Understanding Pivot Points in Binary Options Trading

Understanding Pivot Points in Binary Options Trading

Submitted by adil on Fri, 01/02/2015 - 07:44

In binary options trading, technical analysis is frequently used in combination with fundamental analysis. One of the terms used in technical analysis is pivot points. These are trading indicators that estimate the trends over a certain period of time. So, how can you calculate pivot points? These indicators are calculated by taking into account the daily close, daily highs and daily lows that are observed in the previous session. For example, in case of an hourly trading chart, calculated interval is usually for the previous hour, whereas, in case of a weekly chart, calculated period is for the previous week.

Where can Pivot Points be used?

To Determine the Potential Changes in Price Action

Pivot points are used to identify key changes in the price action. If the price of an asset moves higher than the pivot points, the market is said to have a bullish trend, where prices continue to move in the upward direction. But if prices move in a downward direction below the pivot points, the market shows a bearish trend, where the price of an asset continues to move lower. If a trader gets to know the direction in which the prices are likely to move, and accurately predict the market movement, it increases the likelihood of earning high profits in the future.

To Define Support and Resistance Level

Pivot points are also useful to determine support and resistance levels, which are computed using the price levels of the pivot point, and by marking the difference between the high level of price and low level of price that is observed in the previous session. If the price of an asset breaks through either of these areas, the next support and resistance point is computed using the distance between high and low price level of the previous session. It can also be seen in the image below.

To Assist in the Forecasts

The pivot points are automatically calculated and marked on a price chart by different trading platforms, and are very useful for traders in binary options trading. In a binary options trading, the first thing to do is to predict the direction in which the price is likely to move. If the price is expected to increase, a trader should trade call options, but if the price is likely to decrease, put options should be traded. The pivot point can be very useful to predict the price movement, as it marks the initial support and resistance level. Once the price of an asset move through the pivot point, prices are expected to move sharply.

In case of upward trends, a trader usually looks for the asset price to move higher than the pivot point, until it reaches the resistance point. At this point, a trader should exit from his trading position to keep the profits. Whereas, in case of downward trends, the prices usually continue to move lower below the pivot point until it reaches the support level, and at this point, a trader must close his trade in order to avoid losses. Being a trader, you must know that pivot points are short term trading indicators, and change as each session ends. Therefore, these are not useful for the following period, because the price cannot be anticipated on the basis of previous period support and resistance level.