What are pivot points, and how do they provide potential support and resistance levels?

Pivot points are calculated based on the high, low, and closing prices of the previous trading session. They are used to identify potential support and resistance levels for the current trading session. Here's how they work: 1. **Calculation**: The pivot point is calculated as follows: \[ P = \frac{3}{4}(\text{High} + \text{Low} + \text{Close}) \] This average price acts as a reference point for the day. 2. **Support and Resistance Levels**: Support and resistance levels are then determined based on the pivot point: - **Resistance Levels**: \[ R1 = 2P - \text{Low}, \quad R2 = P + (\text{High} - \text{Low}) \] These levels indicate where upward price movement may encounter resistance. - **Support Levels**: \[ S1 = 2P - \text{High}, \quad S2 = P - (\text{High} - \text{Low}) \] These levels indicate where price may find support. 3. **Market Sentiment**: Trading below the pivot point, especially at the beginning of a trading period, suggests a bearish market sentiment, which may lead to further price declines. Conversely, trading above the pivot point can indicate a bullish trend. 4. **Tactical Applications**: Pivot points are used by traders to determine entry and exit points for their trades. They are particularly useful for short-term traders looking to capitalize on small price movements. 5. **Combination with Other Indicators**: Using pivot points in conjunction with other technical analysis indicators can enhance their effectiveness. For example, moving averages can help confirm trend directions, improving the accuracy of pivot point-based trading strategies. In summary, pivot points provide a clear framework for identifying key levels where price movements may change direction, offering traders valuable insights into market sentiment and potential trading opportunities.