Using Pivot Points for Predictions

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Using Pivot Points for Predictions

Traders in equities and commodities markets employ pivot points. They are derived using the high, low, and closing prices from prior trading sessions and are used to forecast support and resistance levels for the current or forthcoming session. Traders may use these support and resistance levels to define entry and exit points for stop-loss and profit taking.

Key Takeaways

  • A pivot point is a technical analysis indication or calculation that is used to assess the market’s overall trend across various time periods.
  • The pivot point is just the average of the preceding trading day’s high, low, and closing prices.
  • Trading above the pivot point the next day is supposed to reflect continued positive mood, while trading below the pivot point shows pessimistic emotion.
  • In this section, we will go through how to compute pivot point levels and use them in practice.

How to Calculate Pivot Points

There are various techniques for determining pivot points, the most prevalent being the five-point approach. This approach calculates a pivot point by combining the previous day’s high, low, and close, as well as two support and two resistance levels (for a total of five price points). The following are the equations:

PivotPoint = ( PreviousHigh + PreviousLow + PreviousClose ) 3 textPivot Point = fracleft(textPreviousHigh + textPreviousLow + textPreviousCloseright) {3} PivotPoint= ​

Support1 ( S1) = ( PivotPoint 2 ) PreviousPreviousHigh textSupport 1 (S1) = left(textPivot Point*2right) – Previous High Text Support1(S1)=(PivotPoint∗2)−PreviousHigh

Support2(S2) = PivotPoint ( PreviousHigh PreviousLow ) textSupport 2 (S2) = textPivot Point – left(textPrevious High- textPrevious Lowright) Support2(S2)=PivotPoint−(PreviousHigh−PreviousLow)

Resistance1(R1) = ( PivotPoint 2 ) PreviousLow textResistance 1 (R1) = left(textPivot Point*2right) Previous Low – text Resistance1(R1)=(PivotPoint∗2)−PreviousLow

PivotPoint + Resistance2(R2) ( PreviousLow PreviousHigh ) textPivot Point + left(textPrevious High- textPrevious Lowright) = textResistance 2 (R2) Resistance2(R2)=PivotPoint+(PreviousHigh−PreviousLow)

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Use the high, low, and close from the day’s typical trading hours for equities that trade only during particular hours of the day.

In 24-hour markets, such as the forex market, pivot points are often determined using the New York closing time (4 p.m. EST) on a 24-hour cycle. Because the GMT is often utilized in forex trading, some traders choose to end a trading session at 23:59 GMT and begin a new session at 00:00 GMT.

While it’s common to use the previous day’s data to create pivot points on the chart to offer support and resistance levels for the next day, it’s also feasible to utilize last week’s data to create pivot points for the next week. Swing traders and, to a lesser degree, day traders might benefit from this.

Alternative Methods

The addition of the opening price in the calculation is another typical modification of the five-point system:

PivotPoint = ( Today’s Open + Yesterday’s High + Yesterday’s Low + Yesterday’s Close ) 4 textPivotPoint = fracleft(textToday’s opening + textYesterday’s High + textYesterday’s Low + textYesterday’s Closeright)4 PivotPoint = fracleft(textToday’s opening + textYesterday’s Low + textYesterday’s Closeright)4 PivotPoint= ​

The opening price is now included into the calculation. The supports and resistances may then be computed using the modified pivot point in the same way as the five-point approach.

Tom DeMark, creator and CEO of DeMARK Analytics, created yet another pivot-point system. The following rules govern this system:

Image by Sabrina Jiang © Investopedia2020

As you can see, there are several pivot-point systems to choose from.

While learning how to compute pivot points is vital, most charting programs calculate pivot points for us. Simply add the pivot-point indicators to your chart and configure them to your liking.

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Interpreting and Using Pivot Points

When calculating it, the pivot point itself is the major support and resistance. This suggests that the greatest price fluctuation is anticipated at this price. The other levels of support and resistance are less prominent, but they may still cause major price fluctuations.

Pivot points may be utilized in two different ways. The first method is to ascertain the general market trend. The market is bullish if the pivot point price is broken in an upward advance. If the price falls below the pivot point, the trend is bearish.

The second strategy is to enter and exit markets using pivot point price levels. A trader, for example, may place a limit order to purchase 100 shares if the price breaks through a barrier level. A trader might also place a stop loss at or around a support level.

Image by Sabrina Jiang © Investopedia2020

While the levels seem to be quite excellent at anticipating price movement at times, they also appear to have no affect at all at other times. Profits from depending just on one signal, like any other technical instrument, are unlikely.

The effectiveness of a pivot point strategy is entirely dependent on the trader’s ability to correctly utilize it in combination with other kinds of technical analysis. Other technical indicators include aMACD, candlestick patterns, and the use of a moving average to assist define trend direction. The more good indicators there are for a transaction, the better the odds of success.

The Bottom Line

Pivot points are an excellent tool for identifying regions of support and resistance, but they are most effective when paired with other types of technical analysis.

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Pivot points are based on a basic formula, and although they may be valuable for certain traders, they may not be for others. There is no guarantee that the price will halt, reverse, or even reach the levels depicted on the chart. At times, the price will bounce back and forth between levels. It, like other indicators, should only be used as part of a comprehensive trading strategy.

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