Every trader should know what a pivot point is. It comes as the core element of various baseline strategies when using technical analysis and various trading charts. Generally, people who trade commodities or equity use a pivot point strategy that makes it possible to make accurate support and resistance level predictions. They help to identify potentially successful entry points, traders use pivot point trading rules to set stop-losses or limit orders, and so on.
However, a few beginners understand what a pivot point is and how it can be used under real-market conditions with a specific trading strategy.
Pivot point explained
With so many technical indicators, the pivot point is probably the major one, as it helps to define the future trend or price movement. Besides, it shows the situation on the market with the overbought or oversold environment. What's more, the indicator makes it easy to identify the trend, in addition to support and resistance levels.
Take a look at the pivot point example on MT4 chart (thin horizontal lines):
Ways to use and interpret Pivot point trading rules
As mentioned earlier, the technical indicator is used to specify and calculate primary support and resistance levels. In other words, you can use it to see the biggest price movement that is about to take place at the given price tag. Of course, pivot points may be used for other types of support and resistance. However, they are not as influential and informative as the primary. On the other hand, they help to spot specific price moves as well.
There are two ways traders can use pivot point trading rules:
- Determining the overall market trend. This way works for both bulls and bears. If you see the price dropping through the indicator, it is the bearish signal. If it breaks the upward movement, it is a bullish signal.
- Determining market entry and exit positions. Let's say you set a limit order to buy 1,000 shares if the price makes a breakthrough and passes the resistance level. At the same time, you can set a stop-loss located next to the support level.
As you can see, pivot point trading rules make it easy to make accurate predictions using support and resistance. On the other hand, sometimes levels may have no sense of impact. What we are trying to say is that you are not supposed to rely only on the technical indicator. It should be used along with other tools and trading instruments integrated into a comprehensive trading approach.
The best idea is to use pivot points along with other technical indicators such as MACD, moving averages, candlesticks, and some others.
Here you can choose an MT4 trading platform for your device and quickly install it for free. The only thing needed is a simple registration form. MetaTrader 4 allows installing indicators and plugins, and offers a version that doesn't require installation.