Pivot points are technical indicators used to calculate the overall trend of the market over varying time frames. These technical indicators are usually only used in combination with support and resistance indicators.
The formula for calculating a pivot point is quite simple:
Pivot = (High+Low+Close)/3
High stands for the highest price recorded during the previous day of trading, low is for the lowest price, and close refers to the closing price.
Applying pivot points on crypto markets
When you look at a crypto chart, you will automatically see the price information you need, high, low and close – usually at the top of the screen. Apply the formula to calculate the pivot point.
With this number, you can determine the overall trend of the today by look at the distance between the two numbers. When the price goes above the pivot point, it indicates that a reversal of the trend is in the making but when the price action stays below the pivot point, it is likley the market will continue with its current trend.
You csn calculate pivot points on all time frames, however, it is advised to use them mainly in daily and weekly charts. The higher the time frame is, the more important pivot points are.
Using support and resistance levels
With the calculated pivot point, we can calculate at least two support and resistance levels. Support levels are key to reading the movements on the charts. Very often, when the price touches the first level of support, it won’t be long until it rotates back higher.
To calculate the first support level (S1), we use the following formula:
Support 1 = (Pivot × 2) − High
The second layer of support is calculated by using this formula:
Support 2 = Pivot − (High − Low)
The first support level has the role of being precise. Usually when that support level is reach, you can expect a trend reversal. But in case it does get broken, then it all comes down to the second support level.
Resistance levels play the same role as the support levels described above, but then for price action moving the opposite way.
To calculate first resistance level:
Resistance 1 = (Pivot × 2) − Low
The second resistance level is calculated like this:
Resistance 2 = Pivot + (High − Low)
All four support and resistance levels can be used in two ways: to predict trend reversals and to confirm the current trend.
Combine pivot points with other indicators
Unlike other technical indicators like oscillators or moving averages, pivot points are static. Once they are calculated based on the prior trading day, they remain the same until the next day’s price is printed.
For that reason, pivot points are best used in combination with other technical indicators. Always look for confluences such as a pivot point within the same zone as another important indicator like Fibonacci or the moving average.
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