A pivot point is widely used by traders to predict the market
movement. This technical indicator aims at confirming the overall market trend
for certain time period.
The pivot point is computed based on the average of significant
prices, including high, low and closing prices from the prior trading day. The
way to determine the market sentiment is to compare the market movement and the
daily pivot point. For example, if the market keeps moving above the pivot
point is deemed as the bullish sentiment. You can keep your portfolio for the
time being. However, if the pivot point drifts down, and the market keeps
moving up, it would foretell the potential reversals. It may not be imminent,
but it would occur in the near future.
On the other hand, the pivot point technical indicator is
frequently used to detect the market support and resistance levels. From this point
of view, you can treat it as a trend line indicator. The width of the trading
range between the pivot point and the extremes (highest or lowest price level)
from the prior trading day is used to determine the first support or resistance
levels. Further, the full market movement width between extremes (highest and
lowest price levels) is used to compute the second support and resistance
levels.
When we calculate the pivot points, the pivot points themselves
are working as the primary support or resistance for the general market.
Traders often utilize pivot points in two ways:
The first ways is to determine trend for the general market which
can be tracked by Dow Jones, NASDAQ, or S&P 500. If the pivot points move
up sharply and break the resistance to the upward direction, then we treat this
market in bullish mode. Likewise, if the pivot points move dramatically low and
break the support level to the downward direction, then we should take cautious
and bearish stand. However, based on its formula, the pivot points reading is
only good for one day. It needs to be recalculated next day. Therefore, this
technical indicator can only be applied to short-term trading. That is the
reason it is widely used by momentum traders, especially day traders.
On the other hand, pivot points can be used to make up the trading
strategies, including entering and exiting the market. Traders can place order
by either limit order or stop-loss depends on the movement of pivot points. If
the pivot points move above the resistance and show bullishness, traders can
set limit order to long stocks. Likewise, if the support level is broken,
traders can plug in a stop-loss to sell stocks. If you are experienced traders,
you can even short the stocks or market based on the movement and price levels
of pivot points.
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