Pivot Levels

Description

“Pivot Levels” are a widely used tool in technical analysis, particularly in financial trading, to determine potential support and resistance levels. These levels are calculated based on the high, low, and close prices of the previous trading session and are used to predict the range of trading for the next session.

How Pivot Levels Work:

1. Calculation: The basic pivot point (PP) is calculated as the average of the high, low, and close prices from the previous trading day: 𝑃𝑃=(𝐻𝑖𝑔ℎ+𝐿𝑜𝑤+𝐶𝑙𝑜𝑠𝑒)3PP=3(High+Low+Close)​.
2. Support and Resistance Levels:
   • First Level Support and Resistance:
     • Resistance 1 (R1) = $(2\times PP)-Low$
     • Support 1 (S1) = $(2\times PP)-High$
   • Second Level Support and Resistance:
     • Resistance 2 (R2) = $PP+(High-Low)$
     • Support 2 (S2) = $PP-(High-Low)$
   • Additional Levels can be calculated for deeper analysis, including third levels of support and resistance (R3, S3), depending on the trader’s requirements.
3. Application: Traders use these levels to determine potential entry and exit points. A move towards a pivot point or through it can signal a shift in market sentiment.

Uses:

• Predictive Tool: Pivot levels provide a straightforward predictive insight into potential future movements of the market.
• Day Trading: They are particularly popular in day trading, where traders aim to capitalize on small price movements.
• Market Sentiment: Breaks above or below pivot levels can indicate strength or weakness in the market.

Considerations:

• Market Volatility: Pivot levels may be less reliable in highly volatile markets where price movements can be erratic.
• Complementary Strategies: Many traders use pivot points in conjunction with other forms of technical analysis, such as trend lines and oscillators, to confirm signals.

Pivot levels are a fundamental tool in a trader’s arsenal, providing a structured method to gauge market sentiment and potential price movements based on previous market data.