Price Pivots Circle Big Profits

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Price Pivots Circle Big Profits

When a trader knows and employs pivots, his or her profit potential increases. The word pivot refers to a price turning point that often corresponds with important levels of support and resistance. Pivots are classified into two types: calculated pivots (those derived by a mathematical method) and price pivots (determined by looking at the price action on a chart).

In this post, we’ll look at price pivots and how to properly incorporate them into an active trading system.

Types of Pivots

A calculated pivot, also known as a floor trader pivot, is created by a formula that takes into account the previous day’s high, low, and closing prices. As a consequence, there is a focal price level around which price movement is likely to turn, either upwards or downwards. Price pivots are genuine historic turning moments, while calculated pivots suggest probable price turning points.

Price pivots aren’t computed. The structural connection between price bars defines the pivot. Price pivots emerge on all time frames, serve as trend building blocks, and give traders with objective entry and exit locations.

Price pivots are best shown using three bars. A three-bar pivot low symbolizes support and is established when price moves from down to up due to buying pressure. A price bar with a higher low that closes above the preceding bar’s high, when the previous bar’s low is lower than the bar that before it, denotes it. This holds true at all times.

When sellers change price from up to down, a three-bar pivot high is produced, which signals resistance. It may be noticed when a price bar with a lower high closes below the preceding bar’s low, or when the previous bar’s high is higher than the bar before it. When viewed in a diagram or on a price chart, structural pivots are easier to spot and understand. This holds true at all times. (See Fig. 1)

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Figure 1: These three-bar formations create the pivot low/high.

Image by Julie Bang © Investopedia2020

Price pivots signify reversals and are the foundation of a trend. A downtrend is defined as a succession of lower pivot highs and lower pivot lows, with the pivot highs joined to create a down trend line. An uptrend is defined as a succession of higher pivot lows and higher pivot highs, and the pivot lows are joined to create an up trend line, as seen in Figure 2.

Figure 2: A series of higher pivot lows create an uptrend.

Source: TradeStation

Strategic Uses for Price Pivots

Pivots are also useful for determining when the trend shifts in the other direction. A shift in the sequence of pivots indicates a trend reversal. A downtrend is defined by a succession of lower highs and lower lows, with a downtrend line formed on the pivot highs. When there is a higher high and higher low, there is probable evidence of an upward trend reversal (Figure 3).

When the higher pivot low occurs above the down trend line, the signal intensity increases. Aggressive traders might join at the closing price on the same day that the pivot formation is completed by the higher low.

Figure 3: Downtrend reversal in Nasdaq futures. The higher pivot low triggers a reversal in the uptrend. This signal is strengthened when the higher pivot low closes above a descending trend line.

Source: Tradestation

Pivots also aid in risk management. The stop-loss order in Figure 3 is set under the preceding pivot low. When price produces another higher pivot high and low, it confirms the trend flip from down to up. If the price cannot achieve a higher high, a trend reversal has not happened, and the trader will quit the position. If the price makes a higher high and lower low, the stop-loss is pushed to the next higher pivot low, and the stop is followed beneath succeeding pivots as the trend continues.

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With the opposite pivot sequence, an uptrend reverses to the downside. An uptrend is defined by a succession of higher lows and higher highs, with an uptrend line established on the pivot lows. There is probable evidence of a trend reversal to the negative when there is a lower low and lower high (Figure 4).When the lower pivot high occurs below the uptrend line, the signal intensity increases once again. Traders might join at the closing price on the same day that the pivot formation is completed by the higher low. The first stop is set at the previous pivot high and tracked according to the trend.

Figure 4: Uptrend reversal in Goldman Sachs. The lower pivot high/low triggers a reversal.

Source: Telecharts, Worden Brothers Inc.

Price is framed by pivots, which allows us to identify when the trend enters a phase of transition. Normally, price cycles between trend and range circumstances. Price enters range consolidation, or a sideways trend, when pivots establish a sequence of varied highs and lows. The pivots of a range do not move consistently up or down. Price oscillates between support and resistance, indicating degrees of buying and selling pressure.

Trend lines may be constructed on the borders of the pivot highs (resistance line) and lows (support line) to indicate price patterns during these times of price consolidation.

Using Patterns as Confirmation

When both the support and resistance lines are horizontal, a rectangle, or channel pattern, forms (Figures 3 and 5).When one or both of the lines are slanted, a triangular pattern appears (Figures 4 and 5).These lines’ little penetrations may be faded in the other direction. The lines also aid in determining when range circumstances revert to trend.

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A new pivot high with price remaining above the resistance line indicates an upward breakout. A new pivot low with price remaining below the support line indicates a downtrend breakout.

Figure 5: Weekly Trends

Source: TDAmeritrade Strategy Desk

One of the primary advantages of employing pivots for trade signals is that they are objective price points that help reduce emotional trading. Based on the structure of the price bars, pricing has either reversed or not. Stops are set in relation to pivot points. There is no need to estimate where to place a stop or make forecasts about the price’s future direction. Pivots show us what is really occurring rather than what we think will happen.

Traders who grasp pivot structure will no longer have to guess what price is doing: they will be able to predict it.

The Bottom Line

The ability to recognize structural pivots gives you a significant advantage in trading. Profits may be increased by using pivots in stocks, mutual funds, exchange-traded funds, currencies, and futures. Pivots indicate the existence of a trend as well as when the trend transitions into a reversal, consolidation, or breakout from consolidation. Structural pivots aid in the identification of major price trends and provide real-time signals for entry, exit, and stop-loss placement.

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