Pivot Point + Psychological Resistance

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Pivot Points (Resistance and Support)

  • Support and resistance
  • Technical analysis
  • Support and resistance
  • Technical analysis

Description

Pivots Points are price levels chartists can use to determine intraday support and resistance levels. Pivot Points use the previous days Open, High, and Low to calculate a Pivot Point for the current day. Using this Pivot Point as the base, three resistance and support levels are calculated and displayed above and below the Pivot Point.

How this indicator works

  • Pivot Point support and resistance levels can be used just like traditional support and resistance levels. As with all indicators, it is important to confirm Pivot Point signals with other aspects of technical analysis.

Calculation

Resistance Level 3 = Previous Day High + 2(Pivot – Previous Day Low)

Resistance Level 2 = Pivot + (Resistance Level 1 – Support Level 1)

Resistance Level 1 = (Pivot x 2) – Previous Day Low

Pivot = Previous Day (High + Low + Close) / 3

Support Level 1 = (Pivot x 2) – Previous Day High

Support Level 2 = Pivot – (Resistance Level 1 – Support Level 1)

Support Level 3 = Previous Day Low – 2(Previous Day High – Pivot)

Pivot Points (High/Low), also known as Bar Count Reversals, are used to anticipate potential price reversals.

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

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Pivot Point

What is a Pivot Point?

A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.

The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.

  • When the price of an asset is trading above the pivot point, it indicates the day is bullish or positive.
  • When the price of an asset is trading below the pivot point, it indicates the day is bearish or negative.
  • The indicator typically includes four additional levels: S1, S2, R1, and R2. These stand for support one and two, and resistance one and two.
  • Support and resistance one and two may cause reversals, but they may also be used to confirm the trend. For example, if the price is falling and moves below S1, it helps confirm the downtrend and indicate a possible continuation to S2.

The Formulas for Pivot Points:

High indicates the high price from the prior trading day,

Low indicates the price from the prior trading day, and

Close indicates the closing price from the prior trading day.

How to Calculate Pivot Points

The pivot point indicator can be added to a chart, and the levels will automatically be calculated and shown. Here’s how to calculate them yourself, keeping in mind that pivot points are predominantly used by day traders and are based on the high, low, and close from the prior trading day. If it is Wednesday morning, use the high, low, and close from Tuesday to create the pivot point levels for the Wednesday trading day.

  1. After the market closes, or before it opens the next day, find the high, low and close from the most recent day.
  2. Sum the high, low, and close and then divide by three.
  3. Mark this price on the chart as P.
  4. Once P is known, calculate S1, S2, R1, and R2. The high and low in these calculations are from the prior trading day.

Pivot Points

What Do Pivot Points Tell You?

Pivot points are an intra-day indicator for trading futures, commodities, and stocks. Unlike moving averages or oscillators, they are static and remain at the same prices throughout the day. This means traders can use the levels to help plan out their trading in advance. For example, they know that, if the price falls below the pivot point, they will likely be shorting early in the session. If the price is above the pivot point, they will be buying. S1, S2, R1, and R2 can be used as target prices for such trades, as well as stop loss levels.

Combining pivot points with other trend indicators is a common practice with traders. A pivot point that also overlaps or converges with a 50-period or 200-period moving average, or Fibonacci extension level, becomes a stronger support/resistance level.

The Difference Between Pivot Points and Fibonacci Retracements

Pivot points and Fibonacci retracements or extensions both draw horizontal lines to mark potential support and resistance areas.

Fibonacci retracement and extension levels can be created by connecting any price points on a chart. Once the levels are chosen, then lines are drawn at percentages of the price range selected.

Pivot points don’t use percentages and are based on fixed numbers: the high, low, and close of the prior day.

Limitations of Pivot Points

Pivot points are based on a simple calculation, and while they work for some traders, others may not find them useful. There is no assurance the price will stop at, reverse at, or even reach the levels created on the chart. Other times the price will move back and forth through a level. As with all indicators, it should only be used as part of a complete trading plan.

How to Use Pivot Points in Trading

Some traders use nothing but Pivot Points to trade.

Most probably you are among the ones who’ve never used the Pivot Points because this method is the banks traders favorite strategy.

The never talk about their trading strategy anywhere.

If you do some research about the Pivot Points, you will find it really useful to have them on the charts even if you follow a different trading system.

Most traders who use Pivot Points are intraday traders.

I mean Pivot Points can be used mainly for intraday trading.

What Are Pivot Points?

Pivot Points or Pivot Levels are nothing but some support and resistance levels that you can calculate and plot on your charts very easily.

Some trading platforms support Pivot Points and have an indicator to plot them on the charts.

But if you use a platform that doesn’t support it, you can easily calculate and plot them on the charts manually.

Pivot Levels are calculated using three types of information from the previous trading day:

Even in the forex market which is a 24 hours market we have high, low and close prices for each day.

The easiest way to find the high, low and close prices of the previous day is checking the previous day candlestick on the daily chart.

Each candlestick on the daily chart takes 24 hours to mature and close.

Then the next candlestick opens.

So whenever you want to trade, you have to check the previous day’s daily candlestick and find the high, low and close prices of the previous day.

If you don’t know what high, low and close prices can be found in a candlestick, you can read the candlestick article: The Language of Japanese Candlesticks

So, Pivot Points that should be used for today’s trading are plotted using the high, low and close price of the previous day.

You can plot the Pivot Points (levels) on smaller time frames like one hour or five minutes chart.

Pivot Levels tell you that when and how the price will reverse and change the direction.

Like all other indicators and signals, Pivot Points is not a 100% guaranteed indicator, and sometimes it doesn’t work.

But as I explained at the beginning of this article, it is good to have them on your charts even if your trading system is not based on the Pivot Points.

The first and most important Pivot level is the Pivot Point which is the average of the high, low and close price of the previous day:

Pivot Point = ( Yesterday High + Yesterday Close + Yesterday Low )/3

Then we have Resistance 1 and Support 1 or R1 and S1:

Resistance 1 = ( Pivot Point x 2 ) – Yesterday Low

Support 1 = ( Pivot Point x 2 ) – Yesterday High

Pivot Point, R1 and S1 are the most important Pivot Levels, but we can also calculate the Resistance 2 and Support 2 or R2 and S2.

Resistance 2 = Pivot Point + ( Yesterday High – Yesterday Low )

Support 2 = Pivot Point – ( Yesterday High – Yesterday Low )

So we will have 5 horizontal lines on our chart:

Resistance 2
Resistance 1
Pivot Point
Support 1
Support 2

These are the levels that the price may react to during the day.

Now let me show you the 5min chart that the Pivot Levels are calculated and plotted on it.

Here is the high, low and close prices:

High = 1.4787
Low = 1.4737
Close = 1.4787

and here is the calculated Pivot Points according to the above formulas:

R2 = 1.4820
R1 = 1.4804
Pivot Point = 1.4770
S1 = 1.4754
S2 = 1.4720

and here is the plotted levels on the 5min chart:

As you see it is very easy to calculate and plot the Pivot levels.

Now let’s see how the price reacted when it reached any of the Pivot levels.

To do that, I am showing you the chart with a higher magnification and will shift from candlestick to line chart to have clearer look.

Follow the blue ellipses and numbers on the below chart and read my explanations.

1- This is the beginning of the day.

The price starts moving under the Pivot Level (1.4770) and goes a little down.

2- Then the it goes up to retest the Pivot Level (1.4770) as a resistance.

As you see here the Pivot Level works as a strong resistance that price cannot break above, and so it goes down.

3- Price is stopped almost by the S1 level (1.4754).

4- Then goes up to retest the Pivot Level and this time succeeds to break above the Pivot Level.

5- Then it goes down to retest the broken Pivot Level as a support, but fails and goes up.

6- It tests the R1 level and breaks above it.

7- It goes down to retest the broken R1, but fails and goes up.

8- It goes down to retest the R1 and goes up and down immediately and completes the triple top pattern, retests, breaks down the R1 and goes down.

9- It is stopped almost by the Pivot Point as a support.

It goes up and down around that level and then …

10- Goes up to retest the R1, fails once, goes down and then goes up to retest.

Then it breaks above the R1 level and goes up.

11- It doesn’t show any reaction to the R2 level and goes much higher.

12- It goes down to retest the R2.

This time R2 works as a support and price reacts to it.

It fails to break down the R2 and bounces up and the day is finished.

Now you can plot the Pivot points for the next day using the high, low and close price of the previous and this process can be repeated day after day.

This is how the price went up and down between the Pivot Level and Resistance 1:

As you see, Pivot Levels are important and markets react to them strongly.

How to Trade Using the Pivot (Points) Levels?

The main Pivot Level is the most important level [( Yesterday High + Yesterday Close + Yesterday Low )/3].

In a trading day, if price opens under this level, it means it has a stronger tendency to go down and Bears are stronger.

So we can take a short (sell) position.

If the price opens above the Pivot Level, it means Bulls are stronger and we can take a long (buy) position.

All other levels may work as support and resistance and so we have to be careful when price reaches them.

As you see on the above chart, price is opened a little above the Pivot Point while it had already started going up.

It goes up as high as the R1 level and then goes down.

Those who use Pivot Levels to trade, would go long at the beginning of the day but for me it will be a little different.

For me, the Pivot Levels will be considered as the potential support/resistance levels.

I will not take any position just because the price is opened below or above the main Pivot Level.

I use my technical analysis, find patterns and pennants.

Then I will have an eye on the Pivot Levels to close my trades on time before I lose my profit.

I consider this rule that if price is opened above the main Pivot Level, it may go up and visa versa.

Then I wait for a breakout and will take the proper position.

For example in the above example, I would consider that price was opened above the Pivot Level and it had a stronger tendency to go up.

Then I would wait for the price to break above the wedge and then I would go long.

Then I would have an eye on it and as soon as it showed some reactions to the R1 level, I would collect my profit.

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