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Pivot Point Strategies

Pivot point trading is a technique that uses support and resistance levels calculated from the previous day's price action to predict where prices may reverse direction. There are five main pivot points - R2, R1, Pivot Point, S1, and S2 - as well as additional levels that are calculated using a formula involving the high, low, and close prices from the prior day. Understanding these pivot point levels provides traders with targets and clues about when to enter and exit positions based on prices interacting with the support and resistance levels.

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2K views6 pages

Pivot Point Strategies

Pivot point trading is a technique that uses support and resistance levels calculated from the previous day's price action to predict where prices may reverse direction. There are five main pivot points - R2, R1, Pivot Point, S1, and S2 - as well as additional levels that are calculated using a formula involving the high, low, and close prices from the prior day. Understanding these pivot point levels provides traders with targets and clues about when to enter and exit positions based on prices interacting with the support and resistance levels.

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PIVOT POINT-SUPPORT AND RESISTANCE STRATEGY

What is Pivot point trading?

Pivot point trading is a technique widely used among Forex traders, that allows to determine
important support/resistance levels for the day which derived from the previous day's trading
range.

Pivot points the key levels or certain price values for a current day are points around which
traders base their entries and exits. There are 5 major and several additional pivot levels, we are
going to learn about them later.

In simple words, it is similar to knowing where the price is going to stop and reverse and how far
it will go next time: The knowledge of such support/resistance levels is priceless as it allows to
get in / out of the trade, set stop and profit orders with maximum advantage to traders.

In fact, if you have troubles seeing where the market is going, Pivot points can give you a clue!
It is like having a map on your charts!

Compare the two charts below.


That's the way traders would see a chart without Pivot points.
That's the chart with a Pivot "map" on it:

Obviously, the second chart had a great advantage over the first one. As we can see, for the
whole trading day a trader was able to accurately predict price's turning points.

Pivot points are calculated daily, weekly and monthly.


The most common are daily Pivot points. But important are all three: daily, weekly and monthly
pivots. So, make it a habit once a week to set weekly pivots on a chart, once a month refresh
monthly pivot points.

For intraday trading traders calculate daily Pivots and then use them on the charts they prefer to
trade with: hourly charts, 30 minutes, 15 minutes etc. We will learn how to trade with daily Pivot
points on 15 minute charts.

As a rule all calculations are done by charting software, but Pivots can also be calculated
manually. For this purpose we will have a formula below. However, a short-cut way would be to
use an
Online Pivot Point Calculator.

Few clicks, simple calculations and any trader, beginner or a pro can see the same exact key
levels of importance; and no more price guessing..!
Pivot point Terminology

Before we speak about how to calculate and use Pivot point levels, let's define a few terms we
will be using here:

PIVOT POINT is the point where the market reverses. It is a turning point. If the market is
trading above Pivot Point it is considered to be a bull market (buyers are dominant), once it goes
below the Pivot Point it becomes a bear market (sellers are dominant).

RESISTANCE is a high point in the market where buyers meet strong opposition of sellers. A
rising market reaching resistance has big potential of falling back down.

SUPPORT is a low point in the market where sellers meet strong opposition of buyers. A falling
price reaching support has a big chance of climbing back up.

Support and resistance levels are difficult to break through, but they do fail, otherwise the price
would be all the time going in one direction only...

There is a rule that once a support or resistance level is broken it becomes the opposite force: a
broken support will become a resistance, and a broken resistance serves as a future support.

Let's look at the picture to see how it works:


Pivot point trading emphasizes on the importance of such support and resistance levels and its
theory is based solely around those levels.

How to calculate Pivot points?

Pivot levels are derived from previous day High, Low and Close price values. Thus, every new
day Pivot points must be reset using the newest data. As a rule traders take the time range from
midnight to midnight, e.g. from midnight price bar to midnight bar.
Later we will introduce some traders' tricks about the timing.

Pivot points study provides traders with 5 major levels:

R2 Second Resistance
R1 First Resistance
PP Pivot Point
S1 First Support
S2 Second Support

There are also additional levels, such as R3, S3 third resistance and support, as well as Mid-
points middle levels between the major levels.
There are no limits on how many Pivot levels to use, however, one should remember, that
making complex charts makes trading complicated as well. We would suggest sticking to 5
major Pivot point levels, around which most of the price action takes place.

The formula for calculating Pivot points is next:

Major 5 levels:

R2 = Pivot + (High Low) (same as R2 = Pivot + (R1 S1))


R1 = 2 * Pivot Low
Pivot = (High + Close + Low) / 3
S1 = 2 * Pivot High
S2 = Pivot (High Low) (same as S2 = Pivot (R1 S1))

Additional levels:

R3 = High + 2 * (Pivot Low)


S3 = Low 2 * (High Pivot)
Midpoint between R1 and R2 = R1 + (R2 R1) / 2
Midpoint between Pivot Point and R1 = Pivot + (R1 Pivot) / 2

Online Pivot Point Calculator

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