There is no dearth of technical terms in cryptocurrency trading. One of the reasons for this is the relatively new nature of the market. However, in many ways, trading in cryptocurrency is similar to trading in equities or stocks. Both are speculative with a varying degree of risks and investors in both markets often depend on their reading of a few parameters to gauge the overall trend. One of these parameters is pivot points. Investors calculate these points based on the high, low, and closing prices of previous trading sessions to see whether they should stop or double down on their investments.
A pivot point is found through technical analysis and is an indicator of the overall trend of the market. It is simply the average of the high, low, and closing prices from the previous trading day or session. If the market the next day runs above the pivot point, it is considered that the market is showing bullish sentiment. If not, it could be time to stop and rethink your investment strategy.
When pivot points are combined with other technical tools, they throw up a broad picture about an asset, as well as the support and resistance levels during a short-term trading session.
Pivot points can be calculated in several ways. But the most common of them is a five-point system. This method uses the previous session's high, low, and close data — along with two support levels and two resistance levels. Using these price points, a pivot point is calculated. The equation for calculating a pivot point is given below.
Pivot Point = (Previous High + Previous Low + Previous Close) divided by 3
Support 1 = (Pivot Point x 2) − Previous High
Support 2 = Pivot Point − (Previous High − Previous Low)
Resistance 1 = (Pivot Point x 2) − Previous Low
Resistance 2 = Pivot Point + (Previous High − Previous Low)
These results are used to plot 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 the price seems most sensitive and is likely to cause a shift in the market sentiment.
The common practice is to use pivot points for smaller time frames — at most for 4-hour charts and for as small as 15-minute charts.
There are five types of pivot points. Apart from the pivot point finding method discussed above (Standard Pivot Point), there are Camarilla Pivot Point, Denmark Pivot Point, Fibonacci Pivot Point, and Woodies Pivot Point.
Instead of relying on the current price movement, the pivot point system makes use of the previous day/ session's price data. This approach provides traders with an early signal of the things to come so they can plan accordingly. The pivot points remain static until the start of the next trading session.
Experts say pivot points are suited only for intra-day trading as they are based on simple calculations and may not hold true during swing trading. Also at times, volatile price movements can completely disregard pivot point predictions. When volatility is high, experts say it's best not to depend on pivot points as price fluctuations are rapid and wide for any predetermined calculation strategy.