A pivot points is a significant support and resistance level a trader can use to make successful investments with binary options. Pivot points are somewhat similar to Bollinger Bands, and allow for just as precise and easy-to-trade predictions.
What are pivot points?
The pivot point of the current period is calculated as the average of the previous period’s high, low, and close price. Depending on whether the pivot point is above or below the current market price, it becomes a resistance or support level.
Pivot points are more significant with longer time periods.
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To use Pivot points with binary options, you should trade daily and weekly pivot points on an intraday chart, as you can see in the picture below.
If a stock is trading at a price of $100 and has a pivot point of $101, for example, the pivot is above the current price and works as a resistance. As a trader, you therefore know that the market is more likely to fall than to rise above the resistance generated by the pivot point. Therefore, you could invest in an option predicting falling prices, or use other elements of technical analysis, such as technical indicators or candlestick formations, to search for additional signals of a turnaround.
This is the most basic form of use of pivot points. To help you trading even more, the pivot point can be used as a basis to calculate a number of other support and resistance levels. In the picture below, the daily pivot point is drawn into an intraday price chart as the yellow line.
As you can see, the pivot point is sometimes far from the current market price. In a situation like this, the pivot point would be of no help to your trading decisions. Starting from the pivot point, there are a number of additional support and resistance levels calculated by adding or subtracting other significant price differentials.
All of these levels work the same way as the pivot point: They form a resistance when they are above the current market price, and form a support when they are below the current market price. It is important to know, however, that the support created by the levels above the pivot point is less strong then their initial resistance. Conversely, the levels below the pivot point create less resistance than they create initial support.
Therefore, risk-averse traders should only trade these additional pivot lines in their initial direction: Levels above the pivot point should only be traded as resistance, and levels below the pivot point should only be traded as support. Traders willing to take more risks, however, can take a chance on trading these levels both ways.
Trading pivot points with binary options
The most basic way to trade a pivot point and its accompanying resistance and support levels is to predict a turnaround in price direction when the market approaches the level. You can do that by investing in a High / Low option. Similarly, you can invest in a High / Low option to trade the breakout once the market has moved past a resistance or a support level.
A more advanced technique to trade pivot points is to invest in a Touch option or a Boundary option once the market breaks through a resistance or support level. When this happens, the market suddenly becomes a lot more room to work with and is likely to use this room to fluctuate in.
As you can see in the picture, during this fluctuation, it is likely to come close to the next support or resistance level. If your broker offers a touch option or a boundary option within this price range, you have a good chance of winning the investment and generating a high payout.
Keep in mind, though, that the price levels generated by the pivot points will change once the day is over and that your prediction becomes worthless with the next day. Therefore, you should only use this type of strategy when there is enough time for prices to develop the movement you are expecting.