How Pivot Points
can benefit your Binary Options Trading
. Pivot Points have been used by traders for technical analysis since the bears and the bulls started fighting it out. Mainly used as an indicator to predict future market movement such as reversals, it has become a popular tool not only used by professional traders, but newbies as well. It is very similar to drawing normal support and resistance levels by analyzing the charts yourself, but it is more of an automated process calculated differently based on the previous day’s price movement. This might sound like a plain vanilla type indicator that can easily be done manually. The benefits of automation all adds up and is a great time saver. Let’s face it, time is money in this industry…
What Exactly Are Pivot Points
I am sure you have heard on the news or read in the financial section of your local newspaper analysis speaking about price nearing a certain price point, referred to as support and resistance levels. Each level is important because it indicates the possibility where we can expect to see major price movements occur. It can also indicate the overall market trend. So in simple terms pivot points are the average High, Low and closing price of the past trading day. It shows us potential levels of interest.
How Pivot Points Are Calculated
There are multiple different methods to how we can calculate these points. The most commonly used is called the 5 point system.
Previous day's high, low and close, along with two support levels and two resistance levels = 5 Points.
R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)
The most important part is the pivot represented by the “P”. P = (High + Low + Close)/3 For those interested into getting into more technical terms calculations a simple Google search will answers your questions. By looking at the above mentioned calculation you can see how Support 1 & 2 as well as Resistance 1 & 2 are calculated. These levels can also play a huge role in overall market sentiment and should not be overlooked.
How Can I Apply This To My Trading
…. Good Question indeed! There are tons of free Pivot Point Indicators all over the internet. Some brokers even include it with their charting software. Point is, there is no lack of supply. Another good point to raise is the fact that traders fail to use it correctly or even overlook it completely. Before we get into an example it is worth mentioning that this is not a lagging indicator, and in my book I would not even classify it as an indicator - rather a trading tool.
Metatrader indicator for pivot points
As always, MetaBinaryOptions is offering you a free Metatrader
indicator for helping you apply this strategy.
Click here to download the indicator 100% free
The indicator will automatically draw pivot points. Spot the alignment of multiple levels for stronger signals.
Figure 1 – Metatrader Indicator for Pivot Points
Using this recent example on the EUR/USD we can see how powerful Pivot Points along with the calculated Support & Resistance levels can be. In this case we had a triple top at resistance (red line), price testing the same level 3 times before we see a massive break to the downside. So this could have indicated in advance that the bears are in control and that we could expect a strong bearish movement.
The first test of the resistance concluded in a minimal retrace where we hit a support level (green line). From there we moved back into the first resistance zone once again. A classic double top or “M” formation occurred at our point of interest before selling off to the downside. As a rule of thumb we cannot expect a level to hold forever, thus on a third test of the same level we can expect one of two things to occur. A break of the level or a rejection followed by a strong move. As we can see by looking at Resistance 1 (red line), price stopped on a dime. Where most traders would have seen the lower low in between the double top and expected price to break to the upside we had the advantage of our Pivot/Resistance level telling us otherwise.
Figure 2 – Metatrader Indicator S1,2,3 & R1,2,3
Sure, I can see the people getting ready to comment: “We could have easily drawn in those level”. Yea, true! But this is where this comes in handy for first timers and unexperienced traders. There is nothing wrong with making something easier and more convenient if the tools are available. I am not saying this is an easy way out, a shortcut or a replacement for drawing manual S&R levels. The more confluence we have the better our prediction and odds of the market moving in our favor.
Pivot Points Summary
So as you can see Pivot Points (5 way system) combined with the power of support and resistance level should not be underestimated! When used by a trader that knows how to utilize it properly it can really make a huge difference and positive impact on your binary options trading. Just make a mental note that this alone does not guarantee success or profitability. You need to use it in conjunction with your trading plan and strategy.
Can this only be used on Forex/Currency Pairs? This can be used just as successfully on Stocks, Commodities and Indices. Pivots were actually used on these forms of trading long before it became a popular tool in the Forex – Binary Option scene. You are more than welcome to go into more depth if you are one of those technical people that want know exactly why, how and when etc. Nothing wrong with asking questions and educating yourself. We actually encourage that! A word of advice before I finish of this article. If you are completely new to Pivot Points, support and resistance or binary options, do you yourself a favor and demo trade before jumping into the deep end, risking your own money!