Pivot Points
Tue, Apr 15Pivot points, often referred to as pivots, define support and resistance areas by analyzing the highs, lows, and closing prices of an asset. They are valuable for recognizing trading ranges, trend reversals, and overall market sentiment.
There are various methods to calculate pivot points in practice. A commonly used approach starts by taking the simple average of a periodic high, low, and closing price, which is then applied to a periodic trading range. The pivot value is determined using the following formula:
Pivot = (High + Low + Close) / 3
Once the pivot is calculated, it is utilized to establish four levels of support and resistance:
Resistance 1 = (Pivot * 2) - Low
Resistance 2 = Pivot + (High - Low)
Support 1 = (Pivot * 2) - High
Support 2 = Pivot - (High - Low)
Pivot points can be employed in various ways, mainly to indicate whether the market is trending or range-bound. A general guideline is that when the price is above resistance levels, a bullish trend is indicated. Conversely, if the price is below support levels, a bearish trend is suggested. When the price is situated between support and resistance, it indicates range-bound conditions.
Overall, pivot points provide a simple method for quickly establishing a set of support and resistance levels.
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