivot trading. 

Pivots

In order to get involved in pivot trading, it is important to understand what a pivot is. A pivot point is basically an important price level on a price chart. There are indicators that you can use that will place the pivot points on your chart for you. In most cases, the pivot point is an average price over a certain period. For example, you might have a pivot point that is the average of the closing price of a stock over the last week. You could have another pivot point that is the average of the open price of a stock over the last week. By looking at the pivot points, you will be able to see a range that the stock has traded in over the last week. You could change the pivot point criteria to any time frame that you choose.

Support and Resistance

One of the main benefits of using pivot points is that they create levels of support and resistance for traders to use. Support and resistance levels are commonly used as a way to get into and out of trades. Many times, stocks will move up to a resistance level and then stall out. They could also go down until they reach a support level and then start to move back up. Over a long period, stocks tend to move around support and resistance levels. Therefore, if you are a trader, you may want to be aware of these levels so that you will know when to get out of a trade.

Taking Profit

Once you have identified the proper support and resistance levels, you can use them to determine where to take profit in a trade. For example, if you see that the price of a particular stock is moving up, you may want to put your take profit level just below the upper pivot point. In many cases, the price will get up to that level and then reverse. Therefore, by using this pivot point as a guideline, you will be able to capture the most profit. 

Breaking Through

Some people will also use pivot points in another manner. When you look at where the pivot points are located and you see a price breaking through them, this could indicate a large change in market direction. Many people wait for the price to break through a pivot level before placing a trade. This way, they know which way the market is heading and can take advantage of some large price movements in this manner. Many times, after a stock breaks through a resistance level, it will keep moving upward for quite some time.

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