Trading Strategies with Pivot Points in Technical Analysis

What are pivot points?

Pivot points are a technical analysis indicator used to identify the general market trend over different periods. It is simply the average of the high, low, and close prices of a given trading session. The next day, trading above the pivot point generally indicates a bullish sentiment, while trading below indicates a bearish sentiment.

Initially created by floor traders operating in the volatile markets of stocks and commodities, pivot points are now widely used. Traders determine the pivot of the current day at the beginning of each session, using the previous day's prices. They then calculate the support and resistance levels from that pivot point.

Pivot Point Calculation

The main method used by most traders to determine pivot points is the five-point system. This system uses support and resistance levels as well as the previous day's high, low, and close prices. The pivot point (P) is calculated by averaging the previous high, previous low, and previous close. From this pivot point, support levels S1 and S2 as well as resistance levels R1 and R2 are determined according to specific formulas that take into account the price variations of the previous session.

| Element | Formula | |---------|---------| | Pivot Point (P) | (Previous High + Previous Low + Previous Close) / 3 | | Support 1 (S1) | (P x 2) - Previous high | | Support 2 (S2) | P - (Previous High - Previous Low) | | Resistance 1 (R1) | (P x 2) - Previous base | | Resistance 2 (R2) | P + (Previous High - Previous Low) |

Using Pivot Points

Pivot points have several applications in technical analysis. They help identify market trends, considered bearish when the price stays at or below the pivot level, and bullish when it moves above. Additionally, traders commonly use calculated support and resistance levels to place stop-loss orders or set profit targets, thus optimizing their entry and exit strategies in the markets.

Pivot Point Limits

Although pivot points are based on a simple calculation and can be useful for some traders, they have certain limitations. The levels drawn on the chart do not guarantee that the price will stop, reverse, or even reach these levels. In some contexts, the price may fluctuate around a pivot level, making interpretation particularly difficult. As with all technical indicators, pivot points should be integrated into a comprehensive trading strategy and used in conjunction with other analysis tools to achieve the best results.

In conclusion, pivot points are a valuable tool for technical analysis, but they should be used judiciously and in conjunction with other indicators to achieve the best results.