Pivot point
calculations are used by security traders to attempt to
predict support and resistance levels. They are commonly used
in the forex and commodity futures markets. Pivot point
analysis is a subset of technical analysis, although it is not
as popular or well known as other technical methods.
Pivot points are frequently used by foreign exchange traders
as a means to calculate resistance and support levels which
are, in turn, used as visual cues to execute trades. Pivot
point calculations provide traders with objective visual bench
marks which some use to predict price changes, although the
validity of these levels is still subject to debate.
Some traders believe that there are two prevailing tendencies
in price movements. If a day's price action begins above the
pivot point, prices will tend to stay above that point
(fulcrum) until it reaches a resistance point. Conversely, if
a day's price action begins below the pivot point, the price
will tend to stay below that point until it reaches a support
point. A resistance level is a price that tends to prevent
further upward movement. A support price is a price action
point that tends to prevent further downward movement.
Typically such a trader, when price approaches a pivot above,
waits for a reversal at that point and sells. The opposite is
true when price action is moving downward, the pivot trader
waits for a bounce off the pivot of support and places an
order to buy.
The rationale of this is an attempt to avoid buying high (at
R2) or selling at the low (S2).
It should be noted that none of these beliefs are supported by
the traditional random walk market model. |
