Pivot point (technical analysis)
In technical analysis, a pivot point is a significant level used to determine potential support and resistance levels. It is typically calculated based on the high, low, and closing prices of the previous trading period (day, week, or month). The pivot point itself, along with calculated support and resistance levels, are often used by traders to identify potential areas where the price of an asset might change direction.
The most common calculation for the pivot point (P) is:
P = (High + Low + Close) / 3
Once the pivot point is calculated, support (S) and resistance (R) levels are derived from it using various formulas. Common support and resistance levels include S1, S2, S3, R1, R2, and R3.
Several methods exist for calculating these support and resistance levels, including the classic method, Woodie's pivot points, Camarilla pivot points, and Fibonacci pivot points. Each method uses a slightly different formula based on the previous period's high, low, and close prices.
Traders use pivot points in various ways:
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Identifying Trend: If the price consistently trades above the pivot point, it can be interpreted as an uptrend. Conversely, if the price remains consistently below the pivot point, it might signal a downtrend.
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Potential Support and Resistance: The calculated support and resistance levels are used as potential areas where price might bounce or stall.
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Stop-Loss and Target Levels: Some traders use pivot points to set stop-loss orders and profit targets. For example, a trader might place a stop-loss order just below a support level.
Pivot points are considered a lagging indicator, meaning they are calculated based on past price data and do not predict future price movements. They are most effective when used in conjunction with other technical analysis tools and indicators. It's also important to consider market context and news events when interpreting pivot point levels. Different market conditions may require adjusting the application of pivot point strategies.