Whenever a newbie starts trading , the question top-most in his/her mind is,"whether to play long or short during the day?"
And technical analysts have a straight answer for that:"Use Day's pivot as a reference point ! "
What is this "Day's pivot?!"
Previous day's (High+Low+Close)/3 is considered Current Day's Pivot.
Above Pivot=Bullish Bias
Below Pivot=Bearish Bias
Lets take example of Nifty: On EOD 11.5.2023 we know that Days High=18390 ; Days Low= 18270 and Days Close=18297
So Days Pivot on 12.5.2023 =(18390+18270+18297)/3=18319
Now if you are a 5min time-frame trader, wait till 9.20am
If you are a 15 min time-frame trader, wait till 9.30am
Depending upon where the price closes at 9.20am or 9.30am with reference to this Days Pivot, it becomes easy to decide the day's bias.
If price has closed above Days Pivot :Look for opportunities to go long !
If price has closed below Day's Pivot : Look for opportunities to go short !
Point to note: Some people use Days Pivot = Previous Day (Open+High+Low+Close)/4
Once the Days Pivot gets known, other important numbers of considerable interest are Day's Resistance and Day's Support levels. These are ,then calculated using following formulae:
Resistance1=(Pivot x 2)-Low
Resistance 2=(Pivot +(High-Low)
Support 1=(Pivot x 2)-High
Support 2=Pivot -(High-Low)
And to make every wannabie traders job easy, every charting software has built the above indicater
So on EOD 11.5.2023, one can mark the above points in advance (for trading on 12.5.2023) as illustrated below
And see how the price behaved on 12.5.2023
Are you not impressed that Price took support at previously mentioned level (Support 2) and then moved up to test Daily Pivot ??
But then how to trade it ??
How to develop a process for it ??
Should one Short at the open itself when price opened below the Daily Pivot??
How would one know whether Price would take support at at Support 1 or Support 2 ??
Actually it is the answer to above questions that brings in focus points like
Defining Risk,
Defining position size accordingly,
When to book out,
How to trail
etc etc.
And to give answers to above questions (which wouldnot even arise till you start actual trading), further trading systems like CPR, PEMA etc were developed from the above concept of Daily Pivot.
Limitations of Daily Pivot Based trading:
Major limitation comes from the fact that larger market play-out is not taken into account and each day is taken as an independent trading unit.
To compensate the above point, in addition to Daily Pivot, Weekly/Monthly/Yearly Pivot points and Support/Resistance points are calculated (using Previous Week/Month/Year High,Low,Close) and various processes have been defined based on it. For Example
High of Year 2022= 18888
Low of Year 2022= 15183
Close of Year 2022= 18105
Pivot for Year 2023= 17392=(18888+15183+18105)/3
Support 1 for the year 2023 = 17392 x 2 - 18888= 15896
Resistance 1 for the Year 2023 = 17392 x 2 - 15183 = 19601
All of us know that price during current year did go below the Yearly Pivot of 17392 and as per above logic should have taken support only around 15896 , but it reveresed from 16828 itself and currently trading above Yearly Pivot.
How could it take support from 16828 and not dip to 15896 ???
Important point here is : these are just some reference points, at times these work, At other times , they donot work. No one should approach them as some guidelines written in stone.
Markets are always in flux. Always factoring in different informations -- geo-political, social , economical and keeps reacting/discounting them.
Anyone who claims to predict them correctly is either God or Liar !!!
