what is the meaning of pivot point in stock market

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2021-04-17 17:15:30

Much has been discussed about technical analysis as almost an integral part of trading, although those who trade relying on the fundamental data can argue with this. Nevertheless, many beginner traders use indicators that most brokers offer: Stochastic, Bollinger Bands, Moving Average, etc. They are effective but sometimes you can improve results and with the help of other indicators. Pivot point in technical analysis is one of the main indicators for many traders, which accurately shows the points of the trend reversal. Therefore, it helps to determine whether the market is leaning towards an upward or downward trend.

What is the meaning of pivot point in stock market? The so-called pivot points are potential turning points of trend positions that reveal support/resistance levels. All calculations on values of potential reversal are carried out through historical analysis. There are special calculators on numerous online resources. Market players independently contribute points of support and resistance levels over the previous trading period (for example, over the past 24 hours) in these online applications and, as a result, gain access to possible pivot points. At the same time, there are resources that provide traders with final calculations.

The system of working with the indicator was developed more than 80 years ago by Henry Chase. However, even now it has not lost its uniqueness.

The following formulas are used for calculations:

P = (H+L+C)/3;

S1 = (P×2) –H;

R1 = (P×2) –L;

S2 = P-H+L;

R2 = P+H-L,

where P - level of pivot, S - value of support level, R - value of resistance level, H - maximum price of selected timeframe, L - minimum price of selected timeframe, C - closing price. All data is taken into account for a certain time period. Pivot point is the value of the asset price, which is exactly in the middle of the S1-R1, S2-R2 levels and so on. You can also learn how to calculate pivot point for yourself but you need to gain experience and understand the formulas. It is not at all necessary to calculate the levels and value of the pivot point yourself because now there are many other ways to do this, which make it easier to work with the indicator. Thanks to websites that have programs that automatically identify pivot points or the opportunity to enter the necessary data into a calculator, you are merely left with one thing - to understand how to use the data.

The classical formula for calculating pivot points mentioned above is far from the only one. A lot of researchers created their own formulas, which make it possible to calculate the support and resistance zones. You can choose one of the following options: traditional, Fibonacci, Woodie, Demark, Camarilla, etc.

ABCs of pivot points:

When the asset value is located in the same coordinate system as the level of the central pivot level, it is necessary to monitor the movement;
when the price approaches R1, it eventually touches R2 (however, it can approach the central pivot level);
when the asset value approaches S1, there will be further movement to S2 or a return to the central pivot level;
when the price has reaches R2, then it will approach R3 or return to the initial R1 level;
when the price has reaches S2, it will move to S3 or return to S1;
in case there are no important news, the price often starts moving next to the pivot levels till S1 or R1;
when important news stories do come out, price can immediately break through R1 or S1 and approach R2 or S2;
R3 and S3 usually reflect the limiting values of the asset value direction, in particular with significant volatility;
pivot levels function really well in the flat trend when the asset value varies in the range of R1 as well as S1.

Strategic trading the break of pivot

You enter the trades and activate the Sell position. In this case, your Stop loss must be placed above the pivot level. As for the Take profit order, it must correspond to S1. When the asset value is under S1, you should move the Stop loss and place it above this level. After that it is recommended to observe the trends that appear in the stock market. Often, the price continues to move to S2 and S3. Therefore, it is necessary to move the very first Take profit closer to this indicator. Do not ignore the following situation - when the break of the pivot level takes place, it is more sensible to wait for additional testing of this level. Only then should you activate the trading position.

It is noteworthy that the pivot point technique is seen as a clear indication that self-fulfilling prophecies do exist. After all, the pivot level indicator is an indispensable tool for those market participants who found themselves in an "exchange trap". At the same time, the methodological analysis of pivot points proved to be effective due to numerous similar transactions that traders carried out. Those who argue that the methods of support (base) points are no longer in demand by traders are mistaken since the vast majority of market participants use them to this day. This circumstance testifies that this method is a promising direction and capable of bringing positive results. But do not immediately use the strategy in real trading if previously you have not. Try the method on a demo account because there is no guarantee that such a method of trading will suit you.

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Damian

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I have been trading Forex for more than 5 years, mostly with manual and automatic trading. I set up advisors for round-the-clock automated trading. I'm sure I can help to establish your trading skills....