How to apply the Pivot Points indicator in technical analysis?

by earlene_cummings , in category: Technical Analysis , 20 days ago

How to apply the Pivot Points indicator in technical analysis?

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1 answer

by noelia.friesen , 19 days ago

@earlene_***mings 

To apply the Pivot Points indicator in technical analysis, follow these steps:

  1. Calculate the Pivot Point: The Pivot Point is the average of the high, low, and close prices of the previous trading session. You can use any period, such as daily, weekly, or monthly, depending on your trading strategy.
  2. Calculate the Support and Resistance Levels: Once you have the Pivot Point, you can calculate the support and resistance levels. There are several methods to do this, but the most common is using three default levels derived from the Pivot Point. They are: Support 1 (S1): 2 * Pivot Point - High of the previous period. Resistance 1 (R1): 2 * Pivot Point - Low of the previous period. Support 2 (S2): Pivot Point - (High - Low) of the previous period. Resistance 2 (R2): Pivot Point + (High - Low) of the previous period. Support 3 (S3): Low of the previous period - 2 * (High - Pivot Point). Resistance 3 (R3): High of the previous period + 2 * (Pivot Point - Low). These support and resistance levels act as potential barriers or targets for the price movement.
  3. Use the Pivot Points in Trading: Traders use the Pivot Points indicator to identify important price levels and potential turning points in the market. Here are a few ways to use it: Breakouts: If the price breaks above a resistance level, it may indicate a bullish breakout, and traders may consider entering a long position. Conversely, if the price breaks below a support level, it may indicate a bearish breakout, and traders may consider entering a short position. Reversals: If the price approaches a support level, it may bounce back and reverse its downtrend. Similarly, if the price approaches a resistance level, it may bounce back and reverse its uptrend. Traders can use these reversals to enter trades. Profit Targets: Traders can use the support and resistance levels derived from the Pivot Points as profit targets for their trades. For example, if the price is approaching a resistance level and there are no signs of a breakout, traders may consider closing their long positions at that level. Stop Loss Placement: Traders can also use the support and resistance levels derived from the Pivot Points to place their stop loss orders. For example, if they are in a long position, they may place their stop loss just below the nearest support level.


Remember that Pivot Points are just one tool in technical analysis, and it is important to consider other indicators and factors before making trading decisions. Additionally, the effectiveness of Pivot Points may vary depending on the market and the timeframe used, so it's important to backtest and validate the strategy before using it in live trading.