Pivot Points are a type of technical analysis tool used by traders to determine potential support and resistance levels. These play a vital role in identifying the moments where the direction of market’s price movement could change. Pivot Points are calculated using the high, low, and closing prices from the previous trading session.
There are several methods to calculate pivot points, but the most commonly used are the Standard Pivot Point and the Fibonacci Pivot Point. The standard version calculates the pivot point with an average of the high, low, and closing prices. It predicts five levels of potential support and resistance. Meanwhile, the Fibonacci version uses the same formula to find the pivot point, but applies Fibonacci retracement levels to determine potential support and resistance zones.
These pivot points are significant because they’re often used by professional traders and therefore become self-fulfilling prophecies. As more traders watch these levels and place trades around them, the prices will often react at these levels. Beginners can utilize pivot points as a strategy to understand better where to enter and exit trades, and where to place stop loss or take profit orders.
