Daily Pivots are a price level indicator calculated using the previous day’s price data.
The Daily Pivot for today’s trading is calculated by calculating the mean average of the:
- Previous Day’s High
- Previous Day’s Low
- Previous Day’s Close
The Daily Pivot is a tool you might want to use to construct a trading strategy. If you find you side with some of the arguments questioning the usefulness of Daily Pivots, it’s still valuable to monitor them as certain market participants do give them credence.
The below chart of the CFD price action in SEB shows how the Daily Pivot is calculated.
Source: City Index Demo Account 20181113
Classic Trading Strategy
One established method of trading the Daily Pivot is to monitor price action for the first 15 minutes of the day and if it is below the Daily Pivot to trade into a short position and if the price is above the Daily Pivot then to trade into a long position. Holding periods would be intra-day, and there would be scaling out of positions at the Support Levels or Resistance Levels depending on whether you are trading long or short. Your Stop Loss levels would typically be set just the other side of the Daily Pivot.
The theory behind the Daily Pivot trading strategy is somewhat self-fulfilling. The Daily Pivot is a well-known analysis tool that has been around for a long time. Even if you are not basing your trading activity on the Daily Pivot, you are still likely to benefit from knowing where it is and understanding its impact on price action. The fact that some other market participants will be trading using the Daily Pivot means it is important to monitor.
While the Daily Pivot is important, you might be questioning the benefit of risking your capital trading strategies based around it.
Take time to step back and consider the significance of the three data points chosen to calculate it? How useful are they as determinants of today’s price action?
Why not include the previous day’s Opening Price? Why not only consider two data points, namely the previous Day’s High and Low? The truth is that some traders do use methods with different data points.
It’s fair to conclude that Daily Pivots must have worked pretty effectively at some point. Any method of making profits in the market soon gains a loyal following. You have to draw your own conclusion on the significance you’ll place on Daily Pivots. Even if not completely convinced by the methodology the role of the Daily Pivot needs to be acknowledged and might at least be tested by trading a Demo account.
Pivot points can be applied to different time intervals. Weekly and Monthly Pivot points are calculated using the same method, for example:
Monthly Pivot = mean average of (Previous Month’s High + Previous Month’s Low + Previous Month’s Close)
A yearly or monthly Pivot might even be running through your intra-day charts and explain particular price action.