What Is a Pivot Point?
Pivot Points serve as the Polaris for navigators of the financial market’s oceanic vastness, giving traders a lighthouse by which to gauge the potential movements of the market sea. In technical analysis, a pivot point is calculated to be the arithmetic mean of a financial security’s high, low, and closing prices from the previous trading session. Traders use this as a benchmark to estimate subsequent support and resistance levels.
This concept is not just about simplification but rather an intricate signal within the market’s inherent chaos. Trading above this pivot point generally signals bullish sentiment, whereas taking actions beneath can hint at bearish moods festering in the market.
Formulas for Pivot Points
The dance of numbers unfolds as follows:
- P (Pivot Point) = (High + Low + Close) / 3
- R1 (Resistance 1) = (2 x P) - Low
- R2 (Resistance 2) = P + (High - Low)
- S1 (Support 1) = (2 x P) - High
- S2 (Support 2) = P - (High - Low)
Utilizing Pivot Points
For day traders, pivot points are like the spices to the broth of their trading strategy. By calculating these points before the market opens, traders can sketch out potential entry and exit points. This anticipatory strategy aligns well with market volatility, giving day traders an edge as sharp as Occam’s Razor.
What Do Pivot Points Tell You?
Much like tea leaves at the bottom of a cup, pivot points offer traders insights into possible future price movements. These points inform traders when a market might pivot, hence the name, from bullish to bearish or vice versa.
Pivot Points vs. Fibonacci Retracements
Pitting the straightforward pivot points against the enigmatic Fibonacci retracements presents a duel of David and Goliath proportions. While pivot points provide a grounded approach with set levels derived from the last trading session’s figures, Fibonacci retracements offer a more dynamic perspective, stretching and conforming between any two crucial price points, making it a versatile tool for particularly waves-counting Elliotticians.
Related Terms
- Support and Resistance Levels: These are specific points on a chart that price tends to respect, potentially inhibiting or reversing price movements.
- Technical Analysis: Examination of historical market data, including price and volume, to forecast future market activity, primarily using charts.
- Day Trading: The practice of buying and selling within the same trading day, before the markets close.
Suggested Reading
- “Technical Analysis of the Financial Markets” by John J. Murphy – A comprehensive resource for learning about various technical indicators, including pivot points.
- “Trading for a Living” by Dr. Alexander Elder – An exploration into the psychological challenges and technical strategies of trading, including the use of support and resistance levels like those derived from pivot points.
Step into the realm of pivot points, and let me, Prof. Cash Ticker, guide you through the intricate ballet of numbers and charts, making market trends as decipherable as your morning newspaper.
