Pivots points
Pivot points are technical analysis indicators used to determine potential support and resistance levels in the market. They are calculated based on the previous day’s high, low, and closing prices. The main pivot point serves as the primary support/resistance level, while additional levels (called support and resistance levels) are derived from it. Traders use pivot points to identify potential entry and exit points, as well as to gauge market sentiment. By observing how the price interacts with these levels, traders can make more informed decisions and anticipate market movements.
Open the indicator and you get up to 7 lines overlaying the chart – a central pivot line, three resistance levels above and three support levels below. The central pivot line represents an asset’s fair value for the period covered – let’s say a day – and it’s the average of the previous day’s open, its daily high and low.
The lowest resistance level is the pivot multiplied by 2 minus the previous day’s low and the highest support is the pivot doubled minus the previous day’s high. Now the other levels are similarly computed, and there are actually alternative ways of estimating these levels.
But the main thing to remember is that people look at these levels and either use them as triggers or targets. Here we get to ask the question whether pivot points work or whether they’re simply a question of self-fulfilling prophesies. But at the end of the day, it doesn’t matter: they usually work!
So, for example, let’s say we have an indication that a breakout is about to take place. In this case, R1 will be confirmation of the breakout and THAT will serve as our opening level. Should we HIT that, R2 will serve as our target – our take profit level. We’d probably put out stop loss on the central pivot.