You must have often heard a lot about the daily, weekly and monthly support and resistance levels. Well, how do the market analyst calculate these daily, weekly and monthly support and resistance levels? The truth is simple. Most of them use the pivot point analysis to calculate these support and resistance levels on the different time frames.
Difference between a winning trader and a losing trader is what they do with the price data they have. Pivot Point can give you the edge as they are considered to be a leading indicator unlike most other technical indicators that are lagging in nature. Read the first article on Pivot Point Analysis before you continue with this one.
Many new traders get confused by pivot point analysis. The reason is simple. Most get confused by the information overload when they look at the seven different support and resistance levels that are provided by the pivot point analysis for each time frame. So, how to simplify and remove the information overload. Read on to know how!
Pivot Point Analysis provides you with three resistance levels R3, R2, and R1 and three support levels, S1, S2,and S3 plus the Pivot Point P. Let's simplify. In a ranging or a consolidating market, R1 and S1 are the most important levels to watch. In a bullish up trending market, S1 and R2 are the levels that you should watch while in a bearish down trending market, S2 and R1 are the important levels that you should monitor. The potential range for the trading session will be this S2 and R1 in a bearish market.
These pivot point levels work often as so many institutions and traders use them. Many have taken different size positions and tend to start scaling out of positions as these numbers are approached by the market. So, you should not ignore these different pivot point levels in your trading.
Another reason that you should use the Pivot Point is that these levels reflect the behavior of the three important group of traders that is the day traders, the swing traders and the position traders.
And if you find the daily, weekly and the monthly pivot point support or resistance levels line up, this should be given a lot of importance. As all three levels have been calculated using different open, close and highs. When they line up, it means high probability of market reacting at these levels. These lines should be taken as areas or small zones around which the market can react and take a potential turn not just as lines!