Today we are going to talk about the Pivot Points; what are they; how they are calculated and what they are for, according to the Traditional Method. Although today we are going to focus on this method, we must indicate that there are other methods to identify the levels where prices can be rotated, both in support and in resistance. These levels or types of pivot points are more common: Traditional, Fibonacci, Woodie, Camarilla and each type have its own method of calculation.
With this, we only intend that they are another tool to consider, if you consider it useful, therefore it is not a recommendation nor is it the panacea to obtain benefits.
Like all tools, Pivot Points have their defenders and detractors, so each one is free to use them or not.
What are Pivot Points?
It is a tool that is used for trading and especially scalping, which allows us to mark some levels of supports and resistances to be taken into account since there are usually important movements around these levels.
The pivot point is a mathematical average based on certain data of the behavior of a certain asset during the previous day, is the point at which the market sentiment changes from bearish to bullish or vice versa, that is why in addition to using it the traders as a tool more as guidance to technical analysis. It is also taken into account by financial institutions as indicators of strength. Around this, the Pivots are established at different levels. Its use will allow us to hold positions until the price touches the supports or resistances, depending on whether we get long or short. Another objective is that they can be used as an important entry and exit points. Located the Pivot Point, will help us understand the value trend, if the price that has marked us the Pivot Point has been broken by some upward movement, the market would then be bullish, and on the contrary if the Pivot Point is broken in a Downward movement the market will then have a bearish trend.
For investors who are interested to know when it is time to enter and exit a value, use the Pivots for inputs and outputs according to the market trend.
Representation of the Pivot Points
The Pivots are represented by horizontal lines that we will introduce in our graphics once they have been calculated and will serve as a reference to make the appropriate decisions.
Some think that it is just one more way to “dirty the graph” and they are limited to taking into account the maximum and minimum of the candle of the previous day and in this way a support and resistance is marked.
The pivot point is the point at which the market sentiment changes from a bearish to a bullish one.
Example: Ibex 35, closing of Friday 28/12/2018:
And others use the Pivots as trend indicators because they are useful to their operations.
In short, the Pivots Points help us to set a price objective in our trading operations and allow you to not close the open operations precipitously.
However, these tools have to be complemented with others, in order to optimize yields.
How are they calculated?
With this method, 5 points are calculated.
In order to calculate the Pivot Points, which we will call “P”, three data must be taken into account:
- Closing price previous day. What will we call “C”
- Price maximum previous day. What shall we call “H”
- Minimum price previous day. What will we call “L”
- Pivot Points formula
Pivot Point “P” = (C + H + L) / 3 = Pivot point base.
First resistance “R1” = L- (2 * P)
First support “S1” = H- (2 * P)
Second resistance “R2” = (R1-S1) + P
Second support “S2” = (R1-S1) -P
Once they have been calculated, for which we provide you with a calculator prepared by Stock Exchange Success at the end of the article, in order to facilitate the calculations, you have to put the graph in the preferred time for trading. Remember that we are talking about scalping, which is a very short-term operation that uses graphics of 5, 15 or 30 minutes, each one has to adjust yours to its time frame.
The use of the calculator is very simple, we just have to put the closing data, maximum and minimum of the session of the previous day, in its corresponding box and the calculator will throw us the different supports and resistances as well as the pivot point.
We will identify the trend, bullish if the price breaks up or down if it is the other way around.
As it is a very short-term operation, the pivots will have to be updated at the end of the day.
How are they represented?
We will represent them in the graphic in the following way:
- Pivot point Base, with a black horizontal line.
- First and second resistance level R1, with a red dotted line.
- First and second level of support, with a green, dotted line.
Example: IBEX 35 closing on Friday 28/12/2018:
The operation is simple if the price opens above the base Pivot point, we get long and close the transaction once it reaches the R1 or R2, and conversely, if it opens to the downside, we short up to S1 or S2. We can also take advantage when the price approaches the S2 to get long and the reverse when you touch the R2.