It is said that one of the biggest challenges with trading binary options is to determine where the underlying assets’ prices are likely to reverse direction. The gold’s price might be going through a downtrend, for example, showing a reflection of bearish sentiment, but reverse suddenly to climb to a new record. As a binary options trader, how can you make use of that reversal? And how can you save yourself from price reversals that might otherwise reveal you to serious losses?
With many traders, the solution to solve this matter is to use a pivot points trading strategy.
So, what do pivot points mean and how are they leveraged by seasoned traders to make predictions of profitable price? We’ll mention below. What follows is a short tutorial on how to trade binary options with a pivot point strategy. Let’s start with a quick synopsis of how they operate and the core reasons market veterans use them. You’ll learn how pivot points are calculated, and also how to put them into use when trading binary options.
An Overview of How Pivot Points Work
Listening tightly to accomplished traders, you’ll hear them mention about points at which they have an expectation the asset’s price makes a distinct movement in a particular direction. They’re often talking about pivot points as well as their respective support and resistance levels. Traders use them to help predict price movements, and decide where to take profits on their trades or even limit their potential losses.
A pivot point is a price level reflecting a possible turning point (or pivot) in an asset’s price action.
For instance, if gold is experiencing an uptrend and reaches its pivot that might a warning signal of an uptrend is nearing its end. If the price of gold is going through a downtrend, then, reaching its pivot point might warn the bearish price action is losing steam.
Pivots can be a signal for the start of bullish or bearish sentiment in an asset. For instance, if the gold’s price opens the day high and drops, so, crossing its pivot point could mark the start of a serious downtrend.
Support and resistance levels are applied in conjunction with pivot points. They define levels where an asset’s price is expected to have difficulty crossing. If gold falls through its pivot point at the start of a downtrend, for example, its price is expectant to become stable at the first support level. We can see that the level acts like a test. The support may hold or give out totally, at which point the price may continue falling.
Resistance levels operate similarly, however, in an opposite fashion. For example, the gold’s price may cross through its pivot during a major uptrend, still slow when it reaches the first resistance level. So, here again, the level is a test. It may hold or it may be breached, both outcomes of which send various signals to traders.
Now, you see how pivot points work with binary options. We will have a quick look at the reasons why traders very rely on them.
Four key Reasons Why Pivot Points Are Used by Binary Options Traders
Firstly, pivot points, together with their support and resistance levels, are relatively easy for calculation. Thus, they are very convenient to use.
Secondly, they have flexibility in their application. As you see that Pivot levels can be used with stocks, commodities, currency pairs, binary options, and almost any other financial instrument with trading activity.
Thirdly, they tend to be exact. The moves of price pivot points are presumed to signal tend to happen as expected. That alone makes them a very valuable tool for technical analysis.
Fourthly, pivot points are leading indicators of price action. To know why this is important, consider moving averages. They are the signal of bullish or bearish price trends based on what has happened during the last 5, 10, or 30 (or even whatever number of) days. In this case, they lag the market. This means the signals usually arrive late, thus, it is difficult to take advantage of them.
With the support of pivot points, traders can watch for certain price levels to be reached as indicators of where prices are headed. On the other hand, it is clearly that the pivots lead the market, and are thus it is easier to leverage.
How Pivot Points Are Calculated and How Do You Decide Where the Pivot Point Is
Several methods used in order to calculate pivot points and their support and resistance levels. The most common method is the 5-point system. Besides the pivot, 2 support levels and 2 resistance levels are also calculated.
The data often come from the trading of the previous day. However, it’s worthy for you to note that you can also calculate the various price levels based on weekly or monthly data. Well, the formulas with definitions for the variables are listed as below:
Pivot Point = (pdH + pdL + pdC) / 3
1st Support Level = (PP x 2) – pdH
1st Resistance Level = (PP x 2) – pdL
2nd Support Level = PP – (Res1 – Sup1)
2nd Resistance Level = PP + (Res1 – Sup1)
PP – pivot point
Res1 – 1st resistance level
Res2 – 2nd resistance level
Sup1 – 1st support level
Sup2 – 2nd support level
pdH – previous day’s high
pdL – previous day’s low
pdC – previous day’s close
You can see that the math is quite simple. It is useful and helpful for you to see the formulas used to calculate pivot points, thus you can understand well how they are derived from the past trading activity. There are a lot of online pivot point calculators that you can use to crunch the numbers for you. Or, you also can create a simple spreadsheet into which you plug the previous day’s data in order to generate the current day’s price levels.
Applying Pivot Points Trading With Binary Options
So, how can you incorporate pivot points into your binary options trading strategy in order to enhance your results? First of all, you should realize that breaks in upward or downward trends often show price action for the rest of the day. Particularly, this is true if the breaks move the price across the pivot point.
For instance, assume that gold was trading yesterday at a level above today’s pivot. Let’s also suppose that the price opens above today’s pivot point, however, drops below it during early trading. This break is a signal of the potential bearish price action. It’s an ideal time to either take your profits or short the underlying asset, getting profit from the fall.
Now, let’s suppose gold was experiencing an upward price trend yesterday and opened below today’s pivot point. Also get a further suppose that its price crosses the pivot. This could display the end of the bullish price trend. Well, the price may continue surging toward the first resistance level, but could just as easily reverse direction. So, taking profits may be a good idea.
It’s also possible in using the areas between the first and second support levels and first and second resistance levels (respectively) as markers to carry out trades. For instance, assume gold has crossed its first resistance level during an uptrend; however it is difficult to cross its second resistance level. This might show that the price is about to crumble, dropping past the day’s pivot point. Thus, it may be a good time for you to take profits and/or short the asset.
Assume the gold’s price on a major downtrend has dropped past the first support level. Still, it has not yet pushed through the second support level. Herein, there may be a chance to make a profit from a pending bullish price trend.
How Trustworthy Are Pivot Points With Binary Options?
It has the most important thing for you to remember when using a pivot point strategy with binary options that is changes in price action are not written in stone. On the other hand, there aren’t natural laws that dictate the price of an asset based on its pivot points and support and resistance levels. In fact, pivots are crossed without major changes in price movement every day; support levels deteriorate; resistance levels can shatter as an asset that continues to press its bullish run. The only rule is there aren’t any rules.
As mentioned, experienced traders have learned to apply pivot points because they are really effective and reliable. Moreover, they are reasonable accurate, also easy to calculate, remain a critical tool for technical analysis. Currently, if you’re not using them in your binary options trading strategy, well, it is a good time to get a start right now.
Pivot points can be used in a lot of trading types and are one of the more common tools in technical analysis of the market. Understanding how to calculate pivot points as well as how they can help you in purchasing binary options will offer you another tool at your disposal to support you become beneficial.
What Are Pivot Points?
Pivot points permit traders to look at the day’s market conditions to predict when it is suitable to invest without difficulty. Many investors are interested in using them. With information having a source from the previous day’s conditions, they have increased reliability.
Calculating Pivot Points and How to Calculate Pivot Points
Investors are concerned only with price points such as high point and low point, opening point, closing point. These points are taken from the previous day together with 2 support and resistance points and set into predetermined formulas to find in which a pivot point will be for the current day. For a beginning investor, there are many software programs available that will automatically plot pivot points. This helps to save the trouble of entering data into equations on a regular basis.
Why Are Pivot Points Popularly Used?
One of the key reasons pivot points become a favored method of prediction among investors is due to the fact that as the information that they provide holds true for the whole day, time and effort is not wasted in recalculating. You can calculate pivot points on a daily, weekly or monthly basis that depends on how the information will be used. In addition, support and resistance levels are fairly easy to understand and they can be seen visually on a chart. Investors, therefore, find pivot points are actually easy to learn and useful especially during options with a short time to expiry.
Applying Pivot Points with Binary Options Trading
After deciding the pivot point for a day, traders can use this information to support them in choosing where to come into the market with a binary option. Pivot points are usually marked as a horizontal line on a candlestick chart, describing where there is likely to have a shift in the market. Thus, this can be used with binary options, and then you are able to predict whichever asset you have chosen to trade will or will not reach this level. This can be done by a call or put binary option, and it depends on where the pivot point lies and how the asset is behaving in the market at the present time.
Ensuring that you have enough time for entering whichever binary option you select. If enter too late, it could mean the difference between being profitable or not. As pivot points are just a prediction based on the previous day’s trading behavior, it is crucial to understand any asset, particularly more volatile assets usually exhibit behavior various to what is predicted by the pivot points.
After being familiar with binary options, you will start to see the trends in the market supporting these pivot points. You will become better at predicting about the best time to enter into options and what assets are best used with this strategy of investing.