Have you ever heard about pivot points? I am pretty sure that yes, you have heard about PPs, but do you know what pivot points are?
Knowing about pivot point is very important in your trading life because it is a tool used by many traders in technical analysis to identify levels and market movements. It is also the base for many forex strategies.
Keep reading, and you are going to discover the world of pivot points, its variations and formula, and how PPs are calculated. If you learn how to use it right, you are going to have a powerful chartist tool that will enhance your trading skills.
What are pivots points
Pivot point is a technical analysis indicator that helps to identify daily price levels. Investors around the world use it to determine entry and exit points as well as intraday support and resistance levels, and even stop losses.
PPs are calculated after the high, low, and closing prices of previous trading sessions. It usually uses the New York closing time at 4 PM ET on a daily cycle. The indicator takes a pivot point as a base, then three resistance levels and three support prices are plotted above and below the given pivot point.
How do pivot points work
As mentioned before, the indicator can be used as traditional support and resistance levels. Those levels are usually seen as turning points and are based on specific calculations. However, every trader can adapt it to his or her trading style.
How the Pivot Point calculation is
Although there are several different methods to calculate pivot points in the market, the most common is the arithmetic average of closing, high and low prices of the unit in the previous period. In Forex, you would take the EUR/USD high, low, and closing prices if you are applying pivot points to the euro-dollar.
Pivot Point formulas:
PP = (H + L + C) / 3
You can also calculate it with the addition of the opening price:
P = (O + H + L + C) / 4.
Pivot points can also focus on closing prices or opening prices:
P = (H + L + C + C) / 4
P = (H + L + O + O) / 4
Support and resistance levels are obtained by the identification of the upper and lower sections of the previous trading range, defined by the movement above and below the pivot point.
- R1 = (PP*2) – L
- R2 = PP + (H – L)
- R3 = H + 2 * (PP – L)
- S1 = (PP*2) – L
- S2 = PP – (H – L)
- S3 = L – 2 * (H – PP)
How to use pivot points in Forex
When you are trading with pivot points, the pivot is the primary support and resistance. It means that the market is expected to have the most significant movement at that price level. The other lines can generate selling or buying interest, but the focus will always be at the central pivot point.
In forex, if the pivot point price is broken in an upward movement is considered as a bullish market confirmation. On the other side, if the price drops below the pivot point, then the market is bearish.
You can also add pivot points as entry or exit marks. For example, if you decide to open a position after a break of the pivot point. One general profit taking would be on the next support or resistance level.
Besides, you can use pivot points with other indicators or technical studies. A confluence of moving averages and pivot point levels would be a stronger support or resistance. Alternatively, a MACD cross that is happening right at the same time the PP is being tested in the chart would be considered as a confirmation.
The Forex strategy
A common Forex strategy using pivot points is to open a position when the price touches the pivot point and after the high or low of the bar that fails to make an extension is broken back.
In a long trade, the candle touches the pivot point, then the price fails to make a new low, and it turns back positive after the candle breaks above the high of the previous bar.
In a short position, the candle touches the pivot point, and then it fails to make a new high. Finally, the candle breaks below the low of the previous bar.
Once your position is placed, let it mature and wait for it to develop the strategy. It can take minutes or hours. Usually traders use the next pivot point level as the profit taking level. Stop loss would be the contrary PP price.