This guide will look at how traders can utilise pivot points to chart support and resistance levels. We also look at how support and resistance can be provided through other methods as well.
Most traders look at support and resistance and are important zones of intense buying or selling pressure.
We can calculate support and resistance levels using a Pivot Point, which is a level the price of an asset oscillates around.
A resistance or support level is stronger the more times it is tested without being broken.
There are two ways to trade support and resistance levels; bounces and breaks.
A bounce strategy is used for a strong support or resistance and you believe the level will hold.
A break strategy is used for weak supports or resistances, or you believe the level will break.
A broken resistance will often turn into a support level, and vice versa.
There are different types of support and resistance, such as traditional and Fibonacci. Fractals and psychological levels can also be used as support.
Trend lines and channels can also be drawn by linking up two price points. A third price point confirms the trendline/channel.
How are Support and Resistance Levels Determined?
As markets fluctuate over time, they often encounter zones of intense buying pressure or selling pressure. These zones are known as support and resistance levels. Pivot points are used to determine support and resistance levels, but support and resistance can also be indicated by psychological price levels and fractals.
Pivot points are a useful indicator because most market participants look at traditional or Fibonacci support and resistance levels.
For instance, a trader may believe a strong resistance will hold and place a sell order around this level. If there are enough traders who hold this same belief and respond by selling at that resistance level, then the price level is likely to respect the resistance level, since the market is just the composite of all individual traders.
Pivot points are also objective, since we can calculate the pivot points using the average of the previous session’s high, low and close. We then calculate the resistance and support levels using the pivot points and high and low from the previous session.
Breaks and Bounces
There are two ways to trade support and resistance levels:
- You believe a support or resistance will hold and that the asset continues to trade in a range; buy near support and sell near resistance. If you are trading a support level, set a stop loss below this level in case it breaks. If you are trading a resistance level, set a stop loss above this level in case it breaks.
- You believe a support or resistance is weak and the asset will breakout; buy near resistance or sell near support prior to the price breaking through. Alternatively, you can wait for the break of support/resistance and then enter your trade once the price re-tests the support/resistance. If you are trading a support level, set a stop loss just above this level in case it bounces. When trading a resistance in this way, you stop loss should be below the resistance just in case the market bounces.
Similarly, with pivot points there are two perspectives; you can view them as reversal points where you place buy and sell orders or as a key level to confirm a breakout.
The 15-minute chart for bitcoin below shows traditional support and resistance levels for each day. The pivot points, supports, and resistances are recalculated each day. As you can see, the price fluctuates around the pivot points quite consistently. A large bullish spike was cut short just below R2 level, which would have indicated to exit long positions or enter a short trade.
As the price fell, R1 was tested and eventually broken, with the price action returning to test R1 twice giving good opportunities to sell as BTC-USD went onto to trade around the pivot point for the following day.
Once the price breaks a resistance level, it often turns into a support level (vice versa). The more times a support or resistance level is tested, the stronger it becomes.
Psychological Support and Resistance
We also find support and resistance in the form of psychological numbers. These are nice round numbers at which points people are inclined to take profits from their trades, as big, round numbers numbers are often used as price targets.
In the chart below, we see that $10,000 held as support for bitcoin. However, buyers could not move above $11,000, which acted as a psychological resistance.
Fractals as Support and Resistance
The fractals indicator can also provide a quick overview of important support and resistance levels.
Fractals are identified using five candles. A sell fractal is where there is a higher high in the middle candle and two lower highs on each side and is drawn with an upward arrow on trading charts. A buy fractal is where the middle candlestick has a lower low, while there are two higher lows on either side and is drawn with a downward arrow on trading charts.
A break of a fractal is thought of as the same as a break of support or resistance, where you can enter a trade on the break of a fractal high or low, or wait for a break of the fractal and for the candlestick to close higher or lower for confirmation.
The chart above shows the fractals on the daily timeframe for bitcoin. A break above a sell fractal is a bullish signal; as displayed below, there was a strong upward move after the fractal at $9,475 in August was broken. Similarly, a break below a buy fractal is a bearish signal, as shown by the move below $10,762 in mid-July which extended as low as $9,000.
Trend lines, as well as horizontal lines, provide support and resistance levels.
In a rising trend, a support line can be drawn connecting two major bottoms, whereas in a falling trend, a resistance line can be drawn by connecting two major tops. While you only need two points to draw a trend line, it must connect three price points to be confirmed.
Once a rising trend line breaks, it gives you a potential reversal signal to go short. If a falling trend line breaks, then it is a possible buy signal. It is important to keep in mind that the steeper a trend line is, the more likely it will be broken.
The example above shows a downward trend line. After the second high around October 3rd, a trend line is drawn connecting the two highs. The trend line is tested once again, as highlighted by the yellow circle and offered an opportunity to sell.
Channels can also be drawn using two parallel lines to contain an uptrend or downtrend and can help determine good places to buy or sell. The tops of channels offer resistance and the bottoms provide support. A channel can be ascending, descending or horizontal.
The chart below shows an ascending channel. The first and second highs and lows are highlighted and are required to draw the channel. The vertical line represents at which point in time the channel would have been drawn.
After the channel was drawn, the price then tested the support of the channel around $10,470. Since the price was testing support provided by the channel, this would have given a signal to buy. Another buy signal was given shortly afterwards around $10,490.
The price eventually appreciated rising to $10,944.50 and touched the upper channel, which acts as resistance. As the market touched the upper channel, this would have been the perfect opportunity to take profit on the long positions from $10,470 and $10,490.