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. Before you dig deeper into Pivot Point Trading we want to make sure you took advantage of our free online binary option trading course and opened a binary options practise account, which has been heavily recommended in our IQoption review.
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.
Pivot Point Trading 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:
Important When Pivot Point 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 or alternatively read our simple binary options trading strategies. 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.
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Pivot points are just one of several types of price action
Pivot points are just one of several types of price action that can provide profits to those who trade binary options. This forthcoming price action is typically easiest to spot when a pivot point calculator is used. This tool will help you to ascertain the future course of price movement, in conjunction with approximately how far the price may travel during a specific period of time.
These types of estimations are drawn from the typical price, as well as the highest and lowest price levels for a period of time. Support and resistance are added into the mix to deliver additional verification of the upcoming movement. When using a pivot point calculator, keep the settings at the “classic” formula (this will be automatic, just don’t make any changes). These specific settings can be applied to any type of trading, including the Forex markets and traditional markets. These calculators are available on the internet, usually at no cost, and will likely calculate and set the appropriate points for you instantly.
Pivot points offer you a realistic view of the price range of your chosen asset, especially when combined with extra indicators. The best use of pivot points will be to use them to recognize upcoming price direction reversals, as well as to recognize breakout points. They can also be used to ascertain excellent periods of market entry, providing the signal to trade just in advance of a price correction or total reversal of direction. Feel free to use this strategy along with any stock, commodity, index, or currency pair.
Try to remember that pivot points are important price levels. It’s going to be inside of these levels that a reversal of price direction is most likely to take place. Note, however, that the asset price might also pause for a moment after which it continues to shift in its previous direction. Given that obvious boundaries are going to be displayed when using the calculator, consider utilizing this binary options strategy along with instruments such as Long Term or One Touch.
The provided price levels will highlight both support and resistance areas. These along can clearly show the prime areas for likely reversals. Both brief and long-term changes can be detected. For instance, if the price starts out the market session being positioned above the middle pivot, conditions are bullish. If he opening price is greater than the 2nd point, expect bullish long-term movement, but bearish short-term movement. Use these conditions to enter into trades accordingly.
It should be stated that it is much more difficult to predict price corrections, reversals, and breakouts than it is to simply trade along with a trend. For this reason, novice traders should first master trend trading and then move on to working on forecasting more volatile types of price movement. Keep in mind that all types of price movement are caused directly by the actions that are taken by investors. This means that market news related to your chosen assets must be monitored even when using a binary options strategy which is technical in design.
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. If you haven’t already made a trading account we suggest to check our binary options brokers list.
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