Cryptocurrency predictions: what is the pivot point and how is it calculated
There is no shortage of technical terms in cryptocurrency trading. One of the reasons is the relatively new nature of the market. However, in many ways cryptocurrency trading is similar to trading stocks or stocks. Both are speculative with varying degrees of risk and investors in both markets often depend on their reading of a few parameters to gauge the overall trend. One of these settings is the pivot points. Investors calculate these points based on highs, lows, and closing prices from previous trading sessions to see if they should stop or double their investments.
What are pivot points?
A pivot point is found through technical analysis and is an indicator of the overall market trend. It is simply the average of the high, low and closing prices of the previous day or trading session. If the market the next day passes the pivot point, the market is considered to be showing bullish sentiment. If not, it might be time to stop and rethink your investing strategy.
When pivot points are combined with other technical tools, they give an overview of an asset, as well as support and resistance levels during a short-term trading session.
How are the pivot points calculated?
Pivot points can be calculated in several ways. But the most common of these is a five point system. This method uses the high, low, and near data from the previous session, along with two support levels and two resistance levels. Using these prices, a pivot point is calculated. The equation to calculate a pivot point is given below.
Pivot point = (Previous high + Previous low + Previous close) divided by 3
The equation for calculating support levels is as follows:
Support 1 = (Pivot Point x 2) – Previous Up
Support 2 = Pivot Point – (Previous Up – Previous Down)
To find the resistance levels, use this equation:
Resistance 1 = (Pivot Point x 2) – Previous low
Resistance 2 = Pivot Point + (Previous High – Previous Low)
These results are used to chart a course for five levels: two resistance levels, two support levels, and a pivot point. Collectively, the method is known as the Five Point System. This system allows traders to define an area where price seems most sensitive and is likely to cause a change in market sentiment.
Common practice is to use pivot points for shorter time periods, at most for 4 hour charts and only 15 minute charts.
Types of pivot points
There are five types of pivot points. In addition to the pivot point find method described above (standard pivot point), there is the Camarilla pivot point, Denmark pivot point, Fibonacci pivot point, and Woodies pivot point.
How are pivot points different from other indicators?
Instead of relying on the current price movement, the pivot point system uses the price data from the previous day / session. This approach provides traders with an early signal of things to come so they can plan accordingly. Pivot points remain static until the start of the next trading session.
Pivot point limitations
Experts say pivot points are only suitable for intraday trading as they are based on simple calculations and may not be true during swing trading. Sometimes, too, volatile price movements can completely ignore pivot point predictions. When volatility is high, experts say it’s best not to depend on pivot points because price swings are quick and wide for any predetermined calculation strategy.