Pivot Points are majorly used by traders and technicians to identify potential support and resistance levels spread over the chart. Our support and resistance points can be used to identification of entry and exits for upcoming trading sessions and also in putting efficient stop losses.
This technical tool itself is an average of the high, low, and closing price of the previous day. Generally, when prices are trading above the points, the market is set to be in bullish momentum and vice versa if the market is trading below pivot points.
This indicator is usually made up of five points. One is a pivot point, called PP, and the others are 1-1 set of support and resistance each.
While it's difficult to apply pivot points to a chart using data from the previous day for the provision of support and resistance levels for the other day, it's also possible to use the previous week's data and make pivot points available for the next week. So this would definitely serve swing traders and in a lesser context and day traders.
Hereby, the pivot point is itself considered to be the major support and resistance point. This interpretation is generally brought down to the comprehension that major price swings are bound to happen at this point.
Even though the presence of other support and resistance points are crucial and significant, they may turn out to be less influential at a specific time.
In fact, pivot points can be used in two major ways. The first one involves the identification of the major market trend. Understandably, if the pivot point is broken upward, then the market is considered bullish. If the price dropped below the pivot point, it is considered bearish.
The second important use case involves using pivot points for market entry and exit. For example, a trader might put a limit order to buy 100 satoshis, when the price breaks the resistance level. Or he might set a stop loss when the price breaks below the support level.
Figuring out the most crucial concept in technical analysis, Holistic reliability on any one indicator is always disastrous.
Despite the fact that pivot points are a really good indicator for the measure of support and resistances at specific times. There is always a probability of some margin of error, which means at specific intervals, the levels appear to have no impact at all.
Therefore, reliability on one indicator exclusively isn't a surefire way to dream about consistent profits.
But chances are, reducing the margin of error from intrinsic risk in a single indicator can be offset by the usage of multiple categories of indicators, e.g, pairing volume oscillators with pivot points to check if the break above a certain level is justified by the market's money flow volume.
Despite the efficient markets theory, there is a certain flaw in the markets which is they don't always result in the exact production of identical market fractals, and any possibility for the existence of a certain margin of error should always be accounted for in a potentially successful trading plan.