How to Use Pivot Points in Your Trading

Moving averages are the most popular directional gauges. They are typically the first technical indicator in the novice trader’s toolbox. Many professional traders rely on them as well. Typically, the directional signals come when a short-term MA crosses a long-term MA. The problem with this method is that by the time the averages converge and cross the directional move is already well on its way. Thus, entering a trade using this method usually leads to late entry and poor trade location. Bad trade location increases risk and reduces profits.

To improve entry, many traders use exponential moving averages (EMA). These are calculated with more weight on the most recent prices. Thus, they tend to converge and cross faster than simple MAs, which should lead to better trade location.

Most MAs are calculated using the close of the day. But for intraday or short-term traders, these MAs are often useless when volatility is high. Day and swing traders frequently use daily pivot levels for short-term directional signals. These indicators can be calculated in many ways. Maybe the most popular is to take the average of the daily open, high, low, close. If the market closes below this average price, it means sellers have the edge; a settle above this price, bulls gain the advantage.

I consider myself a swing trader most of the time. To me, that means my projected profit on a trade is roughly the length of an average week measured higher or lower from the price at which I take a position.

I designed a pivot that suits my time frame and style. To calculate this pivot, I take an average of the high, low, close over a three-day period, so the pivot is an average of nine prices. If the close is below this pivotal price on the third day, odds favor a move lower over the 24-hour period. On the other hand, a close above this MA means long positions should pay the next day or longer.

There are no right or wrong technical indicators. They all have merit at some point depending on market conditions. Each trader must find the technicals and time frames that fit their personality. Through experimentation I found my niche. Along with some other gauges, the three-day pivot suits my style. The average amount of time you intend to spend in a trade may dictate the pivotal price you should calculate.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.