Today we’ll introduce a special strategy for support and resistance trading, which is used for intraday trading in stocks and indices. We’ll address the common terms “support” and “resistance” in the stock market, which many traders hear about daily.
To address this, the concept of “pivot points,” is explained which is a technical term associated with support and resistance levels. Pivot points are crucial reference points for traders to determine potential price movements and make informed trading decisions.
Understanding support and resistance levels and demonstrates how to identify them manually on a 5-minute time frame using HDFC Bank’s stock chart. Support is where buying interest and demand are concentrated, while resistance is where selling pressure and supply dominate.
On the chart, a resistance level around 1415, where the stock faced selling pressure and experienced a pullback. Conversely, identifying a support level near 1400, where the stock found demand and bounced back.
The concept of the Pivot Point strategy, allows traders to predict future support and resistance levels. While historical support and resistance levels can be manually identified, traders need a method to identify these levels in real-time, as the market develops.
The Pivot Point strategy provides a solution to this issue. It enables traders to calculate potential support and resistance levels for the upcoming period, allowing them to anticipate price movements and make informed trading decisions. By using this strategy, traders can identify crucial reference points for the day ahead and adjust their intraday trading strategies accordingly.
The Pivot Point strategy and how it can be utilized to establish support and resistance levels in the future. He emphasizes the limitations of manually identifying support and resistance, as it only reflects historical data. To address this, we introduce you to the Pivot Point indicator, which automatically calculates and plots these levels based on a predefined formula.
This strategy utilizes the previous day’s open, high, low, and close prices to calculate the support and resistance levels for the current trading day. The indicator also displays a central pivot point, denoted as “P,” which represents a crucial reference level around which the stock’s price is expected to revolve for the day.
The advantages of using the Pivot Point indicator, particularly its stability throughout the trading day, unlike other indicators that dynamically follow the price, the support, resistance, and pivot levels remain fixed for the entire day, providing traders with consistent and reliable reference points.
Moving on to the trading strategy, how the Pivot Point levels can be effectively utilized for intraday trading. Traders can adopt various approaches, such as:
1. Breakout Trading: Traders may initiate a long position if the stock breaks above the resistance level or a short position if it breaks below the support level, with stop-loss orders in place to manage risk.
2. Range Trading: Traders can buy near the support level and sell near the resistance level, aiming to profit from the stock’s price oscillations within this range.
3. Pivot Point Bounce: Traders may enter a trade when the stock’s price bounces off the central pivot point, using it as a key support or resistance level.
This strategy works best with stocks that have higher volatility and sufficient trading volumes, particularly those listed in the futures segment.
The strategy requires waiting until 9:30 AM when the market settles down after the initial market opening at 9:15 AM. Traders need to determine their view on the stock, whether it is bullish or bearish, based on its opening price relative to the pivot point.
If the stock opens above the pivot point, it is considered to be trading in bullish territory, and traders should focus on buying on dips. Conversely, if the stock opens below the pivot point, it is considered bearish, and traders should look for opportunities to sell on rallies.
Let’s take the example of HDFC Bank’s stock on a particular day, the stock opened below the pivot point at Rs. 1401 and closed at Rs. 1407 at 9:30 AM, while the pivot point for the day was Rs. 1413. This indicates a bearish view for the stock from an intraday perspective.
Based on this information, traders can plan their intraday trades accordingly. For example, they could consider shorting the stock as it rallies during the day. The strategy can be used for various trading instruments, such as intraday equity trading, futures, and options.
Traders can also manage their risk based on their risk appetite. They can choose to trade at-the-money (ATM) call or put options or out-of-the-money (OTM) options, though they should be aware that OTM options carry more risk due to time value erosion.
To clarify the strategy, the example of HDFC Bank’s stock, which opened below the Pivot Point at Rs. 1401 and closed at Rs. 1408 at 9:30 AM, indicating a bearish view for the stock.
For entering a short trade, you can place a bid near the Pivot Point (Rs. 1413) because it represents a significant reference level for the day. However, traders can use their discretion and place the bid slightly earlier, around Rs. 1411 or Rs. 1412, to get a more advantageous entry.
Moving on to the exit strategy, one can use the nearby Pivot Point support and resistance levels to set stop loss (SL) and target levels. In this case, R1 (Resistance 1) is at Rs. 1428, and S1 (Support 1) is at Rs. 1383. He advises traders to place their stop loss slightly above R1, around Rs. 1429, to avoid common stop hunting that might occur at well-known levels like Rs. 1428.
Regarding the target, aiming for S1 (Rs. 1383) or even S2, which is the next support level. He emphasizes the importance of being disciplined and sticking to the predefined stop loss (SL1) level for exits, rather than moving to SL2 or SL3, as maintaining discipline is crucial for successful intraday trading.
After entering the short trade at 1413, the market tested patience as it rallied to 1417 before resuming its downward move. Despite the temporary fluctuations, the logic for his short trade remained intact as the stock opened and closed below the Pivot Point, indicating a bearish sentiment.
Around 2:25 PM, the market mounted another selling pressure, driving HDFC Bank’s stock towards its S1 level at 1400, which is a demand zone. Recognizing this support level, we decided to book his profit and exit the trade.
Once again we highlight the importance of backtesting the Pivot Point strategy to validate its effectiveness in different market scenarios. To demonstrate this, we suggest backtesting the strategy for October 10th, when the market experienced a sharp gap down, causing selling pressure in market leaders, including HDFC Bank.
On that particular day, HDFC Bank’s stock opened significantly below the pivot point, between S3 and S4. This indicated a bearish sentiment, prompting to avoid taking any long trades in HDFC Bank for the day. He explained that he only looks for short opportunities when the stock opens below the pivot point, aiming to trade with the dominant selling pressure.
Throughout the day, HDFC Bank’s stock tested different Pivot Point levels, including S3, S2, and S1, where short-term buying pressure was observed.
Ultimately, when HDFC Bank’s stock neared the pivot point of Rs. 1428, short at that level, adhering to the principle of trading close to the pivot point for better risk-reward ratios.
The Pivot Point strategy can be extremely useful for traders who have limited time to actively monitor charts and indicators throughout the trading day. For busy traders who have other commitments or responsibilities, the Pivot Point strategy offers a simple and effective way to identify key support and resistance levels, helping them place bids and trades with minimal effort and time.
By calculating the Pivot Points in advance, traders can plan their trading strategy for the day based on these predetermined levels. This eliminates the need for constant chart monitoring and allows them to focus on their other work or engagements without missing out on trading opportunities.
For traders who use auto-trending software like the advanced version of AutoTrenders, the process becomes even more convenient. The software provides users with a clean and user-friendly interface where they can easily access the Pivot Points for various stocks and sectors.
In the new version of AutoTrenders, users can choose between different themes, such as black and white, based on their preference. By selecting the desired sector, traders can view a list of stocks and their corresponding Pivot Points, making it convenient to identify potential trading opportunities without extensive chart analysis.
The Pivot Point strategy is particularly beneficial for those who seek simplicity and efficiency in their trading approach. It allows traders to stay focused on their primary responsibilities while still participating in the market and potentially making profitable trades.
When a technical indicator shows a high probability percentage, such as 98% down for Bandhan Bank, it means that the price has already experienced a significant decline, and the probability of further downside may be limited.
Traders should be cautious when technical indicators show extremely high probabilities, as it indicates that the price has already moved significantly in that direction. This may result in a lower risk-reward ratio for new trades entered at such levels.
Instead, it is suggested that the best entry points occur when technical indicators show probabilities in the range of 67-76%, which indicates a more balanced risk-reward scenario. In these situations, traders can identify potential trade opportunities with a higher probability of success and better risk management.
Using the example of Axis Bank, he demonstrates how to apply the strategy in real-time. The opening price of Axis Bank was 780, which was above the pivot point at 767. The closing price at 9.30 was also above the pivot point, indicating a bullish view. As per the strategy, the ideal entry point for a long trade would be around 767 with a stop loss at 755.
Despite not providing a direct entry, the strategy helps traders understand the stock’s direction based on the opening and closing prices. In this case, Axis Bank moved towards R1 and R2, validating the bullish view as indicated by the pivot point strategy.
Using the example of Axis Bank, which closed around 767, suggests looking at the 760 strike for options trading. The provided option chain analysis gives an overview of the call and put open interest at various strikes. Traders can use this information to understand where the maximum resistance and support levels are.
However, it is advised not to mix these open interest levels with the pivot point strategy. Instead, the pivot point levels are to be followed strictly, as they have already been calculated based on historical data and provide fixed levels for the day.
The key take away from his explanation is to maintain a clear and focused approach in trading. Avoid complicating the strategy with multiple indicators and stick to the pivot point levels for entry and exit decisions.
As a result, buying options near support and resistance levels may not yield favorable results due to the rapid decline in option premiums as expiry approaches.
It is suggested that for retail traders, it is better to avoid buying options and focus on selling options if they have the risk appetite and understanding of option writing. However, acknowledge that not everyone is comfortable with option writing due to the higher risk involved.
Instead, retail traders to concentrate on trading in-the-money options and find support and resistance levels for the underlying index or stock rather than focusing on option premiums. This approach can provide more favorable risk-reward scenarios for intraday trading.
In conclusion, while the pivot point strategy is effective for intraday trading in stocks and indices, it may not be suitable for options trading due to the rapid time decay. Traders are encouraged to be cautious and mindful of the specific characteristics of options while devising their trading strategies.
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