This is a guest post by Ahmad Hassam
You must have often heard market analysts talking about the daily, weekly and monthly support and resistance levels. How do these analysts calculate these daily, weekly and monthly support and resistance levels? Most are using Daily, Weekly, and Monthly Pivot Point numbers!
Difference between a winning trader and a losing trader is what they do with the price data they have. Pivot Point can give you the edge as they are considered to be a leading indicator unlike most other technical indicators that are lagging in nature. Read the first article on Pivot Point Analysis before you continue with this one.
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 for one time frame. How do you filter noise from this information overload on your daily, weekly and monthly charts when using pivot point analysis?
Here’s what you do to filter out information overload from these numbers. In low volume consolidating trading sessions use R1 and S1 on all the time frames. In a bullish market, highs should be higher and the lows should be higher than those of the proceeding session so use S1 and R2 as the potential trading range. Similarly in a bearish market, the highs should be lower and the lows should be lower, so use R1 as the resistance and S2 as the support.
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 support and resistance levels in your trading.
When several pivot points line up, there is higher probability of a strong reaction from the market at these numbers. One reason for using the daily, weekly and the monthly pivot point levels is that it reflects the behavior of three different groups of traders. These three important group of traders are the day traders, the swing traders and the long term position traders who are generally the hedge funds.
So, if you see the daily, weekly or the monthly pivot resistance or support levels congesting into a narrow zone, this should be noted. Longer term numbers should be watched for clues that the current trend could be exhausted and potentially reverse itself. When you find the three pivot levels on the daily, weekly and the monthly chart lining up nicely, consider it as a signal that the market is going to react strongly around this level.