Pivot Point – a tool to determine market movementdeltafx writer 21 June 2021
what you read here:
- 1 What is a Pivot Point?
- 2 Applying pivot point in day trading
- 3 Predicting the support and resistance levels
- 4 Calculating a pivot point by using support and resistance levels
- 5 Entering trades by using a pivot point
- 6 FAQs
A Pivot Point helps you determine the most suitable entry point for the Forex market. Suppose you are one of those traders who have difficulty determining these points or have just entered the Forex market and do not have experience working with this tool. In that case, this article will help you learn more about one of the most practical detection methods of entry and exit points.
What is a Pivot Point?
Pivots Points are specific levels that market analysts can use to determine the directional movement or potential support/resistance levels. In this regard, these levels are introduced as predictive or leading indicators. Thus, yesterday’s pivot point could indicate an uptrend in the market, and this will only happen if trades are made above these levels. On the other hand, if the trades are made below these levels, they indicate a downward trend. You should know that while the daily pivot points are considered important by swing traders, these levels are also useful in 4-hour timeframes for day trading.
Applying pivot point in day trading
Since this tool is one of the most practical methods in determining the market’s direction, you can use it to predict the future trend of the market. If the stock price is above the pivot point when it opens, this market move could be a sign of an uptrend in the market. So, after passing the first resistance level, you can set your profit limit on the second resistance level. On the other hand, if the price is below this level at the opening, it indicates a downtrend. These charts are only for day trading and fluctuate every day based on the final prices of that day.
Predicting the support and resistance levels
It is possible to say that all forms of technical analysis are based on support and resistance concepts. Some traders expect the price to return as the market approaches these levels, but others may predict a breakout. Therefore, prices are also considered important because they indicate the possibility of significant movements in the market. Thus, identifying the location of these levels will be a decisive step in continuing the market trend.
Considering the importance of support and resistance levels, the question that arises is how to calculate these important price levels? There are many ways to answer this question, but one of the most common techniques is to use them in pivot points. Pivot point levels provide standard price information at closing time and the highest and lowest prices, and we can use them to predict potential support and resistance levels.
Calculating a pivot point by using support and resistance levels
Pivot Point support and resistance levels can be used exactly like their normal forms. However, like other indicators, confirmation of Pivot Point signals and other aspects of technical analysis are important.
- Resistance level 3 = highest price of the previous day + 2 (Pivot – lowest price of the previous day)
- Resistance Level 2 = Pivot + (Resistance Level 1 – Support Level 1)
- Resistance level 1 = (pivot 2 x) – the lowest level of the previous day
- Pivot = yesterday’s price (high + low + closing) / 3
- Support level 1 = (pivot 2 x) – yesterday’s highest day
- Support level 2 = Pivot- (Resistance level 1 – Support level 1)
- Support level 3 = lowest price of the previous day – 2 (the highest price of the previous day – pivot)
Entering trades by using a pivot point
- First, open the chart – After calculating the daily levels, open the chart and add the pivot points.
- Follow the market movements – wait for the price to be closed at a pivot point. If you open a buy position, you should know that the price movements should touch the lower levels as they approach the pivot points. If you have a selling position, check the market as the price movements touch higher levels as they approach the pivot points.
- Let the price touch these levels – after that, you have to wait until the price reaches the pivot point, which basically means that the stock is being traded at the pivot price at that time.
- And finally, enter the trade – now you can make a trade by following the steps mentioned above.
❓ Are pivot points used only to predict support and resistance levels?
In general, there are five different types of pivot points, and the standard and Fibonacci are the most famous ones. The basic pivot point is used for the standard type (basically, it represents the balance between the uptrend and the downtrend), and it provides a simple average of the highest and lowest prices and the closing price, which is related to the previous period. Fibonacci pivot points start exactly like the standard type.
❓ What is the benefit of using these methods?
– They’re Suitable for day trading – Pivot points take data from the previous trading day and apply it to the current trading day. This makes pivot points a unique final indicator for day trading.
– They use short-term timeframes – since the pivot point data is for a trading day, the best time intervals are 1 minute, 2 minutes, 5 minutes, and 15 minutes. Hence, its use is suitable for day trading.
– Their high accuracy – Since this indicator is used by many traders such as day traders, professionals and amateurs, it has a high accuracy.
– They have a rich set of data – since this indicator shows seven separate trading levels, it is undoubtedly sufficient for day traders.
– They’re easy to use – Most trading platforms offer these types of indicators. This means that you do not have to calculate the levels separately.