Presentation of the pivot point :
The level of the pivot points is calculated once a day. There is therefore one pivot point per trading session. The main function of the pivot point is to indicate the support and resistance levels of a price.
To obtain this point, both technical and psychological data must be used. It is represented by a line on a graph.
Ultimately, the pivot point is the point at which a trend can change direction up or down. When it is broken on the upside, it gives a buy signal and when it is broken on the downside, it gives a sell signal. Be aware that pivot points change regularly and should therefore be used for short-term trading only.
Calculation and determination of the pivot point :
The calculation of the pivot point is mathematically quite complex and we do not enter here in detailed explanations on this subject, especially since these points are indicated by all brokers who provide their customers with technical analysis data.
Its calculation is done at the end of a session for the following session and takes into account the following elements
- Highest level reached the day before
- The previous day's low
- The closing price
Using pivot points in trading :
Generally speaking, pivot points are used to determine the best entry and exit points in the market. Thus, when the price of an asset moves above a pivot point, it is advisable to speculate on the upside. Conversely, if the price of the asset is below the pivot point, it is better to speculate on the downside.
It is also possible to use the pivot point to place stop loss orders. These orders will be placed just above or below this point depending on the direction you are trading. This is to protect against a reversal of the trend.
We can therefore say that pivot points have more or less the same function as support and resistance levels in that when the price is above this point, it is considered as support and when the price is below this point, it is considered as resistance. Clearly, the more a pivot point holds up, the more it will be an important support or resistance level.
It is advisable to be cautious with the use of pivot points because they can be broken upwards or downwards. It is best to avoid using this indicator when prices are only moving in the direct vicinity of this point without any real volatility.
The ideal here is to couple the interpretation that you will make of this pivot point with other technical indicators which can prove interesting to determine for example the strength of a movement or the volatility of a market. It is also important not to neglect the elements of fundamental analysis.
Is the use of pivot points really effective?
As we have just seen, the pivot point technique is extremely useful if you want to invest directly in the market for a given asset.
Of course, this method also has its limitations. Firstly, it does not allow to know the strength of a trend and thus remains imprecise as for the reliability and the capacity of the observed movement to last. It is therefore advisable not to use it alone but also to use other indicators such as volatility indicators.
Another weakness of the pivot point method, as with all investment methods based solely on technical analysis of prices, is that it does not take into account external factors that may influence the current trend. Indeed, any good trader will tell you that it is essential to use both technical and fundamental analysis to achieve a complete and reliable investment strategy. In this sense, we advise you to check the fundamental data concerning your asset before basing your strategy on this method.
We can therefore say that the pivot point method is interesting if it is not used in isolation but with other technical indicators and taking into account the events and economic news of the market concerned. It is still recommended as part of a complete analysis.
Practical use of pivot points in your trading session:
Let's see now how it is possible to use the pivot points in a concrete way during your trading session. First of all and after having displayed these indicators on your stock chart, you will spot an upward movement of the pivot. You will then take a buy position with a safety stop order whose level will be located just below this pivot. In this way, if the buy signal sent by the pivot is false, the losses are limited to the strict minimum.
A first price target is then set at the first resistance. When the price of the asset reaches this resistance, it is possible to set a new upward target at the second resistance. Here again, we protect the profits previously made by placing a stop order just below the first resistance.
When the price of the asset reaches the second resistance, it is advisable to take profits, but in some situations it may also be worthwhile to keep the position open when the price is likely to rise even higher. Of course, it is important to protect the previous profits by placing a stop order just below the second resistance.
The use of pivot points is undoubtedly one of the most affordable methods of investment and analysis for traders to follow in their technical analysis. However, one should check that the stop orders are well positioned under the different resistances.
We have taken here the example of an upward position but this strategy is of course also applicable to a downward position when the pivot moves in this direction. The objectives will be set here at the support lines.
It should also be noted here that this pivot point strategy is not always effective, since the price of an asset can move perfectly well around its pivot without any real volatility. In this case, this method should be avoided. In fact, we will favour pivot points on assets with high liquidity and showing clear and frank trends. This strategy is therefore particularly suitable for trading large stocks.
How can you maximise the usefulness of pivot points in your trading?
Finally, here are some simple rules you can apply when using pivot points that will help you to improve their effectiveness and relevance.
First of all, always combine this method with other technical indicators to increase the relevance of the signals obtained. Price indicators are particularly important to maximise the results, as are fundamental indicators which can make a trend more volatile and therefore the pivot point method more interesting. Thanks to economic and financial news and information, you will be able to better anticipate the influential factors and future underlying trends of an asset. All you have to do is secure your position with the pivot point method to perfect your strategy and obtain convincing results.
The second thing about the pivot point method is the time of day at which you take a position. Morning and evening are best, as these are the times when all the new pivot calculations are made. During the session, some unexpected events can indeed call into question the relevance of the pivots calculated at the beginning of the session. It is therefore preferable to take your positions when these pivot points have just been updated and the market is less volatile. You can also place your stop order above the highest pivot point and not below it, and conversely on the lowest pivot point. This will increase your protection against the risk of an unexpected market reversal.
Finally, it is essential that you adapt your use of pivot points to your trading style. In particular, day trading and swing trading will use different pivot points with the daily pivot point for day trading and the weekly pivot point for swing trading in order to check the overall trends for the week and optimise your position taking. Finally, it should be noted that traders who decide to invest for the long term can use annual pivot points but must have sufficient capital to deal with intermediate corrective movements.
By following these rules, pivot points will quickly become important indicators of your investment strategies and will help you to make good technical analysis.