Pivot Points can be a very useful tool for day traders who want to identify near term support and resistance levels for the upcoming trading session.
Pivot points are exactly that, calculated S/R levels where we can expect to see a reaction when price interacts with them.
There are multiple ways these can be used and it really comes down to what your strategy is and what other factors you may look for before entering a trade. Before we explore those lets first understand how Pivot Points are calculated.
The pivot and the subsequent S/R levels are calculated based on the previous days price action, more specifically the previous day’s open, low, high and close.
If you primarily trade the forex markets, which are 24 hour, then the levels will be calculated after the New York close candle.
The calculation for a pivot point is shown below:
Pivot point (PP) = (High + Low + Close) / 3
Support and resistance levels are then calculated off the pivot point:
First resistance (R1) = (2 x PP) – Low
First support (S1) = (2 x PP) – High
Second resistance (R2) = PP + (High – Low)
Second support (S2) = PP – (High – Low)
Third resistance (R3) = High + 2(PP – Low)
Third support (S3) = Low – 2(High – PP)
Lets take a look at a chart and see this is practice
Like with most things in trading sample size is everything. You need to observe how price interacts with the levels to gain confidence in how powerful they can be. Of course there are no guarantees and they won’t work flawlessly every time, trading is about building an edge but if you can see over a large enough sample size that pivot points and subsequent S/R levels do hold a good proportion of the time then you can work them into your strategy.
Here is an example of a clean reaction off the pivot and then the S1 level.
Most modern charting platforms will come with the Pivot Points built in so it would be a simple case of adding them to your charts. If you use MT4 then a quick google search will provide you with the necessary indictor.
We encourage you to scroll back through your charts and take a look at how effective these levels can be, we’re certain you’ll be encouraged by what you see.
How can Pivot Points be used in your trading?
Looking at the charts above and through your own analysis you will see that price does indeed react to the levels, however we don’t recommend you simply take trades blindly.
Depending on your strategy you could choose to exit your trades at these levels or even initiate your position. If you are long and price is approaching the R1 level then you may decide to take your profits in anticipation that price will react, the same is true of a sell position and price approaching S1.
Price approaching R1 could also be a good place to enter a short trade! However remembering what we said about not taking trades blindly, it’s important to build up confluence before entering a position.
A good example would be price approaching one of the R1 levels but is also approaching its daily ATR, this would be a good exhaustion move. If it also coincided with a traditional S/R level or had price action then this builds your case for a trade even further.
At Traders Edge we look for a break of trendlines and then a return to the daily pivot, ideally that will also coincide with horizontal S/R levels.
You can see in the example below we identified those conditions and also had MACD divergence to add to our confluence factors.
Pivot Points can be a powerful addition to your trading strategy as long as you ensure they are only one element and not the only reason for taking a trade. The example above shows how we use them in our own trading and as long as you’re patient and take the best setups then you will be ale to pinpoint precise turning points like we have.