Those familiar with technical chart analysis have likely come across the term Pivot Points, which is a trading indicator that is used to gauge market trends over specific time frames. Broadly speaking, a Pivot Point is calculated by taking the daily high, the daily low, and the daily close seen in the previous session. This can be altered, however, depending on the time frame. So, if we were looking at an hourly chart, the calculated interval would be the previous hour. In a weekly chart, the calculated interval would be the previous week.
Identifying Important Changes in Price Action
The Pivot Points are then used to determine potential changes in price action. When prices trade above a Pivot Point, bullish sentiment is prevailing in the market, and prices are expected to continue moving higher. When prices trade below a Pivot Point, bearish sentiment is prevailing in the market, and prices are expected to continue moving lower.
Understanding how prices are likely to move in the future can prove to be highly valuable when trading binary options, and when these movements are accurately forecast, large profits can be captured in a fairly short amount of time.
Support and Resistance Levels
One of the ways that Pivot Points are most useful is in defining support and resistance levels. In many cases, support and resistance is calculated using the the price level of the pivot and marking the difference between the price high or low seen in the previous session. If prices break through once of these areas (either to the upside or to the downside) the next levels of support and resistance will be calculated using the price distance between the high and low from the previous session.
An upside break of the first support or resistance level targets the secondary support/resistance level. An example of these levels can be seen in the chart graphic below:
Using this Information When Trading
For traders that are looking to gain a more in-depth understanding of the exact formulas in calculating Pivot Points, an internet search will turn up various formulas. But with modern trading stations, your platform will make these calculations for you and clearly mark them on your price chart. Once these levels are visible, we can start to use this information when placing actual binary options trades.
When dealing with binary options, our first task is always to get a sense of which direction prices are likely to travel going forward. If we believe prices will increase, we enter into CALL options. If we believe prices will decrease, we enter into PUT options. Pivot Points can be very useful in these forecasts, as the pivot itself marks the first level of support/resistance. Once prices rise above (or move below) this level, we can determine our directional bias. Since the pivot area itself is the most important price region, we can expect prices to move sharply once this level is breached.
So, for bullish trades (CALLS) we are looking for prices to rise above the pivot and continue moving higher until prices reach the next resistance area. At this point, the trade should be closed and profits should be taken. In bearish trades (PUTS) we are looking for prices to fall below the pivot and continue moving lower until prices reach the next support area. At this point, the trade should be exited.
Conclusion: Using Pivots to Determine Future Direction
Pivot Points can be a great tool for traders looking to gauge the general direction of the market. Modern trading stations plot these points easily, and once marked, these areas can be highly influential in helping traders determine whether they should enter into CALLS or PUTS for a given asset. One important point to remember is that Pivot Points are short term indicators, and these levels will change at the end of each session. Because of this, all trades should be kept within these time frames as price activity becomes less predictable in the following time periods.