Pivot points are still trusted by many investors as a reliable tool to determine effective support and resistance levels. Although the pivot point is very popular, how to apply it can be difficult. Therefore, this Forex Trading article will help you better understand What is pivot point and how to use a pivot point in trading.
Resistance and support levels in What is pivot point?
A pivot point, also known as a “pivot point”, is a price area where a reversal reaction can occur.
- Supply – Demand: In the stock market, “supply” represents the amount of securities available to be sold. “Demand” represents the amount of securities available to be purchased. When demand prevails, prices tend to increase and vice versa.
- Support: Support is the price level where “demand” increases strongly and prevents the price from falling further. For example, every time the price touches the support level (blue). “Demand” is attracted by low prices and strong participation. While “supply” is no longer interested in selling like before.
- Resistance: Resistance is the price level where “supply” increases sharply and prevents the price from increasing further. For example, every time the price reaches the resistance level (red). “Supply” is attracted by high prices and strong participation. While “demand” is no longer interested in buying like before.
- Resistance – Support in Pivot Points: Pivot Points can be used as regular support and resistance levels. However, like other technical signals. Investors should use Pivot Points in a technical signal system to confirm reversals. Or price breakouts (instead of just relying on single Pivot Points to trade).
Often when support and resistance levels are broken significantly, their roles will reverse or change.
See more: Be more successful through this technical analysis
What is the exact calculation formula for What is pivot point?
Thanks to pivot, traders can identify resistance and support zones. The formula for calculating What is pivot point and the corresponding resistance and support levels are as follows:
Based on historical data including highest price (High), lowest price (Low), and opening price (Open):
- Pivot Point (PP) = (High + Low + Open) / 3
- Resistance 3 (R3) = PP + 2 x (High – Low)
- Resistance 2 (R2) = PP + (High – Low)
- Resistance 1 = (PP x 2) – Low
- Support 1 = (PP x 2) – High
- Support 2 = PP – (Low – High )
- Support 3 = PP – 2 x (High – Low)
These resistance (R) and support (S) levels will help the trader identify important zones in the price chart and can use them to make trading decisions.
Advantages and disadvantages of pivot points in trading
The pivot point is a useful tool that helps investors predict price trends in the market. However, to use a pivot point correctly, investors need to clearly understand both the advantages and disadvantages of What is pivot point.
Advantages of What is pivot point?
Advantage:
- Provides a price threshold number for you to determine when to open and close a trading position.
- Provides several market status indicators.
- Can be used to forecast future support and resistance levels.
- Helps identify areas where prices are fluctuating.
- Can be used on any chart timeframe.
- Can be combined with other indicators such as MACD, RSI, and Trading Volume to optimize the probability of successful trading.
A few minor disadvantages of What is pivot point?
Defect:
- When the low and high prices of the previous time frame are too close to each other. At this time, many false signals often appear.
- When the low and high prices of the previous time frame are too different. At this time there is usually no signal for the following time frame.
- It is difficult to use pivot points to determine stop loss points when the distance between resistance and support levels fluctuates strongly. Setting stop loss points according to pivot points often does not ensure maintaining a balanced profit and risk ratio.
Trading strategies with pivot points from the experts
After understanding the concept and formula for calculating pivot points, we have determined the appropriate trading method for each situation.
Traders need to determine the price state with pivot points
When a pivot point is determined based on a period. If the price moves below the pivot point level. This shows the negative state of the price during that period. Conversely, if the price moves above the pivot point level. This shows the positive state of the price during that period.
Bullish reversal strategy with pivot point
Using pivot points as support and resistance markers can help identify potential price reversals:
- Open a buy order if the price increases and touches the support levels S1, and S2, and place a stop-loss order at the support level immediately below (S2, S3).
- Open a buy order if the price drops and turns around at the resistance levels R1, and R2, and place a stop-loss order at the resistance level just above (R2, R3).
This is a quick and simple, yet effective method of managing risk. However, to increase trading efficiency, investors should combine it with other technical signals.
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Use pivot points – price is likely to break out
Use the pivot point as a resistance mark to look for breakout opportunities. When the price surpasses the pivot point and reaches the resistance level R1. Investors can apply the breakout strategy during the session. To make a purchase, the following steps can be applied:
- Buy as soon as the price breaks through the resistance level R1. Combined with liquidity and other technical signals.
- Wait for a successful confirmation when the price returns to test resistance level R1, confirmed by other technical signals.
- Place a stop-loss order right at the pivot point or use other support levels to protect your trading position.
However, to increase trading efficiency, investors need to combine pivot points with other technical signals. For example, the RSI line, so what is the RSI indicator? A popular momentum indicator that helps traders evaluate and analyze the market effectively. Let’s learn and try to combine and use these indicators together.
Epilogue
Through the knowledge presented by Forex Trading, we have an overview of What is pivot point and its role in predicting future price movements. Pivot plays an important part in market analysis. After this article, many investors will be interested in using pivots in their trading charts.
Frequently asked questions?
Pivot point What is pivot point?
A pivot point is simply an average value calculated based on the high, low, and closing prices of the previous trading session. On the next day, if the price is above the pivot point. This could indicate a bullish sentiment is taking place.
Conversely, if the price is below the pivot point, this indicates bearish sentiment. Therefore, pivot points are calculated to determine market sentiment levels that can switch from bullish to bearish and vice versa.
How are pivot points and Fibonacci different?
Although both Pivot Point and Fibonacci are related to support and resistance levels. However, their calculation methods are different. Because of different calculation methods, pivot points and Fibonacci will produce different results. This leads to different trading methods.
Pivot points are calculated based on three basic prices: high price, low price, and closing price of the previous trading session. Pivot points create support and resistance levels based on these levels.
Meanwhile, Fibonacci is based on fixed ratios in the Fibonacci series such as 0.382, 0.5, 0.618, and others. Fibonacci levels are calculated based on current price levels. Provides support and resistance levels based on these ratios.
Note when trading with What is pivot point?
Unlike trendlines and EMAs, pivot point levels are always the same in all time frames. Because they are calculated using the same formula. However, these pivot point levels are only valid during that trading day. And on the next day, they will change to new pivot point levels (can be R1, R2, R3, S1, S2, S3, and PP) depending on the market volatility.
