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They are useful for identifying trading ranges, trend reversals, and market sentiment.
In practice, there are many ways to calculate pivot points.
A popular method begins with taking the simple average of a periodic high, low, and closing price, then applying it to a periodic trading range.
The pivot value is calculated via the following formula:
Pivot = (High + Low + Close) / 3
Upon the pivot being derived, it is then used in developing four levels of support and resistance:
Resistance 1 = (Pivot * 2) - Low Resistance 2 = Pivot + (High - Low) Support 1 = (Pivot * 2) - High Support 2 = Pivot - (High - Low)
Pivot points are used in a variety of ways, primarily to indicate the presence of a trending or range-bound market.
A general rule is that when the price is above resistance levels, a bullish trend is present.
If the price is below support levels, a bearish trend is present.
If the price falls between support and resistance, this means that range-bound conditions are present.
Pivot points are a straightforward means of quickly establishing a set of support and resistance levels.
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