What are Pivot Points?
Pivot Points are price levels that are mathematically derived, which give them a significant weight in understanding market movements because price tends to respect them with a very high level of accuracy. Pivot Points is an indicator commonly used by professional traders, technical analysts and Hedge Fund managers in financial markets.
Once price reaches one of this pivot points there is almost always a reaction or change in the market. If the price manages to break through the pivot point there is a big movement. The pivot points serve as a very good entry level and also as a good exit level.
Pivots Points is a technical indicator that helps you determine potential support and resistance areas. Unlike Fibonacci numbers, pivot points use a set of calculations using the previous’ day highs, lows, and closing prices to plot the pivot points levels to make them more objective. The Pivot Points indicator is especially useful for day traders.
How to Calculate Pivot Points?
The pivot point system has actually a central pivot and two levels of support below the central pivot and two levels of resistance above the central pivot. The central Pivot is calculated by adding together the yesterday’s high, low and close dividing it by 3, which is a simple average of the high, low and close.
Pivot Point (P) = (High + Low + Close)/3
Realistically, traders don’t need to understand the math behind the Pivot Points calculations, as most of the trading platforms will automatically display those levels on any chart and time frame. However, for more advanced traders it is worth getting to understand the math behind the calculations. This is the math behind the support and resistance pivots:
· 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)
We also have a pivot point calculator should you find that more assistance in your trading.
Simple Strategy using the Pivot Points
This system is easy to use and starts producing results in just minutes. You don’t have to have a lot of money in the bank to use this system either. This system is not a robot that executes trades for you and it’s not a recurring signal service either. This is a proven effective system that identifies profitable Forex trades in seconds. The system features include accurate trades, entry, stop loss, take profit and works in all market conditions.
Retail traders tend to wrongly use the Pivot Points as they will try to sell as soon as the market hits the first level of resistance or they will try to buy as soon as the market hits the first level of support. This, in essence, is counter-trade trading and trading against the prevailing momentum which is one of the reasons why some retail traders lose money. If that is the case it means that trading in the direction of the trend is the way to go and it allows us to extract 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 and we’re only looking 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 and we’re only looking for selling opportunities;
The premise behind this simple rule is that once the market is showing the willingness to trade above/below the central pivot point, the same as with the law of motion, we assume that the market (an object) will continue to move in the same direction until it hits support/resistance (an obstacle).
Forex Trading Examples
Before going into some real trade examples we need first to define our trading rules. The preferable time to enter a trade would be around either London session open or New York session open because that’s when the smart money operates in the market. If at the London open we’re trading above the central PP, we’re looking to buy at the first level of minor support using a protective stop loss order below the central PP and as a first target using the R1 pivot level and the remaining half of our position ideally, we would like to exit at R2 pivot. The same rules apply in reverse for a short setup.