Trading Tool
The pivot point itself represents a level of highest resistance or support, depending on the overall market condition. If the market is directionless (undecided), prices may fluctuate greatly around this level until a price breakout develops. Trading above or below the pivot point indicates the overall market sentiment. It is a leading indicator providing advanced signaling of potentially new market highs or lows within a given time frame.
The support and resistance levels calculated from the pivot point and the previous market width may be used as exit points of trades, but are rarely used as entry signals. For example, if the market is up-trending and breaks through the pivot point, the first resistance level is often a good target to close a position, as the probability of resistance and reversal increases greatly.
Many traders recognize the half-way levels between any of these levels as additional, but weaker resistance or support areas. The half-way (middle) point between the pivot point and R1 is designated M+, between R1 and R2 is M++, and below the pivot point the middle points are labeled as M− and M−−. In the 5-day intra-day chart of the SPDR Gold Trust (above) the middle points can clearly be identified as support in days 1, 3, and 4, and as resistance in days 2 and 3.
Read more about this topic: Pivot Point
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