When trading pivot points, many of the same rules are in force as with other types of support and resistance trading techniques. Many traders keep a watchful eye on daily pivot points, as they are considered to be key levels at the intraday timeframe. Forex pivot points are calculated horizontal price levels on the chart. These levels show potential areas where the price can reverse, especially during the first touch of these levels. Many Forex traders make their intraday trading decisions based on daily pivot levels, and as such it is important for intraday traders to watch price action at these levels closely.
The Standard Pivot point calculation is quite simple. It requires only three numbers — close, high, and low. We should first calculate the main daily pivot point. The formula for this: Most forex traders use the By doing this you can separate the daily trading sessions from each other. When you get the PP, you can start calculating the further upper and lower pivot points. These are called first, second, third pivot resistance levels, and first, second, third, pivot support levels.
Since you now have the basic pivot point, you can now calculate the first support and resistance. We have gone thru the calculations above so that you can understand how these levels are calculated. We will now discuss some quick ways to calculate pivot points without having to do the manual calculations daily.
When you apply the basic pivot point and the three support and resistances, there will be 7 different levels. As you have seen above, it can be a bit tedious to perform the calculations manually. There are different options to get the pivot points without doing the calculations above manually. There are many online pivot point calculators on the net. When you open a pivot point calculator, you will be required to add the three price action variables.
These are the daily high, the daily low and the close. Once you have that, then you could just plot the pivot lines on your trading chart within your trading platform. Most of the trading software available today will have a pivot indictor that will calucatate these levels for you automatically and plot them on your chart. First, check the list of indicators your trading platform offers. You can find many Pivot Point Indicators online, which you could simply add to your platform.
Browse the net and you will definitely find a pivot point indicator available usually for free somewhere. You may have to import the indicator and then extract the files in the indicators folder of your trading platform. Once you have done this, you will be able to apply the pivot point indicator directly on your chart. When you plot your pivot point indicator on your chart, you should see something like this: The horizontal lines on the chart are the pivot points. The blue line is the central pivot point.
The lines above the main pivot point are R1, R2, and R3. We also put three vertical lines on the chart. These three lines separate the different trading days. Notice that the pivot levels of every trading day are lined differently.
This is so, because each trading day has different daily high, low and close values. In this manner, the pivot levels are different too. This is why there is a rapid switch in the levels of the pivot lines for every trading day. There are few basic rules when trading pivot points. Since we have discussed the structure of the pivot points and the way they are calculated, it is now time to demonstrate pivot trading using some chart examples.
Have a look at the image below: The circles show moments when the price consolidates and hesitates in the area of a pivot point. The arrows show moments when the price finds support or resistance around a pivot point level. In this example we see price hesitate around a level 4 times and in 8 instances we have a price reversal after interaction with a pivot point. Now that we have seen pivot points in action, we will now turn to applying some pivot point trading strategies.
Firstly, I will show you how to use pivot points as a part of a pure price action trading strategy, without the assistance of any additional trading indicator. We will rely on regular breakout rules to enter the market.
If we enter the market on a breakout, we will put a stop loss below the previous pivot point. We will target the second pivot point level after the breakout. Take a look at this chart: There are two breakouts through the PP level, which could be traded. The first breakout through the blue pivot line comes in the beginning of the chart. A stop loss order should be put right above R1 — the first pivot level above the main pivot point. The target should be S2 — the second level below the main pivot point.
It is very important to emphasize, that if your trade is held overnight, then the pivot points will likely change for the next day. In this manner, your stop loss and target may need to be adjusted to reflect the new levels. The price starts increasing after reaching the target.
This is a good long position opportunity. If you want to take this long opportunity, you should place your stop loss order right below S1, which is not visible on the picture in this particular moment.
At the same time, your target should be on R2. After breaking the main pivot point the price starts increasing and it breaks through R1. On the next day, the pivot levels are different. The price decreases to the central pivot point and it even closes a candle below. However, the candle is a bullish hammer, which is a rejection candle formation.
This hints that the trade should stay open. Furthermore, the stop loss below S1 is still untouched. The price then starts a consolidation which lasts until the end of the trading day. When the next trading day comes, the pivot points are readjusted again and they are tighter. The main pivot point is higher. The price tests the main pivot point as a support again and bounces upwards.
This implies that the uptrend might continue, which puts on the table a third trading opportunity. If you go long here, you should place a stop right below R1. Since the trade is long and it is open on a breakout through R2, the target limit order should be placed somewhere above R3 we have no R4 level. You could also use your own price action rules to determine how long you should stay in the trade. The point of this strategy is to match a pivot point breakout or bounce with a MACD crossover or divergence.
When you match signals from both indicators, you should enter the market in the respective direction. A stop loss should be used in this trading strategy the same way as with the previous strategy. Your stop should be located on the previous pivot level. You should stay in the trade until the MACD provides an opposite crossover. The image below will make the picture clearer for you.
The image shows one long and two short position opportunities. Signals are based on pivot point breakouts and MACD crosses. We start with the first trading opportunity which is short. MACD lines cross downward and we get the first signal for an eventual downtrend.
Few hours later we see the price breaking through the main pivot point, which is the second bearish signal in this case. A stop loss should be put right above the R1 pivot point as shown on the image. The price starts a downward movement. However, we see a correction to the main pivot point first black arrow. The price then bounces from the PP level and the decrease continues. The second hesitation in the bearish trend leads to a bullish cross of the MACD lines and the trade should be closed.
One could have made 53 pips from this trade. Notice that few hours after the bullish MACD cross, the price switches above the main pivot point. This looks like a good long opportunity which could be traded. In this case the stop loss should be located right below the S1 pivot point. The price starts increasing and the MACD starts trending in a bullish direction. In the middle of the next trading day the MACD lines interact in the bearish direction. This should be taken as a closing signal.
The long trade would have generated profit of 57 pips.More...