Pivot points are a technical analysis tool used to identify potential support and resistance levels in a market. They are calculated based on the high, low, and closing prices of the previous trading session, and they help traders determine entry and exit points, as well as stop-loss levels. Here's how to use pivot points:
- Calculate the Pivot Point: The pivot point is calculated as the average of the previous day's high, low, and closing prices12. The formula is: Pivot Point = (Previous High + Previous Low + Previous Close) / 3.
- Determine Support and Resistance Levels: Based on the pivot point, you can calculate two support levels (S1 and S2) and two resistance levels (R1 and R2)12. These are derived as follows:
- Support Levels (S1 and S2): S1 = (Pivot Point × 2) - Previous High; S2 = Pivot Point - (Previous High - Previous Low)
- Resistance Levels (R1 and R2): R1 = (Pivot Point × 2) - Previous Low; R2 = Pivot Point + (Previous High - Previous Low)
- Interpret Market Sentiment: Trading above the pivot point is considered bullish, indicating ongoing bullish sentiment, while trading below the pivot point is bearish, indicating ongoing bearish sentiment12.
- Use for Trading Decisions: Traders use pivot points to decide entry and exit points, as well as stop-loss levels. For instance, if the price is trading above the pivot point, a trader might place a buy order, and if the price is trading below the pivot point, a sell order might be placed24.
- Combine with Other Indicators: Pivot points are often used in conjunction with other technical indicators for better accuracy. They can help identify trends and potential reversals13.
- Consider Market Context: Pivot points are most effective in markets with high volatility and wide daily trading ranges. They can help identify key levels of support and resistance, which can be used to anticipate price movements5.
By using pivot points, traders can gain insights into market sentiment and potential price levels of support or resistance, which can inform their trading strategies. However, it's important to note that no technical analysis tool is perfect, and traders should consider other factors and market conditions when making trading decisions.