What You Need to Know About Pivot Points

What You Need to Know About Pivot Points

Active investing continues to become more popular as people learn more about it. While active investing has been around for a long time, the reality is that social media and the internet have helped make it more widespread. Technological advancements have reduced barriers to active investing for individual investors. In addition, these advancements have also contributed to active trading because they’ve made it easier for individuals to find pertinent information quickly.

Active investing has similar goals to passive investing. After all, both approaches aim to help investors generate sizable returns on investment. However, active investing differs from passive investing because it aims to outperform the market by focusing on market movements and price fluctuations.

Numerous active investing strategies exist. For instance, some traders prefer to hold positions overnight, while others shy away from it. Whether you’re a day or swing trader, you’ll want to use the right tools and strategies to increase profitability. As a result, you’ll want to utilize technical indicators to ensure the best results.

A trader using an app for their trading activities

What Are Pivot Points?

Pivot points are a technical indicator commonly used by day and swing traders. If you’re a beginner to options trading, you’ll want to learn how pivot points work because they’re useful. Pivot points are especially beneficial because they can determine a market’s overall trend over different periods. They’re the average of the intraday high and low. In addition, they also account for the previous trading day’s closing price.

Once you’ve calculated the pivot points, you can determine if the market is trending bullish or bearish. The market depicts a bullish trend if it’s trading above the pivot point. On the other hand, it’s in a bearish run if trading occurs below the pivot point.

Calculating the pivot point also shows support and resistance levels for the price of a commodity. Traders can determine the direction in which the price is trending if it moves through the resistance and support levels.

A trading chart

How to Calculate Pivot Points?

Calculating pivot point indicators can be challenging if you don’t know what you’re doing. Here’s what you need to do to calculate the pivot points correctly:

  1. Find the previous day’s high or low after the market closes and before it opens for the next trading day. In addition, you’ll also want the closing price point from the previous trading day.
  2. Add the high, low, and closing points and divide them by three.
  3. Mark the calculated figure on the chart.
  4. Use the calculated figure to determine both resistance and support levels.

What Do Pivot Points Tell You?

Pivot points are an essential indicator for those new to options trading because they’re static and stay at the same prices throughout the trading day. As a result, they significantly differ from oscillators and moving averages. Traders like to use pivot points because it helps them plan trades beforehand.

Let’s assume trader witnesses a stock’s price fall below a pivot point. It indicates that the market sentiment for that stock is bearish, meaning the trader will short-sell it early in the trading session. Similarly, traders would purchase the stock if it was above the pivot point.

Most traders generally combine pivot points with other trend indicators for the best results.

How Do Pivot Points Compare to Fibonacci Retracements?

Many traders often conflate Fibonacci retracements and pivot points because they have horizontal lines for support and resistance areas. However, they have significant differences despite being technical indicators.

The Fibonacci retracement indicator is particularly useful for traders because it lets them create levels between any two important price points and consider them high and low points.

As a result, you can create retracement and extension levels by connecting price points on a chart. You can also obtain percentages from lines drawn at the price ranges.

On the flip side, pivot points don’t have percentages. Instead, they utilize fixed numbers, including the previous trading day’s high, low, and closing points.

Limitations of Pivot Points

While pivot points are useful for many traders, they don’t always provide the intended results. That’s because pivot points are based on simple calculations. As a result, there’s no assurance the price will stop or reverse at the levels on the chart. In addition, prices often oscillate between levels. As a result, pivot points must be used carefully as part of a complete trading plan.

A trading graph depicting price movements

Get Started with Trading Alphas

Understanding daily trading patterns can be difficult for a new trader. You’ll likely need some guidance and assistance to help you navigate the market. That’s where Trading Alphas enters the mix. The organization has helped its diverse options trading community of over 1000 members make over $25 million in profits. You can sign up for an options trading subscription on their website. Alternatively, you can also join their options trading Discord server.

Clare Louise

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