Pivot Point

Pivot trading is useful for trading days when there are no important market news released.

If you look at price data, it has:

yesterday high
yesterday close
yesterday low

Pivot theory beleives that the price will only move as much today as it moved yesterday. Opening price is disregarded (in trading shares opening prices can falsly gap due to the market maker decision).

So the price today start at yesterday close. And it can move as much as much down as yesterday it moved from the high to the close (support 1 or S1) or it can even move as much as the distance between yesterdays high and low (support 2 or S2). The same is true if the price move upward.

Pivot Support and resistance prices:

Actually drawing it would be much easier than understanding counting...

PP = (high + low + close)/3

S1 = 2PP - high.
S2 = PP - high + low

R1 = 2PP - low
R2 = PP + high - low

Usualy price moves between S1 and R1. If even the second support is broken, we can assume that the price is going to trend further.

Variations on Pivot

I would also use the intraday moving avarage instead of the close price. In a 24-hour market, deciding in an arbitrary close value is not so reliable. Which hour do you choose as your closing hour?

Another strategy that I would try is to use is the current price:

  1. 24-hour previous high
  2. current price
  3. 24-hour previous low

However, no need to become too mathematical about this as you can see with the bare-eye which direction the price is likely to move and how much on the graph.

Practical Application

The pivot point and the other lines can be used to calculate the probabilty of price moving between the limits. It is a strategy that can easily and perfectly backtested!

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