Pivot Points Explained
One of the biggest challenges with trading binary options is determining where prices of the underlying assets are likely to reverse direction. For example, the price of gold might be going through a downtrend, reflecting bearish sentiment, but reverse suddenly to climb to a new record. How can you, the binary options trader, take advantage of that reversal? And how can you protect yourself from price reversals that might otherwise expose you to major losses?
For many traders, the solution is to use a pivot points trading strategy.
What are pivot points and how are they leveraged by seasoned traders to make profitable price predictions? We’ll explain below. What follows is a brief tutorial on how to trade binary options with a pivot point strategy. We’ll start with a quick synopsis of how they work and the core reasons market veterans use them. You’ll then learn how pivot points are calculated, and how to put them to use when trading binary options.
How Pivot Points Work: An Overview
If you listen closely to accomplished traders, you’ll hear them mention points at which they expect the price of an asset to make a distinct move in a particular direction. They’re usually talking about pivot points and their respective support and resistance levels. Traders use them to help predict price movements, and thereby decide where to take profits on their trades or limit their potential losses.
A pivot point is a price level that reflects a possible turning point (or pivot) in an asset’s price action.
For example, if gold is experiencing an uptrend and reaches its pivot, that might signal the uptrend is nearing its end. Conversely, if the price of gold is going through a downtrend, reaching its pivot point might indicate the bearish price action is losing steam.
Pivots can also signal the beginning of bullish or bearish sentiment in an asset. For example, if the price of gold opens the day high and drops, crossing its pivot point could mark the start of a major downtrend.
Support and resistance levels are used in conjunction with pivot points. They define levels at which the price of an asset is expected to have difficulty crossing. For example, if gold falls through its pivot point at the beginning of a downtrend, its price is expected to stabilize at the first support level. The level acts like a test. The support may hold or give out completely, at which point the price may continue falling.
Resistance levels work similarly but in an opposite fashion. For instance, the price of gold may cross through its pivot during a major uptrend, but slow as it reaches the first resistance level. Here again, the level is a test. It may hold or it may be breached, both outcomes of which send different signals to traders.
Now that you know how pivot points work with binary options, let’s take a quick look at the reasons traders rely so heavily on them.
Four Main Reasons Pivot Points Are Used By Binary Options Traders
First, pivot points, along with their support and resistance levels, are relatively easy to calculate. That makes them very convenient to use.
Second, they are flexible in their application. Pivot levels can be used with stocks, currency pairs, commodities, binary options, and nearly any other financial instrument with trading activity.
Third, they tend to be accurate. The price movements that pivot points are supposed to signal tend to occur as expected. That alone makes them a valuable tool for technical analysis.
Fourth, pivot points are leading indicators of price action. To appreciate why this is important, consider moving averages. They signal bullish or bearish price trends based on what has occurred during the last 5, 10, or 30 (or whatever number of) days. They lag the market. That means the signals often arrive late, making it difficult to take advantage of them.
With pivot points, traders can watch for certain price levels to be reached as indicators of where prices are headed. In other words, the pivots lead the market, and are thus easier to leverage.
How Pivot Points Are Calculated – How Do You Determine Where The Pivot Point Is?
There are several methods used to calculate pivot points and their support and resistance levels. The most popular method is the 5-point system. In addition to the pivot, 2 support levels and 2 resistance levels are calculated.
The data usually come from the previous trading day. However, it’s worth noting you can also calculate the various price levels based on weekly or monthly data. Here are the formulas with definitions for the variables listed below:
Pivot Point = (pdH + pdL + pdC) / 3
1st Support Level = (PP x 2) – pdH
1st Resistance Level = (PP x 2) – pdL
2nd Support Level = PP – (Res1 – Sup1)
2nd Resistance Level = PP + (Res1 – Sup1)
PP – pivot point
Res1 – 1st resistance level
Res2 – 2nd resistance level
Sup1 – 1st support level
Sup2 – 2nd support level
pdH – previous day’s high
pdL – previous day’s low
pdC – previous day’s close
As you can see, the math is simple. It is useful to see the formulas used to calculate pivot points, so you can better understand how they are derived from past trading activity. That said, there are plenty of online pivot point calculators you can use to crunch the numbers for you. Or, you can create a simple spreadsheet into which you plug the previous day’s data to generate the current day’s price levels.
Pivot Points Trading With Binary Options
How can you incorporate pivot points into your binary options trading strategy to improve your results? First, realize that breaks in upward or downward trends often indicate price action for the rest of the day. This is particularly true if the breaks move the price across the pivot point.
For example, suppose gold was trading yesterday at a level above today’s pivot. Let’s also assume the price opens above today’s pivot point, but drops below it during early trading. This break signals potential bearish price action. It’s a good time to either take your profits or short the underlying asset, profiting from the fall.
Let’s now suppose gold was experiencing an upward price trend yesterday and opened below today’s pivot point. Let’s further suppose its price crosses the pivot. This could indicate the end of the bullish price trend. The price may continue surging toward the first resistance level, but could just as easily reverse direction. Taking profits may be a good idea.
It’s also possible to use the areas between the first and second support levels and first and second resistance levels (respectively) as markers to execute trades. For example, suppose gold has crossed its first resistance level during an uptrend, but is having difficulty crossing its second resistance level. This might indicate that the price is about to crumble, plummeting past the day’s pivot point. It may thus be a good time to take profits and/or short the asset.
Suppose the price of gold, on a major downtrend, has dropped past the first support level. It has not yet pushed through the second support level. Here, there may be an opportunity to profit from a pending bullish price trend.
How Reliable Are Pivot Points With Binary Options?
The most important thing to remember when using a pivot point strategy with binary options is that changes in price action are not written in stone. In other words, there are no natural laws dictating an asset’s price based on its pivot points and support and resistance levels. Pivots are crossed without major changes in price movement every day; support levels deteriorate; and resistance levels can shatter as an asset continues to press its bullish run. The only rule is that there are no rules.
Having said that, experienced traders have learned to use pivot points because they are effective and reliable. They are reasonable accurate, easy to calculate, and therefore remain a critical tool for technical analysis. If you’re not currently using them in your binary options trading strategy, now is a good time to start.
Pivot points can be used in many types of trading and are one of the more popular tools in technical analysis of the market. By understanding how to calculate pivot points and how they can help you in purchasing binary options, you will have yet another tool at your disposal to help you become profitable.
What Are Pivot Points?
Pivot points allow traders to easily look at the day’s market conditions to make predictions about when to invest. They have become a commonly used tool by investors. They are based on information from the previous day’s conditions and thus have increased reliability.
Calculating Pivot Points – How to Calculate Pivot Points
Investors are concerned mainly with price points including: opening point, closing point, high point and low point. These points are taken from the previous day along with 2 support and resistance points and put into predetermined formulas to find where a pivot point will be for the current day. For a beginning investor, there are many available software programs that will automatically plot pivot points for you; this saves the hassle of entering data into equations on a regular basis.
Why Are Pivot Points Typically Used?
One of the main reasons that pivot points are a favored method of prediction among investors is due to the fact that since the information they provide holds true for the entire day, time and effort is not wasted in recalculating. Pivot points can be calculated on a daily, weekly or monthly basis depending on how the information will be used. Additionally, support and resistance levels are quite easy to understand and can be seen visually on a chart, thus investors find pivot points to be easy to learn and useful especially during options with a short time to expiry.
Using Pivot Points With Binary Options Trading
After determining the pivot point for a day, traders can use this information to help them choose where to enter the market with a binary option. Pivot points are often marked as a horizontal line on a candlestick chart, depicting where there is likely to be a shift in the market. This can be used with binary options, as you are then able to make a prediction that whichever asset you have selected to trade will or will not reach this level. This can be done in the form of a call or put binary option, depending on where the pivot point lies and how the asset is currently behaving in the market.
Additionally, you need to make sure that you have enough time to enter whichever binary option you choose. If you enter too late, it could mean the difference between being profitable or not. Since pivot points are merely a prediction based on the previous day’s trading behavior, it is important to understand that any asset, particularly more volatile assets often exhibit behavior different to what is predicted by the pivot points.
As you become more familiar with binary options, you will begin to see the trends in the market that support these pivot points. You will start to get better at predicting when the best time is to enter into options and what assets are best used with this strategy of investing.