What are Pivot Points?
Pivot Points are indicators used in technical analysis of the financial markets to predict reversals in market trends. Pivot points are calculated price levels, which give them significant weight in understanding market movements as price tends to respect them to a high degree of accuracy.
Pivots points can determine potential support and resistance lines. Unlike Fibonacci numbers, pivot points are calculated by using the previous day highs, lows, and closing prices to plot pivot points levels on a graph. The Pivot point indicator is especially useful for day traders, as it gives traders an indication of the ranges the market likely will be operating in.
Once price reaches one of these pivot points, there is almost always a reaction or a change in the market. If the price manages to break through the pivot point, there will be a significant movement. Pivot points serve as good trade entry and exit locations.
How to Calculate Pivot Points?
The pivot point system has a central pivot (P), two levels of support (S1 & S2) below the central pivot, and two levels of resistance (R1 & R2) above the central pivot. The central pivot is calculated by adding yesterdays high, low and close and dividing it all by 3. The central pivot is a simple average of the high, low and close.
Central Pivot Point (P) = (High + Low + Close)/3
Traders don’t need to understand the math behind the Pivot Points calculations. Most trading platforms will display these levels on any chart, for any time frame. For more advanced traders it helps to understand the math behind the calculations:
- Support 1 (S1) = (P x 2) – High
- Support 2 (S2) = P – (High – Low)
- Resistance 1 (R1) = (P x 2) – Low
- Resistance 2 (R2) = P + (High – Low)
The third support and resistance levels are calculated as:
- Resistance 3 (R3) = H + 2 * (PP – L)
- Support 3 (S3) = L – 2 * (H – PP)
Pivot Point Strategy
This system identifies profitable Forex trades in seconds, and you don’t have to have a lot of money in the bank to use this system either. The system features include accurate trades entry and exit points, stop loss levels, take profit levels and works in all market conditions.
A counter-trading strategy relies on trading against the prevailing momentum. Don’t sell as soon as the market hits the first level of resistance, or try to buy as quickly as the market hits the first level of support. Trade in the opposite direction of the trend using the following rules:
- If the price of any currency pair is trading above the central pivot point, then the bias for the day is bullish. Only look for buying opportunities.
- If the price of any currency pair is trading below the central pivot point, then the bias for the day is bearish. Only looking for selling opportunities.
The market behaves the same way as any other object carrying momentum and will continue in the same direction until it hits an obstacle. Once the market is showing a willingness to trade above/below the central pivot point, we assume that the market will continue to move in the same direction until it hits a support or resistance level.
Pivot Point Trading Example
The prefered time for this kind of trade would be when the London or New York sessions open, as this is when the smart money operates (banks) in the market. If, at the London open we’re trading above the central PP, buy at the first level of minor support, using a protective stop loss order below the central PP. The first target is the R1 pivot level where we sell the first half of our position, and the remaining half of our position ideally should target the R2 pivot.