Definition of 'Pivot Point'
The pivot point is a dynamic indicator, meaning that it changes every time a new bar is formed. This makes it a useful tool for identifying trends and potential reversals.
There are three main types of pivot points:
* The support pivot point is the lowest point of the recent trading range.
* The resistance pivot point is the highest point of the recent trading range.
* The middle pivot point is the average of the support and resistance pivot points.
Traders often use pivot points to set stop-loss and profit-taking orders. They may also use them to identify potential entry points for trades.
Pivot points are not infallible, and they should not be used as the sole basis for making trading decisions. However, they can be a useful tool for technical analysis and can help traders to identify potential trading opportunities.
Here is an example of how pivot points can be used to identify potential support and resistance levels.
Let's say that the price of a stock has been trading in a range between $100 and $120 for the past few weeks. The 5-day moving average is at $110, and the 20-day moving average is at $112.
The pivot point for this period would be calculated as follows:
(High + Low + Close) / 3 = $111
The support pivot point would be $108, and the resistance pivot point would be $114.
If the price of the stock breaks below the support pivot point, it could indicate that the trend is reversing and that the price is likely to fall further. If the price of the stock breaks above the resistance pivot point, it could indicate that the trend is continuing and that the price is likely to rise further.
Of course, there is no guarantee that the price will actually follow these levels. However, pivot points can be a useful tool for technical analysis and can help traders to identify potential trading opportunities.
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