What are Pivot Points?
Pivot Points are indicators used by professional traders and hedge fund mangers in technical analysis of the financial markets to predict changes in direction. Pivot points are calculated price levels, which give them a significant weight in understanding market movements because price tends to respect them with a very high level of accuracy.
Once price reaches one of these 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 as a good exit level.
Pivots Points can help a trader 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. The Pivot Points indicator is especially useful for day traders as it gives traders and idea of the ranges the market should be operating in.
How to Calculate Pivot Points?
The pivot point system has a central pivot, 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. This gives you the 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 those levels on any chart for any time frame. For more advanced traders it helps 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)
Simple Pivot Point Strategy
This system is an easy-to-use and effective system that identifies profitable Forex trades in seconds. 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, stop loss, take profit and works in all market conditions.
Some retail traders use Pivot Points incorrectly in their trading. 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 is counter-trade trading and relies on 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;I
- f 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 the market will behave the same as an an object with momentum. It will continue in the the same direction until it hits an obstacle.
That said, once the market is showing the 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 support/resistance.
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.