The article below will show what Pivot Points are. Is it the key to success in trading? Through this article on Forex Trading, we will reveal unique strategies to use Pivot Points effectively. Join us to learn how to apply this tool to optimize profits and minimize risks in the trading market. Start now to explore new opportunities!
Pivot Points Overview
Pivot Points remain the preferred choice of many investors because of their ability to effectively identify support and resistance levels. However, applying them can be challenging. Let’s learn more about Pivot Points and how to trade based on them easily and effectively below:
What is Pivot Point?
Pivot is an English word borrowed from French. It refers to “a pivot point”. Pivot Points are price points that are likely to reverse and start moving in the opposite direction. Pivot Points are points where traders can identify resistance and support areas – two important factors in the market trading process because they are determined based on the average value of the highest, lowest, and closing prices of the previous trading session.
What is the meaning of Pivot Point?
Pivot is viewed as an average value across investors. Therefore, sticking closely to the indicator line helps investors make their decisions in buying and selling.
When the price is below the Pivot, this shows that the Sellers are dominant and investors should consider selling. On the contrary, when the price is above the price, Buyers have an advantage and investors can consider buying.
Additionally, Pivot helps identify resistance and support levels. From there, performing Pivot transactions is similar to trading with the above threshold.
See more: Be more successful through this technical analysis
Pivot Points: Pros and cons
Pivot Point is also an important tool in technical analysis. It brings significant advantages to traders. However, there is no shortage of disadvantages encountered. Let’s explore the pros and cons below.
Advantages
Determining price thresholds is an opportunity to find the time to enter and exit orders. If the price is above the Pivot Points line, it shows that the sellers have the advantage and investors should sell or close the buy order. On the contrary, when the price line is below the Pivot Points, it shows that the buyers are dominant. From there, investors can consider buying or closing a sell order.
Investors can use Pivot points as a flexible technical analysis tool on multiple chart time frames.
Combine Pivot Points with some other indicators such as the RSI index and MACD to make trading easier and reach a high probability of success.
Disadvantages
Analyzing Pivot Points can be difficult. Especially during the trading day when the price can cross the daily pivot level several times. This can confuse investors who are new to trading. Not only that, analyzing Pivot points during the day becomes more complicated.
Pivot points have no information about the strength of a trend. Therefore there is no precision in reliability and ability to prolong movement. To reduce errors, we can combine several tools to determine Pivot points based on the previous day. For example, according to chart patterns, we draw levels according to high/low and add channel indicators. Predictions will be more accurate when there are multiple levels that match the Pivot point data.
A further weakness is the lack of complete consideration of external factors influencing current trends. Therefore, to achieve a complete and reliable investment strategy. We should use both technical and fundamental analysis in any period. Combine with other technical indicators and consider surrounding market events and economic news.
How to determine Pivot points
To start with a basic but no less important approach. Determining Pivot points through the point structure and Pivot point calculation formula are the basic steps to better understand this tool.
Structure of Pivot point
What is the structure of Pivot Point? Looking at the chart, we will see that the Pivot point structure can be quite complicated, but its parts are familiar and easy to recognize. The Pivot Points indicator identifies the following horizontal levels:
- P (PP) – rotation level. The PP line is the Pivot point, also known as the pivot point.
- S – support level. S1, S2, S3 are three support lines located below the PP line.
- R – resistance level. R1, R2, and R3 are three resistance lines located above the main PP line.
Based on the image above, there are the following observations:
When the price closes at the top of the candle, the Pivot point is also usually located at the top of the candle. Conversely, if the price closes in the lower part of the candle, the Pivot point usually appears in the lower part of the candle.
The Pivot line usually coincides with the closing price if it is between the highest and lowest prices.
Pivot points calculation formula
Pivot points consist of many different components, so the way to calculate each component will be different:
- Formula to calculate PP rotation point:
PP = (PHigh + PLow + PClose)/3
- Formula to calculate 3 resistance levels:
R1 = (2 x PP) – PLow
R2 = PP + (PHigh – PLow)
R3 = PHigh + 2(PP – PLow)
- Formula to calculate 3 levels of support:
S1 = (2 x PP) – PHigh
S2 = PP – (PHigh – PLow)
S3 = PLow – 2(PHigh – PP)
In there:
PHigh is calculated as the highest price of the previous time frame.
The PLow is calculated as the lowest price of the previous time frame.
PClose is calculated as the closing price of the previous time frame.
PP is calculated as the Pivot point.
Instructions for trading Pivot points
Trade Pivot points when the market is moving sideways
In an undetermined market trend, the price trend fluctuates between support and resistance levels. You can place a BUY order at support and a SELL order at resistance. Remember to place Stoploss below the support line and above the resistance level.
Trade Pivot points when the market breaks out
According to the illustration the blue line is the Buy point. The red line is the stop loss. The orange line is the profit-taking point. You have 2 choices:
- First, place a buy-stop or Sell-stop order at a distance from resistance or support. Next is to take profit at the nearest support or resistance level.
- Second, after the Breakout, you need to wait for the price to recover before placing an order. Next is to take profit at the nearest support or resistance level.
Trade Pivot points when the market reverses
While the market reverses, you need to observe and wait for the right signal and then start trading.
For example, if the price is trending up and has moved above the PP line to touch the R3 line, there is a pair of strong candlestick reversals signaling a downtrend. Then you place a Sell limit order at line R3 and set stop loss higher than the top of the highest candle. Profits can be booked when the price approaches the nearest support, line S1.
See more: Optimize trading with IC Markets Exchange
Conclude
Through the overview of Pivot Points, we see that this is a powerful tool in technical analysis. However, in addition to the advantages it brings, there are many other disadvantages. Hopefully, through the information shared by Forex Trading, investors will clearly understand Pivot point determination as well as Pivot trading.
FAQs
What happens if the Pivot Point is below the main axis point in the Pivot Points structure chart?
The low Pivot point is below the pivot point when the price approaches the resistance levels R1, R2, and R3. The market’s price status is showing negative signs at this time.
What is the nature of Pivot Point?
They are essentially support and resistance lines. Allows investors to identify possible reversal points at support and resistance levels. Or if the price breaks out of the support or resistance threshold, these points always continue with the original trend.
What is the reliability and prolongation of the Pivot point’s movement?
Pivot points do not capture information about the strength of a trend. Therefore, there is no information about the precision and prolongation of the observed movement.
