Pivot Points

Pivot Points are a popular technical analysis tool used by traders to identify potential support and resistance levels in the financial markets. They are calculated based on the previous day's price action and provide important levels that traders can use to make decisions about entering or exiting trades. In this blog, we'll go over the basics of pivot points, how to calculate them, and how to use them in trading.

What are pivot points?

Pivot points are horizontal lines on a chart that indicate potential support and resistance levels. They are calculated based on the previous day's high, low, and close prices. The most commonly used pivot point is the simple pivot point, which is calculated by taking the average of the previous day's high, low, and close prices. From this simple pivot point, traders can calculate three levels of support (S1, S2, and S3) and three levels of resistance (R1, R2, and R3).

How to calculate pivot points

Calculating pivot points is simple. Here is the formula for a simple pivot point:

Pivot Point (PP) = (Previous Day's High + Previous Day's Low + Previous Day's Close) / 3

From the pivot point, traders can calculate the support and resistance levels as follows:

• Support 1 (S1) = (2 * PP) - Previous Day's High

• Support 2 (S2) = PP - (Previous Day's High - Previous Day's Low)

• Support 3 (S3) = PP - 2 * (Previous Day's High - Previous Day's Low)

• Resistance 1 (R1) = (2 * PP) - Previous Day's Low

• Resistance 2 (R2) = PP + (Previous Day's High - Previous Day's Low)

• Resistance 3 (R3) = PP + 2 * (Previous Day's High - Previous Day's Low)

How to use pivot points in trading

Pivot points are often used by traders to determine potential levels of support and resistance in the market. Traders can use these levels to make decisions about entering or exiting trades. If a market is trending up and reaches a pivot point resistance level, it may be a good time to exit a long position or take a short position. If the market is trending down and reaches a pivot point support level, it may be a good time to exit a short position or take a long position.

Another way to use pivot points is in combination with other technical indicators. For example, traders may use pivot points in conjunction with moving averages or oscillators to get a clearer picture of market momentum and trend.

In conclusion, pivot points are a simple yet effective tool that traders can use to identify potential levels of support and resistance in the market. By combining pivot points with other technical indicators, traders can make more informed decisions about entering and exiting trades.