Floor Trader Pivot Lines: Day Trading Key Support & Resistance

What Are Floor Trader Pivot Lines?

Floor Trader Pivot Lines are a series of price levels that act as potential areas of support or resistance during a trading session. These levels are calculated based on the previous day’s high, low, and close prices, giving traders an insight into where the market might turn or consolidate. The concept behind pivot lines is rooted in market psychology: traders often anticipate that prices will react around these levels, making them self-fulfilling as more participants rely on them.

The main levels in the pivot line set are:

Pivot Point (P): The central price level derived from the previous day’s price action. It’s seen as the potential balance point for price movement.
Support Levels (S1, S2, S3): Prices below the Pivot Point where buying interest may cause prices to bounce.
Resistance Levels (R1, R2, R3): Prices above the Pivot Point where selling interest might cap upward movement.

How Are Floor Trader Pivot Lines Calculated?

Calculating pivot levels involves straightforward math based on the previous day’s high, low, and close prices. Here’s the formula for each level:

Pivot Point (P):
$\frac{(High + Low + Close)}{3}$
First Support Level (S1):
$\times P) – High$
First Resistance Level (R1):
$\times P) – Low$
Second Support Level (S2):
$S 2 = P - (H i g h - L o w)$
Second Resistance Level (R2):
$R 2 = P + (H i g h - L o w)$
Third Support Level (S3):
$\times (High – P)$
Third Resistance Level (R3):
$\times (P – Low)$

These levels can be calculated manually or automated through charting software, and they serve as the foundation for planning trades during the day. The chart below was created in EZE / Realtick and shows the Central Pivot (red line), First Resistance (blue), First Support (green), Second Resistance (black), and Second Support (black – below the green line)

Source: Eze EMS, SS&C Eze.

How to Use Floor Trader Pivot Lines in Day Trading

Pivot lines are versatile and can serve multiple purposes within a day trading strategy. Here’s how they’re applied to anticipate inflection points, set profit objectives, and define stop-loss levels.

1. Anticipating Inflection Points

Pivot lines are natural points where traders expect price reversals or trend pauses.

Pivot Point as Balance: When the price hovers near the Pivot Point, it often signals indecision or balance between buyers and sellers. Breaking above or below the pivot level can provide early hints of trend direction.
Support and Resistance as Reversal Zones: Traders often closely observe S1, R1, and the pivot point, as these are the most common inflection points. If the price approaches these levels and shows hesitation (like a reversal candlestick pattern), it may indicate a reversal back towards the pivot or opposite direction.

2. Setting Profit Objectives

Pivot levels provide traders with predefined price targets for their trades, helping to establish logical profit objectives.

Using R1 and S1: If you enter a trade based on a bounce or breakout around the pivot point, R1 or S1 can act as the first logical profit target. For instance, if you enter a long position near the pivot point and the price moves toward R1, it can be an optimal level to take partial or full profits.
Multiple Targets: If the trend is strong, traders may set progressive profit targets at R2, S2, or R3 and S3. These levels represent extended moves and are often reached during high volatility or strong trends.

3. Establishing Logical Stop-Loss Levels

Stop-loss placement is essential for risk management, and pivot lines provide logical reference points.

Placing Stops Below Support or Above Resistance: If you enter a trade near the pivot point, you can place a stop-loss just below S1 for a long trade or just above R1 for a short trade. This placement allows room for normal price fluctuation while protecting you from significant losses if the trade goes against you.
Adjusting Stop-Loss with Trend Progression: If the price moves in your favor to the next level, adjust the stop-loss to the prior level to lock in profits. For example, if your entry was near the pivot and the price reached R1, move your stop-loss up to the pivot to secure gains.

Additional Tips for Using Floor Trader Pivot Lines

Combine with Other Indicators: Pivot lines work best when combined with other technical indicators, such as moving averages, RSI, or MACD, to confirm signals and filter false moves.
Monitor Volume: Volume increases can validate moves around pivot lines. For instance, if the price breaks through R1 with high volume, it will likely continue toward R2.
Align with Market Open and News Events: Major economic news or earnings releases can increase volatility. Pivot levels can serve as objective price points to manage this volatility effectively.

Conclusion

Floor Trader Pivot Lines are invaluable tools in a day trader’s arsenal, offering a straightforward and reliable method to identify support and resistance levels. By learning how to anticipate inflection points, set logical profit targets, and place protective stop losses based on these levels, traders can improve their risk management and increase the consistency of their trading results. Whether you’re a novice or an experienced trader, incorporating pivot lines into your day trading strategy can provide a structured and disciplined approach to navigating market volatility.