Practical Guide to Trading with Pivot Points

What is a pivot point and what is its use?

The pivot point is a technical analysis indicator used to identify the overall market trend over different periods. It is the average of the high and low prices of a given session and the closing price of the previous session.

Pivot Point Calculation

The main method used is the five-point system, where the pivot point [trading]P( is calculated by dividing the sum of the previous high, the previous low, and the previous close by three. Support 1 represents twice the pivot minus the previous high, while Support 2 is equal to the pivot minus the difference between the previous high and low. Resistance 1 equals twice the pivot minus the previous low, and Resistance 2 corresponds to the pivot plus the difference between the previous high and low.

Applications of Pivot Points

Pivot points are primarily used to identify market trends. In a bearish market, the price generally stays around the pivot level or moves downward, while in a bullish market, it remains above the pivot or breaks upward. These indicators also help determine the right moments to enter and exit the market, such as by placing a stop-loss near an identified support or resistance level.

Limitations of Pivot Points

Despite their usefulness, pivot points have certain limitations. Their relatively simple calculation may not suit all traders. Additionally, these levels are indicative and do not guarantee that the price will stop, reverse, or reach these values precisely. It is common to observe price fluctuations around a pivot level. Like any technical indicator, pivot points should be integrated into a comprehensive trading plan and not used in isolation.

In summary, pivot points are a valuable tool for identifying market trends and key levels, but their effectiveness is optimal when combined with other analysis tools as part of a coherent trading strategy.