Pivot Points: A Problem Solving Strategy

While investing in stock trading during continuous trends can be profitable, you can often enjoy larger payouts when you manage to trade when prices enter a period of reversal. As an example, if the price of silver has been on the decline and suddenly makes an upturn, it’s possible to profit from the new shift in price.

 

So how can you anticipate when the price is likely to reverse and head in the other direction? While investors may employ many methods to predict this type of reversal, the pivot points trading strategy is one of the most commonly employed methods of predicting changes in price movement.

 

This piece will introduce the concept of pivot points to you, so that you, too, can begin benefiting from the information that they provide when you’re trading. The guide will also provide an introduction on how to use a pivot point strategy when you are trading. 

Read on to learn more.

Introduction to How Pivot Points Worksh

Seasoned investors will often make mention of price points that they believe indicate that a change in price movement direction will soon occur. Typically, these price points are pivot points, prices that indicate the support and resistance levels of asset prices. Investors can use these points to help them make more educated guesses regarding the direction that prices will move in, so that they can make successful trades.

 

Simply put, a pivot point is a level of price that marks a potential turning point for an asset’s price. As an example, if a stock’s price is trending upward and reaches a pivot point, there is a good chance that the price will begin to decline in the near future.

 

When asset prices move beyond their pivot points, it’s an indication that they are breaking out of previous patterns and gearing up for a major upward or downward trend.

 

As previously mentioned, pivot points are related to support and resistance. The support is the minimum price that an asset is unlikely to fall below, while the resistance is the maximum price that an asset is likely to reach. Supports and resistances are not set in stone; market conditions can cause them to move over time.

 

Generally, investors use the support and resistance price to predict price movement. When an asset reaches its support or resistance price, it is expected to rebound and move in the opposite direction. If a new trend in pricing is about to commence, the support or resistance point may be crossed over. Eventually, new resistance and support points and pivot points will emerge based on trading patterns.

 

Because pivot points are not hard and fast numbers, it’s important to remember that they are only to be used as indicators. There is no method of predicting price movement that will be correct 100 percent of the time, but pivot points can make it possible to make a more informed decision about how to invest.

Four Main Reasons Why Pivot Points Are Useful for Traders

There are four main reasons why investors use pivot points as a strategy in doing their trades

Trading Chart

How to Determine Where the Pivot Points Go

There are a number of ways that you can approach pivot point calculation, but the five point system is one of the most commonly used ways of determining where pivot points should be placed. Normally, data for the calculations is sourced from the financial information from the previous day of trading; however, you could also calculate pivot points based on weekly or monthly data. For this example, we will be using the previous day. To calculate the pivot points:

Once you have the numbers, you can use charting software to plot them.

How Reliable Are Pivot Points?

As previously mentioned, pivot points are not hard and fast pricing rules. The theory behind pivot points has been developed based on historical trends and observations of price movement behavior; however, the financial market is not a science. There are no rules or laws that govern it. Every trading day, you can find examples of asset prices moving past their pivot points without starting a new trend in price. As a result, you can never assume that a decision made on the basis of pivot points is 100 percent correct.

 

At the same time, pivot points have remained a favorite investment strategy among investors because they are more reliable than other strategies. They can be a very beneficial tool for anyone who is trading  because they are accurate a good portion of the time and are relatively easy to calculate.

 

As always, you should never invest more in a trade than you can afford to lose, even if the pivot points are providing a strong indicator of price movement. It’s always possible for the market to behave in a completely unexpected way. Still, using pivot points is a good way to make better investing decisions and minimize your losses. A good rule of thumb is that more volatile assets are less likely to be able to be accurately predicted by pivot lines.

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