The Pivot point technique is an analysis technique used by many analysts who believe that this technique is effective and low in risk. Pivot points are defined as the average of the high, low, and closing prices of the immediately previous trading session to determine support and resistance levels in the current session.
By extension, Pivot points are also used with short-term and long-term timeframes. From there, it is used to make short-term or long-term trading predictions depending on the strength of the support and resistance levels that this method identifies.
1. How to calculate Pivot Points.
Pivot points are calculated based on the high, low, and close of the previous timeframe. The day’s pivot is calculated based on the high, low, and close of the preceding day. The Pivot of the week is calculated based on the high, low, and close of the previous week…
PP = (HP + LP + CP)/3
R1 = 2PP – LP = PP + h’
R2 = PP + HP – LP = PP + h + h’
S1 = 2PP – HP = PP – h
S2 = PP + LP – HP = PP – h – h’
R1: Resistance 1.
R2: Resistance 2.
S1: Support level 1.
S2: Support level 2.
PP: Pivot Point.
HP: Highest price.
LP: Lowest price.
CP: Closing price.
OP: Opening price.
h = HP – PP
h’ = PP – LP
From the Pivot point, it is possible to identify many resistance levels (R3, R4,…) and many support levels (S3, S4,…). However, experts say only care about R1 and S1. It is possible to add R2, and S2 but mainly when the price breaks R1 up or S1 down.
2. How to Trade with Pivot Points.
There are 3 ways of trading with Pivot Points that are highly effective and widely used, as follows:
Trade in scope:
Range trading is considered the simplest trading method in the Pivot point technique. Investors will use the Pivot point as a normal resistance or support level.
In fact, the Pivot Point is the point where the price hit support and resistance levels but then reversed back. If the price fluctuates more and more times, it is considered a good signal to trade.
So, when the price moves close to the resistance, the trader enters a sell order and places a stop loss just above the resistance line. When the price approaches a support level, investors enter a buy order and place a stop loss just below this support level.
When the price breaks the Pivot point, investors will move towards a strong bullish or strongly bearish strategy. Investors believe that the price increases strongly during the session when the price breaks the resistance level 1 or plummets when the price breaks the support level 1. Specifically as follows:
– Buy as soon as the price breaks resistance 1 or sell as soon as the price breaks support 1.
– Trade after the break and return to test the successfully broken threshold.
– Use other technical signals for confirmation.
– Place a stop loss just below resistance or just above support just broken.
Trade according to the central pivot point line:
Investors use the central Pivot point line to determine trading orders. That is, buy when the price breaks the central Pivot point line and continues upward. Conversely, sell when the price breaks through the central Pivot point line and continues down. To minimize risk, investors need to place stop loss right above the central Pivot point line with sell orders or just below the central Pivot point line with buy orders.
Above is the basic content of the Pivot point technique in stock investment analysis. However, the Pivot point technique is often not used alone because of its emotional weight. To increase trading efficiency when using the Pivot point technique, investors need to use it in combination with other technical signals such as indicator systems.
Hope you get the basic knowledge and effectively use the Pivot point technique in your trading.