A commonality across most technical analysis tools is that the fundamental point of virtually all of them is to understand the most likely short and long term directions that a given stock or commodity will take over time. And one of the most fundamental ways to understand those future trading levels is to understand where the potential investment has been price-wise, and where it might be headed.
One such tool to use is the Pivot Points standard. Simply put, a pivot point is an average of the previous day’s high, low, and closing prices for a given stock or commodity. Should the following day’s pivot points prove higher, it suggests a bullish sentiment toward the stock – and of course, a lower pivot point would suggest a bearish sentiment. Taken over time, pivot points can provide useful data as to the trending direction of a given stock or commodity.
Basic Pivot Point Analysis
As stated above, a pivot point is used to understand the overall direction of a given stock or commodity over an intraday period.
Calculating the Pivot Point
Typically, the pivot points indicator makes use of more than just a single pivot point, and typically includes other data, such as expected upper and lower resistance and support limits to bound the trending direction of the stock. By calculating the support, resistance, and close values for the trade-in question, the trader can establish guidelines relative to the expected trending for that trade.
To calculate a standard pivot point, you begin by calculating the base pivot point:
Pivot Point (P) = (Previous days high + Previous Day’s low + Previous Close) / 3
From there, you can calculate the support levels and resistance levels relative to that point, and create a complete pivot point model. Click this link to access an economic calendar for your trading strategiesPivot Points | Indicator Series Click To Tweet
Variations of the Pivot Point
The Pivot Point as a tool is primarily used for intraday analysis of stocks and commodities, but it can be expanded into a number of variations, including:
- Fibonacci – Fibonacci pivot points also use a base pivot point, but add in pre-defined levels into the pivot point calculation, to use Fibonacci ratios to calculate a broader range of support and resistance levels.
- Denmark – Denmark’s pivot points show the relationship between the open and close values and utilize only a single support and resistance level. Because of this, they are calculated differently than standard pivot points.
- Woodie – Woodie pivot points work much the same as standard pivot points, but utilize multiple support and resistance levels to provide a more simplified view of the overall trend.
Through this analysis, traders can gain an insight into the expected direction of a given stock or commodity based on expected trends, and make their trades accordingly.
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