Investing & Trading

Pivot Points Study

By Samantha Baltodano


TL;DR:

Pivot Points is a tool used by traders to find key levels of support and resistance for a security. By using Pivot Points, traders can identify potential entry and exit points for trades, and manage risk by setting profit targets and stop-loss levels. 


Pivot Points can be used on different timeframes, making them a versatile tool for traders. The indicator is calculated using the High, Low, and Close prices of the previous period, and traders use the levels of support and resistance to make informed trading decisions. 


The Pivot Points study can be tested on historical data using TradingView.


What is the Pivot Points Indicator?

Pivot Points is a tool used by traders to find key levels of support and resistance for a security.


Support levels are the price levels where a security will face buying pressure and bounce back up, while resistance levels are the price levels where a security will face selling pressure and fall.


By using Pivot Points, traders can gain a better understanding of the price changes of a security and can use this information to make more informed trading decisions. Pivot Points are particularly useful for day traders, as they provide a quick and easy way to identify potential entry and exit points for trades.


In addition, Pivot Points can be used on different timeframes, making them a versatile tool for traders. Traders can use Pivot Points on daily, weekly, or monthly charts to get a better sense of the longer-term trends of an asset. 


Now that you know what it’s used for, let’s get into the nitty-gritty.


The Pivot Points indicator provides traders with three levels of support and resistance using the High, Low, and Close prices of the previous period. 


The pivot point is the average of the three prices, and the support and resistance levels are calculated based on the distance between the pivot point and the High and Low prices of the previous period. 


The first level of support and resistance is located at the distance equal to that between the pivot point and the High or Low price of the previous period, while the second and third levels are calculated based on the trading range of the previous period.


The Math Behind Pivot Point Indicators

To calculate the Pivot Points indicator, the following steps are followed:


Step 1: Calculate the pivot point by adding the High, Low, and Close prices of the previous period and dividing by three:

  • Pivot Point = (High + Low + Close) / 3


Step 2: Calculate the first level of resistance by subtracting the pivot point from the Low price of the previous period:

  • First Resistance Level = (2 x Pivot Point) - Low


Step 3: Calculate the first level of support by subtracting the High price of the previous period from the pivot point:

  • First Support Level = (2 x Pivot Point) - High


Step 4: Calculate the second level of resistance by adding the trading range (High minus Low) of the previous period to the pivot point:

  • Second Resistance Level = Pivot Point + (High - Low)


Step 5: Calculate the second level of support by subtracting the trading range of the previous period from the pivot point:

  • Second Support Level = Pivot Point - (High - Low)


Step 6: Calculate the third level of resistance by adding the trading range of the previous period to the second level of resistance:

  • Third Resistance Level = Second Resistance Level + (High - Low)


Step 7: Calculate the third level of support by subtracting the trading range of the previous period from the second level of support:

  • Third Support Level = Second Support Level - (High - Low)


Trade Signals Using Pivot Points Indicator

Traders use Pivot Points to identify potential entry and exit points for trades. 


When the price of an asset is approaching a support level, traders may consider buying the asset as the price is likely to bounce back up. 


Conversely, when the price of an asset is approaching a resistance level, traders may consider selling the asset as the price is likely to fall. 


The Pivot Points indicator can also be used to identify potential profit targets and stop-loss levels.


Test The Pivot Points Study

Great news! 


You can back test this exact strategy on historical data for any of your favorite symbols using TradingView. 


This strategy has already been built and all you have to do is log in and take it for a spin. You can access this indicator here.


If you can’t wait to try more, test many other variations of Pivot Points here.


If you’re new to back testing and to TradingView, don’t worry. I created a step-by-step guide you can follow to begin testing the Pivot Points Study.


Summary

  • Pivot Points is a tool used by traders to find key levels of support and resistance for a security.
  • Support levels are where a security will face buying pressure and bounce back up, while resistance levels are where a security will face selling pressure and fall.
  • Pivot Points provide traders with three levels of support and resistance using the High, Low, and Close prices of the previous period.
  • The pivot point is the average of the three prices, and the support and resistance levels are calculated based on the distance between the pivot point and the High and Low prices of the previous period.
  • Traders use Pivot Points to identify potential entry and exit points for trades.
  • The Pivot Points indicator can also be used to identify potential profit targets and stop-loss levels.
  • Pivot Points can be used on different timeframes, making them a versatile tool for traders.


Pivot Points is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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