Nowadays, it is easy to begin investing in the share market. There are several brokerage houses offering facilities to open demat account and start buying stocks. However, demat account opening is just the first step for beginners. Investors and traders must learn the art of analysing stocks. Else, they can encounter serious setbacks in the early days of their stock market journey. In this realm of technical analysis, Pivot Points play a crucial role. Pivot Points are important levels to assess the direction of movement and potential levels of support and resistance. Pivot Points are used to predict future support and resistance levels by using the high, low, and close of the previous session.
Floor traders first utilised Pivot Points to establish crucial levels. Floor traders conducted business in a setting that moved extremely quickly and had a short-term emphasis, much like contemporary day traders. Floor traders would use the high, low, and close of the previous day to determine a pivot point for the current trading day at the start of the trading day. Additional calculations were performed to determine support 1, support 2, resistance 1, and resistance 2, using this pivot point as the starting point. They would then use these levels to help with their trading throughout the day.
Timeframes
The Pivot Points for charts with 1, 5, and 15-minute time intervals take the high, low, and close of the previous day. In other words, the high, low, and close from yesterday would serve as the sole basis for the pivot points for today’s intraday charts. Pivot Points are predetermined and remain in effect for the duration of the day.
For 30, 60, and 120-minute charts, pivot points are based on the high, low, and close of the previous week. These calculations are based on calendar weeks. The Pivot Points for 30, 60, and 120-minute graphs stay constant for the duration of the week once trading has begun. The Pivots do not change until the weekends.
Determining Support and Resistance Using Pivot Points
We can use Pivot points similar to conventional support and resistance levels. The trick is to keep a close eye on price movement. Search for a successful test and bounce off support if prices drop to a support level and then firm up. To confirm an upward movement from support, look for a bullish chart pattern or indicator signal. Similarly, look for a failure at resistance and a collapse if prices rise to resistance and then stall. To confirm a downturn from resistance, search for a bearish chart pattern or indicator signal.
The following formula can be used to determine the precise pivot point:
Pivot Point = (Previous Session High + Previous Session Low + Previous Session Close)/3
After determining the pivot point, the initial levels of support and resistance are determined:
Resistance Level 1 = (2 x Pivot Point) – Previous Session’s Low
Support Level 1 – (2 x Pivot Point) – Previous High
The underlying stock’s potential full range of movement can be covered by extrapolating four more levels after the original support and resistance levels have been determined.
Resistance Level 2 = (Pivot Point – Support Level 1) + Resistance Level 1
Support Level 2 = Pivot Point – (Resistance Level 1 – Support Level 1)
Resistance Level 3 = (Pivot Point – Support Level 2) + Resistance Level 2
Support Level 3 = Pivot Point – (Resistance Level 2 – Support Level 2)
Six total price levels, including three supports and three resistances, are produced by the pivot points. Regardless of where the stock is trading, these levels are still in effect. These are turning points that will cause a response. The trader should be ready for either a price reversal or a breakthrough when a stock is getting close to a pivot point level. The pivot point studies seen on higher-quality trading platforms conveniently calculate and plot the pivot points automatically.
Standard Pivot Points
A basic pivot point is where all standard pivot points start. The high, low, and close are simply averaged here. A solid line running between the pivots for support and resistance designates the intermediate pivot point. The high, low, and close are all from the previous period, so keep that in mind.
Fibonacci Pivot Points
Standard pivot points and Fibonacci pivot points share the same initial position. Fibonacci multiples of the high-low differential are added to the base pivot point to create resistance levels and subtracted to create support levels.
Demark Pivot Points
Different bases and support and resistance calculation methods are used at pivot points. These Pivot Points are dependent on how the close and open are related.
Conclusion
Retracing points and places of support or resistance are known as pivot points. Pivot Point analysis is a method for identifying important levels to which price may respond. They are applicable across a range of timeframes. Traders calculate them using a variety of values, including highs, lows, opening and closing prices. They can be used to gauge a market’s range or to decide whether to enter or quit trades. You can find pivot points easily on a good trading and demat account app that offers all the essential trading tools. For instance, on the BlinkX app, one can access several trading tools and indicators, including pivot points. So, you can get enough information to make correct trades.
