Pivot points are still a reliable tool that many investors choose. Because it is capable of identifying support and resistance levels effectively. Despite its popularity, adopting Pivot can be difficult. Therefore, Forex Trading helps you better understand Pivot and how to use it in trading.
What is Pivot?
Pivot Point is a term in stock trading. It refers to a key point on the chart where the price could change direction. Pivot Points are calculated based on the average value of the highest, lowest, and closing prices of the previous trading session. Identifying Pivot Points helps traders identify resistance and support zones. These are two important factors for making decisions in stock trading. what is a pivot point
Advantages and disadvantages of Pivot Point
Pivot Point is a useful tool for investors to predict price trends. However, investors need to clearly understand both the advantages and disadvantages of what is pivot point.
Pivot Point Advantages
- Pivot Points help identify important price levels. This is also an important step in finding the right time to open and close orders. When the price crosses the Pivot point, it means selling is strong. This suggests that investors should either close a buy order or open a sell order. On the contrary, the price moves below the Pivot point. This demonstrates the strength of the buy-in. To help make it reasonable to open a buy order or close a sell order.
- Pivot Point is mainly to identify support and resistance areas. At the same time, it helps investors identify price points that are likely to reverse.
- Pivot is more than just a technical analysis tool. It is a flexible tool that can be applied on any chart and timeframe.
- To optimize your chances of success, you can combine Pivot Point with other indicators. For example RSI, MACD or trading volume.
See more: Be more successful through this technical analysis
What are the disadvantages of Pivot?
Pivot Point brings many great benefits. However it cannot be denied that there are specific limitations.
- When the gap between the highest price and the lowest price of the previous time frame is too narrow. The emitted signals may not be reliable and may be considered spurious.
- When the gap between the highest and lowest price in the previous time frame is too large. Pivotal point it is often impossible to make accurate forecasts of price signals within time frames.
- When strong variations occur between support and resistance levels. Determining the stop loss point becomes difficult. Use of Pivot Point may not guarantee a risk-to-reward ratio.
Resistance – Support in Pivot
First of all, investors need to have a deeper understanding of two basic factors: supply and demand. In there:
- Supply is the total number of securities available for sale in the market
- Demand is the total amount of securities available for purchase.
The dynamic correlation between supply and demand is the main cause of constant fluctuations in the stock market. When supply prevails, market prices tend to decrease and vice versa.
- Support is the price area where buying demand increases strongly and prevents further price decline.
- Resistance is the area where the price level creates a significant increase in supply and demand. At the same time, it prevents further increases in prices.
Pivots can also act as support and resistance levels. It helps traders identify reversal points and predict price trends.
How to determine Pivot
Pivot is an important concept in stock trading. It is determined by three main factors. The main line of the Pivot Point is the main axis of the chart. Support levels S1, S2, and S3 are below the Pivot point. Resistance levels R1, R2, and R3 are above the Pivot point. The position of the price relative to the Pivot point shows the positive or negative nature of the market. Pivot point calculation formula and support and resistance levels can be applied to market analysis.
What is the structure of Pivot?
Pivot points are formed by three main factors, including:
- Pivot Point’s main street, also known as Pivot Point itself. It is not only the Pivot point but also the main axis of the chart.
- Support levels S1, S2, and S3 are below the Pivot Point (PP) line. Also known as the support pivot point.
- Resistance levels: R1, R2, and R3 are above the PP line (in other words, resistance pivot point)
When the price is above the Pivot point, it means the price is approaching the support levels S1, S2, S3. It represents a positive state of the price. Meanwhile, if the Pivot point is below the main axis point. Price may be approaching the resistance zones R1, R2, R3. This indicates a negative state of the price.
Pivot Point calculation formula
To calculate Pivot Point, you can use the following calculation method:
How to calculate PP rotation point
PP = [Closing price (previous period) + High price (previous period) + Low price (previous period)] / 3
How to calculate support levels (Support – S)
- S1 = (PP x 2) – High price (from previous period)
- S2 = PP – (R1 – S1)
- S3 = PP – (R2 – S2)
How to calculate resistance levels ( Resistance – R)
- R1 = (PP x 2) – Low price (from previous period)
- R2 = (PP – S1) + R1
- R3 = PP – (R2 – S2)
See more: Exness – Trade With The World’s Leading Broker Exness
Instructions on how to trade with Pivot Points
By understanding the nature and calculation of Pivot Point, we can determine support and resistance levels. This means that Pivot Point trading is essentially trading based on support and resistance levels. Therefore, investors only need to apply the appropriate method for each situation. Examples include Breakouts and reversals.
Pivot trading when the market is moving sideways
When the market cannot identify a clear trend. Prices often fluctuate between support and resistance levels. You can open a Buy order (BUY) at the support level and a Sell order (SELL) at the resistance level. Remember to place the stoploss point below the support level and above the resistance level. So to protect your trading position.
Trade Pivot Points when the market breaks out
In this situation, you can choose one of the following two options:
- First, you can place a buy-stop or Sell stop order a distance away from the resistance or support level. And then take profit at the nearest support or resistance level.
- Another option is to wait for the price recovery after the Breakout. Then open an order and take profit when approaching the nearest resistance or support level.
Forex trading in case of market reversal
This is a time that requires special attention. It is necessary to consider many factors before deciding to open a trade. Be patient and wait for the right signal before starting a trade. what is a pivot point
When the price tends to increase and surpass the Pivot point, to the resistance level R3. Then there appears a pair of strong reversal candles. This shows signs of a trend transition from bullish to bearish. You can place a sell order with a limit of R3. Then set the stop loss higher than the high of the highest candle. Finally, take profit when the price approaches the nearest support level, which is the S1 line.
Epilogue
Thus, Pivot points are not just a simple technical analysis tool. It is also an important part of an investor’s trading strategy. By clearly understanding the nature and calculation of Pivot, along with combining it with other analytical tools, investors can optimize the likelihood of trading success. Don’t forget that each market situation requires delicate consideration and evaluation skills. That is the information that Forex Trading wants to provide you about Pivot Point.
Frequently asked questions regarding Pivot
How to use Pivot in stock trading?
Pivot is used to determine support and resistance levels in stock trading. Traders can use Pivot points to set entry and stop loss points. As well as to determine the potential level of profit and risk.
Ways to take advantage of Pivot to perform Forex trading?
In forex trading, Pivot points are used to determine support and resistance levels. Forex traders often use Pivot points along with other technical indicators. Purpose to make trading decisions.
How to calculate support and resistance levels from Pivot?
Support and resistance levels are calculated using the formula from the pivot point. Support levels are calculated by subtracting the highest price of the previous session from 2 times the Pivot point. Resistance levels are calculated by subtracting the lowest price of the previous session from 2 times the Pivot point.
