Classic pivot pointsProfessional traders use pivot points to identify possible support and resistance levels.
In other words, the pivot point itself, as well as its levels, represent an area within which the direction of price movement can change. At the same time, the pivot point is a fairly objective indicator.
Pivot points interact with the high, low and close of the previous period to assess future support and resistance indicators. In this regard, pivot points are considered predictive or leading indicators.
Classic pivot points start from the base pivot point. This is a simple average of the high, low and close. The midpoint of the reversal is shown by a solid line between the support and resistance points. Please note that all the highs, lows and closings relate to the previous period.
The pivot points set the general tone for the price movement. This is the middle line of the group, which is marked with (P). Movement above the pivot point is positive and shows strength. Keep in mind that this point is based on information from the previous period. It is put forward in the current period as the first important level. Movement above the pivot point implies strength with the aim of the first resistance. A break above the first resistance shows even greater strength with the goal of reaching the second resistance level.
Using classic pivot pointsSupport and resistance levels based on pivot points can be used in the same way as traditional support and resistance levels.
The main thing is to closely monitor the price movement when these levels come into play. If prices drop to the support level and then strengthen, traders can look for a successful test and bounce back from the support.
It often helps to search for a bullish graphical pattern or an indicator signal to confirm a rise from support. Similarly, if prices reach resistance and stop, you can look for a failure in resistance and, accordingly, decline. Again, traders should look for a bearish chart or indicator signal to confirm a decline from resistance.
You can use the second support and resistance levels to identify potential overbought and oversold situations. A move above the second resistance level would demonstrate strength, but it would also indicate an overbought situation that could lead to a pullback. Similarly, a move below the second support would show weakness, but would also indicate a short-term oversold condition that could lead to a rebound.
Pivot points offer traders a methodology for determining the direction of the price, and then set support and resistance levels. The price direction is determined by analyzing the price movement of the current period relative to the pivot point: starting above or below the pivot point or crossing it in any direction during trading. The established support and resistance points come into play after determining the direction of the price. Although it was originally developed for traders on trading platforms, the concepts underlying pivot points can be applied on different timeframes.
As with all indicators, it is important to confirm pivot point signals with other aspects of technical analysis. The reversal pattern of a bearish candle can confirm a reversal at the second resistance. The oversold RSI can confirm the oversold conditions at the second support. The growth of the MACD can be used to confirm a successful support test.