Pivot Point Concepts, strategies and benefits when used in trading -

Pivot Point Concepts, strategies and benefits when used in trading

Author: Michael view: 29 Update: 21/11/2023 Downloads: 0

Pivot Point is an important concept in financial markets and is widely used in trading stocks, forex and other asset types. This is a technical tool that helps investors identify important points in the price chart to make effective trading decisions. In this article, we will learn about the Pivot Point concept , trading strategies and benefits when used in trading.

Pivot Point concept

Pivot Point Concepts, strategies and benefits when used in trading

Pivot Point is a technical indicator calculated from the closing price of the previous trading session. It is used to identify support and resistance levels in price charts. These support and resistance levels play an important role in determining trends and entry/exit points in trading.

Pivot Point is calculated by summing the highest, lowest and closing prices of the previous trading session, then dividing by 3. The formula for calculating Pivot Point is as follows:

Pivot Point = (Highest price + Lowest price + Closing price)/3

Additionally, secondary support and resistance levels can be calculated using the following formula:

Support 1 = (2 x Pivot Point ) – Highest Price Support 2 = Pivot Point – (Highest Price – Lowest Price) Support 3 = Lowest Price – 2 x (Highest Price – Pivot Point )

Resistance 1 = (2 x Pivot Point ) – Lowest Price Resistance 2 = Pivot Point + (Highest Price – Lowest Price) Resistance 3 = Highest Price + 2 x ( Pivot Point – Lowest Price)

Pivot Point Trading Strategy

There are many trading strategies built on Pivot Point , depending on the style and experience of each investor. Below are two popular trading strategies using Pivot Point .

Trend trading strategy

This strategy uses Pivot Point to identify the main market trend and find entry/exit points in trading. To apply this strategy, investors need to identify the main trend by observing support and resistance levels calculated from Pivot Point .

If the price is above the Pivot Point and support levels, then the primary trend is up. In this case, investors can buy when the price breaks above the resistance level and set profit targets at the next sub-support or resistance levels.

Conversely, if the price is below the Pivot Point and resistance levels, the main trend is down. In this case, the investor can sell when the price reaches the support level and set profit targets at the next sub-resistance or support levels.

Entry/exit trading strategy

This strategy uses Pivot Points to determine entry/exit points in a trade. Investors will observe support and resistance levels to determine entry/exit points in a transaction.

If the price is above the Pivot Point and support levels, investors can buy when the price reaches the support level and place a stop loss at the next minor support or resistance level. Conversely, if the price is below the Pivot Point and resistance levels, investors can sell when the price reaches the resistance level and place a stop loss at the next minor resistance or support level.

How to calculate Pivot Point

To calculate Pivot Point , you can use the formula mentioned in the previous section. However, manual calculations can cause errors and take a lot of time. Therefore, there are many free tools and software on the internet that help calculate Pivot Point quickly and accurately.

One of the most popular tools is Investing.com’s Pivot Point Calculator. To use this tool, simply enter the highest, lowest and closing prices of the previous trading session, then select the type of Pivot Point you want to calculate. The tool will automatically calculate and display the corresponding support and resistance levels.

Use Pivot Point in trading

Pivot Points can be used over a variety of time periods, from days to weeks or even months. However, to achieve the highest efficiency, investors should use Pivot Point in combination with other technical indicators and determine the main trend of the market.

In addition, using Pivot Point also needs to be combined with observing price charts and other factors such as news and economic events. This helps investors have an overview and make more accurate trading decisions.

Types of Pivot Points

There are many different types of Pivot Points used in trading, however, the two most common are Standard Pivot Points and Fibonacci Pivot Points .

Standard Pivot Point

This type of Pivot Point is calculated by taking the sum of the highest, lowest and closing prices of the previous trading session, then dividing by 3. The formula for calculating Pivot Point is as mentioned in the previous section.

Fibonacci Pivot Point

This type of Pivot Point uses Fibonacci levels to calculate support and resistance levels. Fibonacci levels are calculated by summing the highest, lowest and closing prices of the previous trading session, then dividing by 3 and multiplying by the Fibonacci ratios (23.6%, 38.2%, 61.8%).

Technical indicators related to Pivot Point

Pivot Point can be used in combination with many other technical indicators to make more accurate trading decisions. Below are some technical indicators commonly used in conjunction with Pivot Points .

Moving Average (MA)

Moving Average is a simple but effective technical indicator in determining market trends. When combined with Pivot Point , MA can help determine entry/exit points in trading based on the correlation between price and support/resistance levels.

Bollinger Bands

Bollinger Bands are a technical indicator used to measure price movements. When combined with Pivot Points , Bollinger Bands can help determine entry/exit points in a trade based on the distribution of prices over a certain period of time.

Relative Strength Index (RSI)

RSI is a technical indicator used to measure trend strength. When combined with Pivot Point , RSI can help determine entry/exit points in a trade based on the correlation between price and support/resistance levels.

Benefits of using Pivot Point

Using Pivot Points in trading has many benefits, including:

  • Identify important support and resistance levels: Pivot Point helps investors identify important support and resistance levels in the price chart, thereby helping to make more accurate trading decisions.
  • Identify market trends: When combined with other technical indicators, Pivot Point can help investors identify the main market trend and make appropriate trading decisions.
  • Helps determine entry/exit points in trading: Pivot Points can be used to determine entry/exit points in trading based on the correlation between price and support/resistance levels.

Common mistakes when using Pivot Point

Although Pivot Point is a useful tool in trading, there are also common mistakes when using it. Below are some common mistakes when using Pivot Point .

Do not combine with other technical indicators

Using Pivot Point without combining it with other technical indicators can lead to incorrect trading decisions. Therefore, investors should combine Pivot Point with at least one or two other technical indicators to make more accurate trading decisions.

Not observing price charts and news

Pivot Point is only a technical tool and cannot stand alone in making trading decisions. Failure to observe price charts and news can lead to incorrect trading decisions and cause losses to investors.

Use Pivot Points on short time periods

Pivot Points are often used over long time periods such as days or weeks. Using it on short time periods such as 5 minutes or 15 minutes can lead to inaccurate signals and cause many trading mistakes.

Trading examples using Pivot Point

To better understand how to use Pivot Points in trading, we will look at some specific examples.

Example 1: Trend trading

In this example, we will use Pivot Point to determine the main market trend and entry/exit points in the trade.

Pivot Point Concepts, strategies and benefits when used in trading

As you can see in the chart above, the price is above the Pivot Point and support levels, showing that the main trend is up. When the price breaks through the resistance level R1, we can open a buy order and place a stop loss at the support level S1. The price continues to rise and reaches the resistance level R2, we can close the order with a profit.

Example 2: Trading according to price reaction

In this example, we will use Pivot Points to determine entry/exit points in a trade based on price reaction as it approaches support/resistance levels.

Pivot Point Concepts, strategies and benefits when used in trading

When the price approaches support level S1, we can place a buy order with stop loss at support level S2. If the price cannot break through the S1 support level and turns down, we can close the order with a small loss. Similarly, when the price approaches the resistance level R1, we can place a sell order with a stop loss at the resistance level R2. If the price cannot overcome the resistance level R1 and turns up, we can close the order with a small loss.

Summary and advice when using Pivot Point

Pivot Point is a useful tool in trading, however it cannot stand alone in making trading decisions. Combining Pivot Point with other technical indicators and observing price and news charts is important to make accurate trading decisions. Additionally, investors should note that Pivot Point is often used on long time periods and it should not be used on short time periods. Hopefully this article has helped you better understand Pivot Point and how to use it in trading. Wishing you successful trading!

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