Understanding Pivot Point in Option Trading with Cryptocurrencies
The term Pivot Point is both crucial and common in the world of option trading with cryptocurrencies. It refers to a technical analysis indicator used by traders to determine the overall trend of the market over varying time frames. The pivot point itself is simply the average of the high, low, and closing prices from the previous trading day.
Calculating the Pivot Point
Calculating the Pivot Point is quite straightforward. You take the high, low, and close prices of the previous day, add them together, and then divide by three. The result of this computation gives you the pivot point. The key purpose behind such a calculation is to provide traders with a specific point of reference, which they can use to make decisions.
Importance of Pivot Point in Cryptocurrency Trading
Considering the highly volatile nature of cryptocurrencies, using the Pivot Point can drastically enhance your trading strategy. In a market that never sleeps, it acts as a reliable indicator of when to enter or exit a trade, thereby making it an important tool for risk mitigation.
Understanding Support and Resistance in Connection with Pivot Points
In cryptocurrency option trading, the Pivot Point also plays a role in understanding 'support' and 'resistance' levels. It is commonly used in conjunction with these levels to identify the overall trend of the market. If the pivot point is above the market price, it acts as a resistance level. Conversely, if the price is above the pivot point, it serves as a support level.
Use Cases of Pivot Points in Cryptocurrency Option Trading
Traders use Pivot Points primarily as a way to identify potential reversal points in the market. For instance, if the price is approaching the pivot point from below, the expectation is that the price will bounce off and start to rise. Similarly, if the price is approaching from above, the trader expects it to bounce off and start to drop.
