Pivot Points

Pivot points are a popular technical analysis tool used by traders to identify potential support and resistance levels. These levels can provide valuable information to traders as they determine potential entry and exit points for their trades. In this article, we will explore how traders can incorporate pivot points into their trading strategies.

Understanding Pivot Points

Pivot points are calculated using the previous day's high, low, and closing prices. There are several types of pivot points, but the most commonly used ones are the standard pivot point, also known as the floor pivot point, and the Fibonacci pivot point.

1. Standard Pivot Point: The standard pivot point is calculated by adding the previous day's high, low, and closing prices together and dividing them by three. The resulting number is the pivot point, which is considered the main support and resistance level.

2. Fibonacci Pivot Point: The Fibonacci pivot point is calculated by using the Fibonacci sequence to determine the support and resistance levels. The pivot point is calculated by adding the previous day's high, low, and closing prices together and dividing them by three. The first support level is calculated by multiplying the pivot point by 2 and subtracting the previous day's high. The second support level is calculated by multiplying the pivot point by 3 and subtracting the previous day's high. The first resistance level is calculated by multiplying the pivot point by 2 and subtracting the previous day's low. The second resistance level is calculated by multiplying the pivot point by 3 and subtracting the previous day's low.

Using Pivot Points for Trading

Now that we understand how pivot points are calculated, let's explore how traders can use them for trading:

1. Identifying Support and Resistance Levels: The pivot point, along with the first and second support and resistance levels, can be used to identify potential support and resistance levels. Traders can use these levels to determine potential entry and exit points for their trades. For example, if the price is approaching a support level, it may provide a good opportunity to buy, while if the price is approaching a resistance level, it may provide a good opportunity to sell.

2. Using Multiple Timeframes: Traders can use pivot points on multiple timeframes to get a better understanding of potential support and resistance levels. For example, if the daily chart shows a strong support level, but the hourly chart shows a potential resistance level, it may be a signal that the overall trend is starting to shift.

3. Using Pivot Points with Other Indicators: Pivot points can be used in conjunction with other indicators to confirm potential support and resistance levels. For example, if the price is approaching a support level and the Relative Strength Index (RSI) is oversold, it may provide a stronger signal to buy.

4. Adjusting Pivot Points: Pivot points can be adjusted based on market conditions. For example, if the market is trending strongly, the pivot point may be further away from the previous day's closing price. Traders can adjust the pivot points to better reflect current market conditions and potential support and resistance levels.

Conclusion

Pivot points are a popular technical analysis tool used by traders to identify potential support and resistance levels. By understanding how pivot points are calculated and how to use them for trading, traders can improve their trading strategies and increase their chances of success. Pivot points can be used in conjunction with other indicators and adjusted based on market conditions to provide a more comprehensive view of potential support and resistance levels.