If you listen to the daily market commentary by the analysts, you will hear a lot about the prices approaching the daily, weekly or the monthly support or the resistance levels. How do these analysts calculate these daily, weekly and the monthly support and resistance levels? The answer is very simple! Most of them use the Pivot Point Analysis!
Pivot Points are considered to be a leading indicator as compared to most of the other indicators and oscillators that are lagging in nature and follow the price action.
So, there are in fact 7 numbers that you have to take into consideration when using pivot point analysis and if you include the midpoints of these levels then there are 13 numbers. How do you filter noise from this information overload on your daily, weekly and monthly charts when using pivot point analysis?
In a consolidating market only the R1 and S1 levels are important. In a bullish market, the potential range for the trading session is S1 and R2 while in a bearish market the potential range is the R1 and S2.
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! Get this highly profitable Magic Breakout Forex Strategy by Tim Trush and Julie Lavrin FREE. Get these Correlation Trading Cheatsheets FREE.