Importance Of Pivot Points

Prices in the stock market never go in a linear pattern. This means you will never see a stock or, in fact, any financial instrument go straight up or down in price without a single tick in the opposite direction. And this is why the healthiest moves in the market always form in a pullback manner. Now, what is a pullback pattern? It is the move where prices rally in a single direction, take a break, consolidate or go in the opposite direction for a while. Tests the support/resistance zones and then again continues to move in the original direction. And these moves are the primary patterns where visible and clear support and resistance zones are formed. And hence, form a pivot point.

What is a pivot point?

Skipping the formula behind the pivot point, let's try to understand what is a pivot point and how does it help a trader. So, the name "pivot" itself suggests the fact that whichever "point" it will highlight will surely be a level to watch out for. Now, what are those levels? It can be anything; for example, you open a daily chart. It can be the opening and closing of the previous day's candle, or it can be a point from where the market made a major reversal. Or it can be the point from where markets took support/resistance a month ago. All these things will change based on the settings you put in your indicator.

Now, pivot points are one of the best indicators when it comes to identifying support and resistance since these derive their value from actual reversal and point of concern zones in the past. Therefore, the saying that "history repeats itself" is the backbone of why traders use pivot points, expecting that markets would again behave in an expected way when they come near a pivot point.

How to use a pivot point?

No indicator in this world would alone be sufficient for trading. The best way a good trader can make use of pivot points is by combining them with technical analysis. Also, know where to use and where to ignore the pivot points until and unless you have a specific set of trading rules to do so. Use your analysis to find support and resistance in the market by drawing zones. Now open pivot points and go from bigger to smaller time frames. While doing this, look out for pivot points coinciding with your zones.

Higher time zone pivot points coinciding with your analysis would mean that your zones are much crucial than the ones detected on a lower time frame. Please remember, this isn't a holy bible, and markets can and have behaved oppositely many times in the past. Hence, always do your due diligence to the maximum possible extent. Have multiple reasons why you must enter into that trader. And only enter the position if you find multiple entry reasons. Pivot points are just an indicator. But when used correctly, it has the potential to boost your profitability very high.