The basis of pivot point formulas, which traders use to calculate pivot point numbers, involves several steps. Traders should be able to interpret the rationale behind the calculations.
According to the traditional formula, the pivot point is considered as the average of the previous session’s trading range combined with the closing. The support and resistance levels that are calculated from the formulas indicate the potential trading ranges for the next trading session, based on the past weight of the market’s strength or weakness derived from calculating the high, low, and distance from the close of those points.
The trading session could be an hour, a day, a week, or a month based on time frame that traders use. Most trading software including MetaStock provide easy way to calculate the numbers on a daily, weekly, and monthly time period relatively quickly.
If there is no significant news events have taken place between the close and the next trading session’s open, market price is likely to swing generally between the pivot point and the first levels of support and resistance.
If either of these first levels is penetrated, these breakout points reverse their roles. For example, the first support becomes the new resistance. Once a breakout occurs, the range of trading is expanded, and if a second support or resistance level is broken, then the potential for further momentum is developed.
When prices move to the first or even second support and resistance, while any other technical indicators, such as MACD or stochastic, confirm the direction of price movement. Combine those signals with a familiar candle chart pattern give traders a powerful buy or sell signal.
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