What are Pivot Points?
A Pivot Point is a technical analysis tool used to determine potential areas of interesting or important price action. These areas are ideally where the sentiment might be about to change from bullish to bearish, or vice versa. Although at first glance they may seem complicated, they are actually very simple! That’s because Pivot Points are simply the average of the high, low and closing prices from the previous trading day creating levels on a chart. Standard Pivot Points consist of a Pivot Point level, two support, and two resistance levels. Let’s see an example from the Skilling trading platform:
Pivot Point level (represents yellow lines) based on the simple average of high, low and closing prices of the prior period depending on the timeframe of the chart.
- The first support (S1) and resistance (R1) levels are represented by the red lines while
- The second support (S2) and resistance (R2) levels are illustrated by green lines.
Pivot Points can help you determine whether the trend is bullish or bearish. If the current Pivot Point level is above the prior one, it can usually be interpreted as a bullish sentiment whilst if the price is below the Pivot Point level, it may be seen as bearish. It can be more efficient if you also use at least one moving average to get confirmation of the current trend:
- to provide you with logical suggestions on where to place your stop-loss or take profit levels
- also help you to identify direction if combined with another indicator. For example, with MACD or RSI you might potentially be able to get verification on whether there is a reversal or break-out occurring.
A good way to understand them is to look at them as providing a trader with a warning of where they might expect to see some market ‘action’. These levels are watched by others in the market too, so it’s logical that some interesting moves might occur around these points.
Setting up Pivot Points in your Skilling trading platform
The Pivot Point levels will be calculated automatically and there is no option to provide different parameters. The only thing you need to do is customise the appearance of the levels.
S1 and S2 = Support levels
R1 and R2 = Resistance levels
Pivot Points are a very popular and simple method to plot areas of interest in a chart. As they are easy to place on a chart, they are perhaps a good introduction to help you spot interesting areas (potentially) where you might witness important price action. This could include reversals in a trend, or a break out. Of course, often the price will move to the area of a pivot line and nothing of any significance will happen, whilst at other times they will provide a perfect signal - like all technical analysis no one approach will work all the time. We believe though, that Pivot Points provide a good entry-level indicator to help you understand concepts like support and resistance, reversals, and break-outs.