July 24, 2023
Blog & Resources
By Dan Taylor
Traders grapple with countless uncertainties in the market. One of the toughest knots to untie is knowing when to initiate or exit trades. This is not a problem to take lightly. Successful trading hinges on optimal timing.
But, the volatility and dynamism of markets make this a moving target. The purpose of this article? To arm you with an effective tool to tackle this issue head-on: floor trader pivots. We're about to dive deep into this topic, offering a comprehensive guide on how to enhance your trading strategy.
How do you apply floor trader pivots in your own trading scenarios? One of the most impactful uses is deciding entry and exit points. Say, for instance, a stock price is above the floor trader pivot. This could be a sign to consider buying. On the other hand, if a stock price is below the pivot, you might consider selling or shorting.
Floor trader pivots also come in handy for managing risk. A critical aspect of trading is knowing where to set your stop losses. Pivot levels can guide this decision. Suppose you're in a long position and the price starts to drop. A stop loss set just below the nearest pivot level can provide a buffer against significant losses.
But what about different trading styles? Whether you're into swing trades or day trades, floor trader pivots can adapt. This strategy can accommodate both styles. The deciding factors would include where the price is relative to the pivot point and other considerations such as risk/reward ratio.
Modern traders often turn to "robots" or automated trading systems. Floor trader pivots can feature in these setups too. A trading bot might, for example, be programmed to buy when a price breaks above the pivot or sell when it falls below.
Market conditions play a crucial role when using floor trader pivots. In a bull market, buying at or above the pivot point could prove profitable. However, this strategy might backfire in a bearish or volatile market.
Also, be aware of earnings announcements. These can significantly affect stock prices. A stock's price could be moving favorably according to the pivot points, only for an upcoming earnings announcement to disrupt the trend.
Let's dive into the specifics, starting from the calculation of the pivot point itself.
Take the high (H), low (L), and close (C) from the previous trading day and calculate the pivot point (P) using the following formula:
P = (H + L + C) / 3
This calculation gives you the base pivot point. This serves as a major support/resistance line for the next trading day.
Here’s what a floor trader pivot formula on resistance and support looks like:
These four levels give traders potential entry and exit points. See our article "Spotting Key Indicators in Trading: The Importance of Floor Trader Pivots" for a hypothetical scenario that illustrates how this would work in real life.
In the analysis phase, you'll examine the price behavior in relation to the pivot point and surrounding levels. Are prices hovering around a particular pivot level? Are they trending up or down? Is the price opening above or below the pivot point, and what does that indicate?
Look for potential pivot level breakouts or breakdowns. You might also observe for potential reversals at the pivot levels. This process of analyzing the market provides you with the necessary context for your trading decisions. It's also important to consider the overall market conditions. Is it a bull market, a bear market, or a sideways market? Remember, market conditions can influence how you interpret pivot points.
The key to effective trading using floor trader pivots is to make strategic entry and exit decisions. If the price opens above the main pivot point, it's generally a bullish signal, and you might consider entering a long position. Conversely, if the price opens below the pivot point, it could be a bearish signal, and you might consider shorting or selling.
To determine an exit point, look at the resistance levels if you are in a long position, and support levels if you are in a short position. For instance, if you are in a long position and the price approaches R1, monitor it closely. If the price struggles to break through R1 and starts to reverse, it might be a good time to sell.
Remember, these are general guidelines. It's essential to consider other factors like risk tolerance, your investment goals, and the overall market sentiment when determining your entry and exit points.
Once you have identified your potential entry and exit points, it's critical to define your risk levels. This is where stop losses come in. Stop losses can be set at the nearest pivot level depending on your position.
If you're in a long position, consider setting the stop loss just below the nearest pivot level. This is because if the price starts dropping and breaks through a pivot level, it may keep dropping. By setting your stop loss just below the pivot level, you protect yourself from significant losses.
On the other hand, if you're in a short position, you might set your stop loss just above the nearest pivot level. This protects you if the price starts to rise and breaks through a resistance level.
In both cases, the pivot levels provide a measure of protection against significant losses. They help you to manage your risk while also giving your trades room to move. Always remember, managing risk is just as important, if not more so, than seeking profit.
Floor trader pivots have shown us a way to address one of trading's most pressing issues: optimal entry and exit timing. But mastering this technique requires practice and further learning. It also requires tools and expertise.
At MarketGauge, we offer a number of products to help you become a better investor, from mastering the NASDAQ 100 to implementing your own sector rotation trading strategy. Get help from the pros today and we’ll make you a more informed investor right away.
