How do you set realistic profit targets and stop losses with pivot points?

1 How pivot point trading works

Pivot point trading is based on the idea that the market tends to revert to its mean or average price after a significant move. 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.

2 How to calculate pivot points

There are different formulas to calculate pivot points, but the most common one is the standard or classic method. It uses the following equations:

PP = (High + Low + Close) / 3

R1 = (2 x PP) - Low

S1 = (2 x PP) - High

R2 = PP + (High - Low)

S2 = PP - (High - Low)

R3 = High + 2 x (PP - Low)

S3 = Low - 2 x (High - PP)

R stands for resistance and S stands for support. These are the levels where the price may face difficulty to break through or bounce back. The higher the number, the stronger the level. For example, R1 is the first resistance level above the PP, and S1 is the first support level below the PP. R2 and S2 are the second levels, and R3 and S3 are the third levels.

4 How to choose pivot points

When trading, there are various types of pivot points that use different formulas and time frames to calculate support and resistance levels. Fibonacci pivot points use the Fibonacci ratios (38.2%, 61.8%, and 100%), while Camarilla pivot points use a more complex formula that involves multiplying the PP by certain factors and adding/subtracting the difference between the high and low prices. Woodie pivot points use a modified formula that gives more weight to the current period's open price. The choice of which pivot point to use depends on the trader's preference, style, and market conditions; some traders may even use different pivot points for different time frames or combine them with other technical indicators to confirm their signals and increase accuracy.

5 How to practice pivot point trading

Pivot point trading is a skill that requires practice and patience; the best way to learn and improve is to apply it to real or simulated markets and test your results. To get the most out of your practice, start with a simple and consistent method, such as one type of pivot point and one time frame that suits your trading style and goals. Utilizing a demo account or a paper trading platform can be beneficial for testing your strategies and learning from mistakes without risking capital. Additionally, keeping a trading journal can help track performance, identify strengths and weaknesses, as well as improve discipline and consistency.