A pivot point is defined as a technical analysis indicator calculated to determine the overall trend of the market over different time frames. Once calculated by using different approaches and styles, pivot points are then used in crypto trading to plan the process.
They are usually accompanied by the number of support and resistance levels. In this blog post, we look at the importance of pivot points, different types of pivot points and their applicability in the daily crypto trading process.
Pivot point is calculated using a simple formula:
Pivot = (High+Low+Close)/3
High represents the highest price recorded during the previous day of trading, low the lowest price, while the close shows the closing price from the prior trading day.
Applying pivot points: BTS/BitUSD as an example
Now that we have a pivot point, we use this price to calculate two resistance and support levels. On Sparkdex’s charting tool, just point the mouse cursor over the shadow of the candle in question and you will get the price info (high, low, close) on top of the screen.
By applying the formula, we calculated the pivot point for BTS/bitUSD trading pair on SparkDEX . Given the aggressive daily close the price action recorded yesterday, the price is currently far away from the pivot point.
Nevertheless, this level will help us determine the overall trend of the market for today. A move above this level will likely mean a trend reversal is taking place, while if we stay below, the market is likely to continue to move further lower.
Pivot point on BTS/bitUSD (Sparkdex)
Calculating support levels
More importantly, the calculated pivot point will help us to now calculate at least two support and resistance levels.
To calculate the first support level (S1), we use the following formula:
Support 1 = (Pivot × 2) − High
There we have our first support level. As seen in the price chart below, BTS/bitUSD perfectly demonstrates the importance of pivot points in trading. Based on the calculations from the prior trading day, the price action found support exactly at the first support level. The price touched the first level of support and immediately rotated back higher.
First support on BTS/bitUSD (Sparkdex)
In a similar manner, the second layer of support is calculated by using this formula:
Support 2 = Pivot − (High − Low)
The second support is now inserted in the price chart as well, as you can see below. Given the precision of the first level of support, we can expect that the second layer of support also has an important role to play in the future, in case S1 gets broken.
Second support on BTS/bitUSD (Sparkdex)
Calculating resistance levels
We focused on support levels first since the price action has been bearish recently and we still trade below the pivot point. In the next price chart, we have inserted two resistance levels, as calculated using the following formula:
Resistance 1 = (Pivot × 2) − Low
Resistance 2 = Pivot + (High − Low)
Support and resistance on BTS/bitUSD (Sparkdex)
We have finally calculated and inserted all required levels. Remember that all four additional levels (S1, S2, R1 and R2) can be used in two ways: First, cause bounces/reversals and secondly, confirm the existing trend. In this particular case, BTS/bitUSD is extremely bearish short-term, and that’s why we are more on the existing trend than reversals.
Combine pivot points with other indicators
Unlike other indicators, like oscillators or moving averages, and similarly to Fibonacci levels, pivot points are static. Once they are calculated based on the prior trading day, they remain in the same place until present day’s daily candle is finalized. It is worth remembering that we may calculate pivot points on all time frames, however, it is advised to use them mainly in daily and weekly charts. The higher the time frame is, the more important pivot points are.
As it is the case with other indicators, pivot points are best used when combined with other points. Our advice is to always look for confluences i.e. if a pivot point lies in the same zone as other important indicators e.g. Fibonacci, moving average, trend line, its importance becomes higher. So, always aim to use it as one part of a comprehensive crypto trading plan.
Originally published at https://www.bitspark.io.