A Technical Analyst Uses Pivot Points
Pivot Points are predictive, or leading, technical indicators. They represent a significant price level used by traders to predict market movement, as well as support and resistance levels. They are calculated through the average of some of the most significant pricing data - the prior period's high, low and close. While there are a number of different ways to calculate this technical indicator, the most frequently used is the five-point system. The five-point system uses the prior period's day's high, low and close prices, together with two support levels and two resistance levels to calculate the point. The main time periods used are daily, weekly, and monthly.
There are two main ways in which this technical indicator is used. Firstly, they can be used to determine whether the market is in an upward or downtrend trend. Where the price level breaks through a Pivot Point to the upside the market is seen as bullish, and where the price level breaks through a Pivot Point to the downside the market is seen as bearish. Because of the way Pivot Points are calculated there is the limitation that what they represent in the short-term may not be what they consistently express the next time they are recalculated. For instance, if the market in the following period trades above the Pivot Point then bullish sentiment is expressed, whereas if the following period trades below the Pivot Point then bearish sentiment is being expressed.
The second way in which they can be used is by indicating when to invest into or sell out of markets. For instance, where the price level breaks through a resistance point a trader may enter into a position. Similarly, if the price level falls and a support level is broken, a trader may use that point to have set a stop loss and exit the market.
The Pivot Point itself is the primary level of support or resistance that traders look at. The other support and resistance levels that are calculated are considered to be of lesser significance significant although there may still be strong price movements at these points.
Technical analysts and traders will frequently use Pivot Points alongside other technical indicator signals to improve the clarity of buying and selling decisions. The other indicators typically used include Moving Average Convergence Divergence (MACD) bullish or bearish crossovers, candlestick patterns that reveal sentiment, or oversold or overbought Relative Strength Index (RSI) readings.
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