Pivot Point + Psychological Resistance

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Pivot Point

What is a Pivot Point?

A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.

The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.

  • When the price of an asset is trading above the pivot point, it indicates the day is bullish or positive.
  • When the price of an asset is trading below the pivot point, it indicates the day is bearish or negative.
  • The indicator typically includes four additional levels: S1, S2, R1, and R2. These stand for support one and two, and resistance one and two.
  • Support and resistance one and two may cause reversals, but they may also be used to confirm the trend. For example, if the price is falling and moves below S1, it helps confirm the downtrend and indicate a possible continuation to S2.

The Formulas for Pivot Points:

High indicates the high price from the prior trading day,

Low indicates the price from the prior trading day, and

Close indicates the closing price from the prior trading day.

How to Calculate Pivot Points

The pivot point indicator can be added to a chart, and the levels will automatically be calculated and shown. Here’s how to calculate them yourself, keeping in mind that pivot points are predominantly used by day traders and are based on the high, low, and close from the prior trading day. If it is Wednesday morning, use the high, low, and close from Tuesday to create the pivot point levels for the Wednesday trading day.

  1. After the market closes, or before it opens the next day, find the high, low and close from the most recent day.
  2. Sum the high, low, and close and then divide by three.
  3. Mark this price on the chart as P.
  4. Once P is known, calculate S1, S2, R1, and R2. The high and low in these calculations are from the prior trading day.

Pivot Points

What Do Pivot Points Tell You?

Pivot points are an intra-day indicator for trading futures, commodities, and stocks. Unlike moving averages or oscillators, they are static and remain at the same prices throughout the day. This means traders can use the levels to help plan out their trading in advance. For example, they know that, if the price falls below the pivot point, they will likely be shorting early in the session. If the price is above the pivot point, they will be buying. S1, S2, R1, and R2 can be used as target prices for such trades, as well as stop loss levels.

Combining pivot points with other trend indicators is a common practice with traders. A pivot point that also overlaps or converges with a 50-period or 200-period moving average, or Fibonacci extension level, becomes a stronger support/resistance level.

The Difference Between Pivot Points and Fibonacci Retracements

Pivot points and Fibonacci retracements or extensions both draw horizontal lines to mark potential support and resistance areas.

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Fibonacci retracement and extension levels can be created by connecting any price points on a chart. Once the levels are chosen, then lines are drawn at percentages of the price range selected.

Pivot points don’t use percentages and are based on fixed numbers: the high, low, and close of the prior day.

Limitations of Pivot Points

Pivot points are based on a simple calculation, and while they work for some traders, others may not find them useful. There is no assurance the price will stop at, reverse at, or even reach the levels created on the chart. Other times the price will move back and forth through a level. As with all indicators, it should only be used as part of a complete trading plan.

How to Trade with Pivot Points the Right Way

You need to learn how to trade with Pivot Points the right way. if you want to take full advantage of the power behind the pivot points. Trading with pivot points is the ultimate support and resistance strategy. It will take away the subjectivity involved with manually plotting support and resistance levels.

Our team at Trading Strategy Guides will outline why using pivot points is so important!

Pivot Points are derived based on the floor trading guys that used to trade the market in the trading pit. It’s important to know this fact to appreciate the value pivot points can bring to your trading. The way bankers trade is totally different. So you can also read bankers way of trading in the forex market.

Floor traders try to frame the day based on the previous day’s trade. They use a framework or a boundary to analyze the market. Because of this, pivot points are universal levels to trade off of.

Traders using the pivot point system will attempt to identify the movement of an asset’s price, and whether that movement is likely to continue or “pivot” in a different direction.

Pivoting usually occurs around areas of strong resistance or support. In order to calculate this, you will identify the opening price, high point, low point, and closing price from the most recent trading period. Pivot points are also called the floor pivot points!

Pivot point trading is also ideal for those who are involved in the forex trading industry. Due to their high trading volume, forex price movements are often much more predictable than those in the stock market or other industries.

The professional traders and the algorithms you see in the market use some sort of a pivot point strategy. In the old days, this was a secret trading strategy that floor traders used to day trade the market for quick profits.

Moving forward, we’re going to give you our introduction to pivot points and show you how to calculate the pivot points. Last but not least, give you a couple of examples of how to trade with pivot points. Also, read Personality Strengths and Weakness in Forex Trading.

What are Pivot Points?

Pivot Points are significant support and resistance levels that can be used to determine potential trades. The pivot points come as a technical analysis indicator calculated using a financial instrument’s high, low, and close value.

The pivot point’s parameters are usually taken from the previous day’s trading range. This means you’ll have to use the previous day’s range for today’s pivot points.

Or, last week’s range if you want to calculate weekly pivot points or, last month’s range for monthly pivot points and so on.

Pivot Points are automatically plotted on your chart so you won’t need to waste any time with calculating them. However, if you really want to have an intimate relationship with them, here is how to calculate pivot points:

Pivot Point (P) = (High + Low + Close)/3

The main pivot point (PP) is the central pivot based on which all other pivot levels are calculated. The math behind the central Pivot Points is quite simple. We add yesterday’s high, low and close and then divide that by 3, which is a simple average of the high, low and close.

And 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)

The central PP is just one of the main support/resistance levels. The pivot points indicator will also plot 10 more distinctive layers of support and resistance levels.

Usually, if we are trading above the central pivot point, it is a signal of a bullish trend. If the price is trading below the central pivot point, it is considered a bearish signal.

Most modern trading software, or platforms, have the pivot points indicator in their library. So, you don’t have to calculate these levels manually on your own.

Without further ado, let’s see how you can efficiently trade following the best pivot point strategy PDF.

Best Pivot Point Strategy PDF

Pivot Points are one of our favorite trade setups. We’re going to show you what the best method is to trade pivot points through our best pivot point strategy PDF.

The pivot point strategy doesn’t require significant trading capital. It can yield positive results right away.

More often than not retail traders use pivot points the wrong way. They usually sell to quickly when the first pivot point resistance level is reached and buy too soon when the first pivot point support level is reached.

This is the wrong way to trade because you’re trading against the prevailing momentum which is one of the reasons why retail traders lose money.

Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of the trading strategy. For this article, we’re going to look at the sell side.

Step #1: Trade only at the London open or the 8:00 AM GMT

The best time to trade the pivot points strategy is around the London session open. However, it can be used for the New York session open with the same rate of success.

We trade the London open because that’s the time big banks are opening for business, and the smart money operates in the market.

Note* We’re going to use the 15-minutes time frame and trade based off of the daily pivot points.

We’ve highlighted on the chart with a vertical line the London open as well as the beginning of a new trading day.

Step #2: Sell at the market if after the first 15-Minutes we’re trading below the Central Pivot Point

If after the first 15-minutes into the London trading session we’re trading below the central pivot point. Then we sell at the market.

The trade logic behind this rule is simple. Once the market is displaying a disposition to trade below the central pivot point, we assume that the bearish momentum will continue to persist.

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.

Important Note * If after the first 15-minutes into the London session we’re too close to the first support level we better skip this trade opportunity because the profit margin has tightened.

The next important thing we need to establish for our day trading strategy is where to place our protective stop loss.

Step #3: Hide your Protective Stop Loss 5-10 pips above the Central Pivot

It’s essential to have a good strategy for your stop loss as much as to have an entry strategy.

If the price breaks above the central pivot point then the sentiment has shifted on the bullish side and it’s wise to get out of any short trades. However, in order to accommodate any false breakouts, we also use a buffer of about 5-10 pips above the central pivot point for our SL.

Last but not least, we also need to define a take profit level for our pivot point strategy which brings us to the last step.

Step #4: Take Partial Profit #1 at Support 1; Take Partial Profit #2 at Support 2.

We employ a multiple take profit strategy because we want to make sure we give the market the chance to reach for deeper support levels.

The first pivot point support level is the first trouble area and we want to bank some of the profits here. We also advice moving your protective stop loss to break even after you took profits.

At the second pivot point, the support level is where we want to liquidate our entire position and be square for the day.

Note** the above was an example of a SELL trade using the best pivot point strategy PDF. Use the same rules for a BUY trade – but in reverse. In the figure below, you can see an actual BUY trade example.

Conclusion

You absolutely need to start using a pivot point strategy as a complementary tool to your support and resistance strategy if you’re not doing it already.

These pivot point trading secrets are very powerful price-based support and resistance levels.

The best pivot point strategy PDF signals a good entry point near the central pivot point and also provides you with a positive risk to reward ratio which means that your winners will be higher than your losing trades.

Thank you for reading!

Please leave a comment below if you have any questions on how to trade with pivot points!

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Pivot points in trading

Pivot points are a classical intervention technique in the Stock Market. I like it for its simplicity and above all its effectiveness.

Pivot points (PP), Resistance (R1 R2 R3) or Support (S1 S2 S3) are impressive because of the clear indications they can give the trader.

What is a Pivot Point?

The Pivot Point is intended to provide psychological areas in which indices, shares etc. have a high chance of stabilising, of rebounding on a support or dropping on a Resistance. Intellectually, it makes no sense, but because many investors use the pivot points technique, that means it makes sense . on the principle of self realization.

Here we see for example that, from 8am to 9am in the pre-market, R1 acts as a resistance, the pivot point led to a mini rebound (scalping) before going to see S1 which served as a rebound zone (scalping or day trading ). Following the good news, the price rebounded at 2pm from PP to R1 and was contained on R1 while waiting the opening of the U.S. markets.

How to calculate a pivot point?

There are several formulas for calculating pivot points, resistance and other support levels. Let me give you the most classical, the most commonly used, and by implication the most effective.

Pivot = (H + B + C) / 3
S1 = (2 x Pivot) – H
S2 = Pivot – (H – B)
S3 = B – 2x (H – Pivot)
R1 = (2 x Pivot) – B
R2 = Pivot + (H – B)
R3 = H + 2x (Pivot – B)

S1 , S2 and S3 are the 3 Support levels R1 , R2 and R3 are the 3 Resistance levels with H being the highest price the day before, B being the lowest price the day before and C being the closing price. Don’t worry; your trading software will calculate this without any problem.

The other Pivot Point formulas

Here you will find formulas for Camarilla pivot points and Woodie pivot points, which are the most famous.

Variant of calculating pivot points in classical mode: Pivot = (H + B + C + O) / 4 or Pivot = (H + B + O / 3 = where O = the highest of the day (it is therefore an evolutionary computation in the day).

What unit of time to use for pivot points?

Generally, pivot points, resistance and support levels in daily UT are used to do day trading, which is logical. We anticipate for example a rebound on the R1 support for a return to the pivot point. Of course, the context is essential to assess whether R1 R2 or R3 are more likely to counter a drop.

In scalping, these levels are also interesting if the market stabilizes on a resistance or support. One can then scalp on the micro variations of the defined area. It is however more delicate with scalping because you have to take into account the time of the day; a stabilization between 2 pm and 3 pm is more likely to stay on a support or resistance (waiting for the U.S. market) than at 9:30 am when the market is finding its feet, and this is more dangerous for scalping.

For swing trading, weekly levels are effective; for long trading, monthly pivot points are preferred.

Strengths of pivot points

A major strength of pivot points is that the levels are determined before the price opening so as to establish a trading plan, to immediately and easily identify areas of tension for the day trading. Furthermore, these psychological areas work well; they are well monitored by traders; and that is all we ask.

Weaknesses of pivot points

Levels determined by pivot points work especially well in a quiet or regular-trend market. In the case of very bad news for example, support levels S1 S2 S3 will not last. If they crash, they will not be effective at all, unless you calculate up to S8). Pivot points must be used in a fluctuating context; they are not absolute.

Some uses of Pivot Points in trading

I will not go into details; this will be handled in another article.

Note however that when S3 is broken in intraday, there is a high probability to go back to this support except where there is a major crash. Similarly, an S3 affected on a monthly unit of time is often a rare opportunity to take a long trading position.

Take this advice even in the case of day trading and the display of daily and weekly pivots simultaneously; if we arrive at S1 daily and S2 weekly for example, it strengthens the possibility of a rebound.

Conclusions on Pivot Points

The simplest things often work best. Pivot points can be used in many ways: determining a possible rebound area (of purchase) with the support, a resistance area (of sales or profit earning). In any event, you definitely need to use them, monitor them and you will see that the market often follows them.

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