You would have often head market analysts talking about an equity price nearing a certain support or resistance level, each of which is important because it represents a point at which a major price movement is expected to occur. But how do these analysts and professional traders come up with these so-called levels?
One of the most common methods is using Pivot Points.
The reason pivot point trading is so popular is that pivot points are predictive as opposed to lagging. We use historical information of the previous day to calculate potential turning points for the day we are about to trade (present day).
Because so many traders follow pivot points you will often find that the market actually reacts at these levels and THIS will give us an opportunity to place our trade.
One of the most common methods is using Pivot Points.
The reason pivot point trading is so popular is that pivot points are predictive as opposed to lagging. We use historical information of the previous day to calculate potential turning points for the day we are about to trade (present day).
Because so many traders follow pivot points you will often find that the market actually reacts at these levels and THIS will give us an opportunity to place our trade.
How to Calculate Pivot Points?
There are several different methods for calculating pivot points, the most common of which is the five-point system.
This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a Pivot Point.
The equations are as follows:
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 5points, 2resistance levels, 2support levels and the actual pivot point. If the market opens above the Pivot Point then the bias for the day is for long trades as long as price remains above the Pivot Point.
The three most important Pivot Points are R1, S1 and the actual pivot point. The general idea behind trading pivot points is to look for a break of R1.
By the time the market reaches R2 the market will already be overbought and these levels should be used for exits rather than entries.
A perfect set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2.
You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2.
This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a Pivot Point.
The equations are as follows:
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 5points, 2resistance levels, 2support levels and the actual pivot point. If the market opens above the Pivot Point then the bias for the day is for long trades as long as price remains above the Pivot Point.
The three most important Pivot Points are R1, S1 and the actual pivot point. The general idea behind trading pivot points is to look for a break of R1.
By the time the market reaches R2 the market will already be overbought and these levels should be used for exits rather than entries.
A perfect set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2.
You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2.
Advanced Method
A more advanced method is to use the cross of two moving averages as a confirmation of a breakout.
You can even use combinations of indicators to help you make a decision.
You can even use combinations of indicators to help you make a decision.
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