Presentation of pivot points:
The level of the pivot points is calculated once a day. There is therefore one pivot point per trading session. This pivot point has the main function of indicating the support and resistance levels of a price.
To obtain this point you need to use both the technical data and psychological data. It is represented by a line on a chart.
To summarise, the pivot point is the point at which a trend can change direction, on the rise or on the fall. When it is breached on the rise, it provides a buy signal and when it is breached on the fall it provides a sell signal. Important note: The pivot points change regularly and should therefore be used for short term trading only.
Calculating and determining the pivot point:
Calculating pivot points is fairly complex mathematically, we won’t go into a detailed explanation, especially since these points are normally indicated by any broker that provides its clients with technical analysis data.
The calculation is done at the end of one session in view of the next one and takes the following elements into account:
- The highest level reached the day before
- The lowest level reached the day before
- The closing price
Using the pivot points when trading:
Generally speaking, we use the pivot points to determine the best entry and exit points of the market. Therefore, when the price of an asset moves above a pivot point it is advisable to speculate on the rise. And, on the contrary, if the price of an asset moves below a pivot point, it is best to speculate on the fall.
It is also possible to use the pivot points to place stop loss orders. These orders should be placed just above or below this point according to the direction upon which you are speculating. This enables you to protect your investment against a trend reversal.
We can therefore say that the pivot points have more or less the same function as the support and resistance levels as when the price is situated above this point it is considered as a support and when the price moves below this point it is considered as a resistance. To summarise, the more a pivot point resists, the more it becomes a major support or resistance level.
Here it is best to be prudent when using pivot points as the latter can be breached on the rise or the fall. It is best to avoid using this indicator when the price only moves close to this point without showing any real volatility.
Is the use of pivot points truly efficient?
As we’ve just seen, using pivot points is extremely useful if you wish to invest on any given asset on the market.
Of course, this method has its limitations as well. First, it doesn’t allow you to determine the strength of a trend and so it remains inaccurate in regard to the reliability and resilience of the movement being observed. It’s recommended that you do not use it by itself and that you also rely on other indicators such as volatility indicators instead.
As with any other investment method that relies solely on a technical analysis of the market, pivot points don’t take into account external factors that could influence the current trend. As a matter of fact, any good trader will tell you that it is essential that you simultaneously make use of technical analysis as well as fundamental analysis in order to set up a complete and reliable investing strategy. In that respect, we encourage you to check the fundamental data relating to your asset before building your strategy around this method.
It seems fair to say that the pivot points method can be interesting when it isn’t used in isolation, but rather when it is used along with other technical indicators as well as taking into account current events and economic developments of the market in question. It remains a recommended tool when making a complete analysis.