Pivot points used to be a favorite on Wall Street, but like other technical indicators, pivot points are time consuming to calculate. Thanks to computers and plenty of web resources, it is now possible to calculate pivot points in seconds. Professional traders have long used pivot points as a way to define support and resistance lines before the market even opens. Pivot points are very successful because they predict the market rather than lag it.
How they work
Pivot points work best in sideways trends because that is practically what they predict. The lines that make up a pivot point calculation define a very tight trading range that isn’t very conducive to uptrends and downtrends. Many profitable traders use pivot points on a daily basis to get an idea of the next day’s trading range before the market even opens.
Open below the pivot
An open below the pivot point is considered to be very bearish and might induce a downtrend, but not for very long. The way pivot points are designed suggests that the price can only fall so long before it hits a support line that makes up the pivot calculation. Creative techniques for playing the bounce usually include shorting the price until it hits the next support line.
Open above the pivot
If the market opens above the pivot, it is said to be very bullish to the next resistance line built into the pivot calculation. Used with other creative techniques and technical analysis indicators, the open up can bring a strong uptrend. However, be careful, as the resistance lines in a pivot point tend to be very strong.
Playing the bounce off the middle pivot
In the center of each calculation is a very strong line known as the pivot. A bounce off the central pivot is always very strong, and breakthroughs come with the same strength. Some professional traders like to play the bounces off this line, while others instead choose to avoid it. Depending on your risk tolerance and ability to make quick decisions, the pivot point might not be the place for you.
Mixing pivot points with candlesticks
This is by far the best strategy, as is any strategy with more than one indicator. If the price has rallied through a few pivot resistance lines before making a bearish candlestick figure, such as the shooting star, the chances of a sell off and upcoming downtrend are very likely. Just as the support and resistance lines often indicate a reversal, the confirmation of a candlestick pattern is very rewarding. Also, oscillators and momentum indicators work very well to make a trading decision.