Crypto Trading 101: Pivot Points And Why They're Useful

When combined with other technical tools, pivot points are valued among day traders for their ability to analyze price movement of an asset as well as defining the support and resistance levels during a short-term trading session.

Pivot points were first developed by floor traders to predict support and resistance levels.

The most common way to calculate a pivot point is the "Five-point system." This comprises an average of the numerical high, low and close of the previous trading period to plot a course for five levels: two sets of supports, two sets of resistance levels and a "Pivot point."

Resistance 2 = Pivot Point +. The pivot point in the example above is derived from the previous low and previous close divided by 3, allowing traders to define an area on the chart where they believe price action is most sensitive and likely to cause a shift in sentiment should it close above or below that point.

If you use an online charting program this can be done automatically for you, plotting horizontal lines using the aforementioned formula with ease, just select the pivot point tool calibrated to the Fibonacci sequence.

While there are traders out there who've adopted pivot points for longer time frames, common industry practice looks at the 4-hour and 1-hour charts, as well as the 30 and 15-minute time frames.

In the bitcoin chart above the resistance levels are marked "R1" and "R2," while supports are labeled as "S1" and "S2," with the pivot point marked as "P.".

Dated Sept. 12, shows that pivot point, marked "P," acted as a crucial threshold for prices to cross bullish for continuation, confirming to traders that the move past $6,285 was legitimate and that prices would move higher.

After several unsuccessful attempts to surpass the higher set of resistances bitcoin plummeted on Sept. 14, when it continued to toy with the second pivot point and traded more or less sideways along the supports for three days.

Pivot points are a useful addition to your technical toolbox for their ability to confirm support and resistance levels as well as judging the strength and significance of big price moves.