What is a pivot point in trading?
In technical analysis, support and resistance levels very important as a trigger or reference in trading, This is a method or indicator to determine support and resistance levels.
To calculate the pivot point method using high low close data in the previous period.
To estimate the next period of support and resistance levels.
Professional traders using pivot points in trading because this indicator is one good enough to be a reference in trading.
Especially for short-term trading.
This pivot method is different from using indicators as previously we learn it, and the level of resistance support at the pivot point is also very objective.
This pivot point indicator is similar to Fibonacci which uses swing high and swings low.
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Pivot point explained
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A pivot point is a technical indicator that typically uses the average of the calculation of the highest and lowest prices and closing prices.
This indicator to estimate support and resistance levels over timeframes.
Thus this indicator can be used to estimate the overall direction of the trend.
Where if the price is above the value of the pivot point it is generally a bullish trend.
Conversely, if the price is below the support level, the tendency is a bearish trend.
Pivot points are indicators that are based on support and resistance through certain calculations of all pivot points.
There are seven main lines in the pivot point.
- Basic pivot level. This is the middle value of the pivot point on the chart.
- R1 (resistance 1). This is the first pivot level above the basic pivot point.
- R2 (resistance 2). This is the second pivot level above the basic pivot point and R1.
- R3 (resistance 3). This is the third pivot level above the basic pivot points, R1, and R2.
- S1 (support 1). first pivot level below the basic pivot point.
- S2 (support 2). This is the second pivot level below the basic pivot point and S1.
- S3 (support 3). This is the third pivot level below the basic pivot points, R1, and R2.
The picture above is an example of a pivot point plotted on the H1 pair EURUSD timeframe as you can see the pivot level is a nice zone as a trading reference.
How to calculation PP
Even though there are several pivot point indicators that automatically calculate in a chart, it is better to understand how to calculate pivot points.
As stated that this uses the highest and lowest prices and closing prices in the previous period. The forex market is open 24 hours, most traders use the New York closing as the closing price.
But we can use broker-based closing prices because this is only subjective. For pivot point calculations we use the following formula.
Basic pivot point calculation
Pivot point (PP) = Low +High + Close /3
S1 S2 R1 R2 pivot point calculation
S1 (support 1) = (2 x Pivot Point) – High
S2 (support 2) = Pivot Point – ( High – Low)
R1 (resistance 1) = (2 x Pivot Point) – Low
R2 (resistance 2) = Pivot Point + (High –Low)
S3 R3 pivot point calculation
R3 (resistance 3) = High + 2 x (Pivot Point – Low)
S3 (support 3) = Low – 2 x ( High – Pivot Point)
Using indicators will be easier, but what needs attention is the configuration of closing time settings to get the right closing price.
In addition to using indicators, you can also use pivot point calculator software such as the Babypip Pivot Point Calculator
The advantage of using pivot points is very objective, we can monitor how to price behavior at the pivot point level is.
How pivot point work?
Pivot points work as standard support and resistance.
Traders will see how the price reaction to pivot levels when prices have approached the pivot point, it can occur bouncing or breakout.
At the pivot point level, if the price bounces, the trader can trade with the bouncing strategy.
And if the price breaks out, the trader trades by following the direction of the breakout.
Levels S1, S2, S3, and R1, R2, R3 are pivot levels that can be used as a reference in determining profit targets, or also stop-loss levels.
How to draw the indicator
To draw a pivot point indicator in MetaTrader 4 you need to download the indicator file first because on the default platform there are no indicators available.
After getting the indicator file, then open the MetaTrader 4 platform, then click indicator.file -> Open data folder -> MQL4 –>Indicator
In the indicator folder, you copy and paste the pivot point indicator file, then refresh the navigator window and the pivot point indicator will appear as a custom indicator.
To simplify the recognize of pivot levels you can distinguish by giving color variations to pivot points, S1, S2, S3, R1, R2, R3.
Also, adjust the closing price settings based on the New York market session.
To attach an indicator to the chart, you just need to double-click on the indicator, the settings box will appear and you can adjust the settings as needed, then click ok.
How to use PP in trading
Pivot points are universal indicators that can use to trade range trading, breakout trading and also measure market sentiment.
How to trade for a range of trading with a breakout is different.
Of course, by paying attention to how the price reaction at the level of the pivot point.
Let start with the first.
How to use the Pivot point for a range trading
A simple way to use a pivot point is like using regular support and resistance.
The price will react to the pivot level repeatedly, the more often the price touches the pivot level the stronger the level.
If the price retests several times at the pivot level then it gives an opportunity to open a position, the rules are as follows.
- If the price is near the resistance level then you can open sell with a stop loss above the resistance.
- Conversely, if the price is at the support level, you can open buy with a stop loss below the support.
It’s easy to understand how to trade pivot points for the market range.
Choosing a timeframe is also important enough for a trading range to use M15, M30 or H1.
This also adjusts the amount of capital available, because the stop loss distance will be even greater when using a high timeframe.
Let’s try with an example.
Take a look chart above, here is the GBPUSD M15 timeframe pair.
We see the price has approached S1 level or support 1 if you believe it is a strong support level, and hold prices, you can open buy above S1 and place a stop loss at S2.
Or if you believe S1 is holding prices, placing a stop loss below S1 is tighter in risk management.
If for example the S1 and S2 levels break, it is likely to become resistant.
The first profit target is the zone between the basic pivot point and R1.
What happens later on after you bought?
There are two possibilities when the price approaches S1, it will bounce back up, or a break will occur and continue the decline.
How to determine buy position at the S1 level, you should pay attention to the candle pattern in addition to using the S1 pivot point.
For example, it appears a Doji, or with a stochastic indicator whether it is in the oversold zone.
In this example what happens is the price bounces and reaches the level of the pivot point where the target is placed.
Pretty sweet if you open a buy position above S1 and the target is above the pivot point, the target should be reached and get profit in the end.
How to use PP as a breakout trading strategy
Basically using a pivot point for a breakout strategy is the same as using support and resistance.
For a safe way, we wait for a breakout but may miss momentum, or in an aggressive way with the belief that a breakout occurs but the likelihood of it not happening.
Using a breakout strategy with a pivot point can be a second plan if the trading range fails because it doesn’t always work at all times.
How to trade aggressively and the safe way there are also advantages and disadvantages of each.
The aggressive way is to open a position after a breakout, and this may be the disadvantage if a false breakout occurs.
The safe way is to wait for the price to retest the area of support or resistance where a breakout occurs, the disadvantage is that the price does not always retest so that it missing momentum.
In simple trading, a breakout is to take advantage of breaking support and resistance levels.
Let’s try with an example
The chart above is the EUR USD pair on the M15 time frame where there has been a rally after a gap above the pivot point.
If you use a pivot point for a range of strategies.
Maybe you will open short positions after the price reaches R1.
But as already stated that trading range does not always work, and here there has been a break of the R1 level.
If you are an aggressive trader, it will open long positions after the breakout of the R1 level.
So that you can catch a profit of around 50 pips.
But if the safe way, traders will wait for the price to retest at level R1.
But apparently, in this example, it did not happen.
Furthermore, the price breaks again at R2, and aggressive traders will open immediately when there is a break.
But traders who like the safe way will wait for the price to retest R2 again.
A break also occurs on R3, but the breakout on R3 is an only fakeout.
An aggressive trader who immediately opens a buy position after the breakout.
May experience a stop out if he puts a stop loss at R2.
After the breakout of R3 observe how the price reaction to R2, because the support occurs the break will become resistance.
And vice versa the resistance that occurs will be new support, this is a role reversal.
After the price breaks down, then R2 here will act as a support.
Watch for price movements at this level, whether to bounce or break.
Breakout pivot point stop loss and target profit
Something that is difficult with the pivot point breakout method is how to place a stop loss.
Unlike the range trading method, the breakout will look for strong trends, and traders can apply the concept, resistance turns into support or support turns into resistance.
By applying this concept, placing a stop loss is below or above the breakout level depending on the break-up or down.
So by using the chart example above if a trader opens a buy position at R1 then he can place a stop loss below R1.
What about the target profit? ideally set targets based on further support or resistance, but traders can also follow the next changes.
If the breakout gives a strong trend indication, the trader can modify the stop loss as the price changes and leave the target floating.
Until when the price is considered to be the highest or lowest price, where the trend starts to weaken, traders can make a manually cut profit.
The chart above is a EUR USD pair that is plotted on time frame M15.
We clearly understand how to place a stop loss using the breakout pivot point strategy.
Aggressive traders open long positions after a break of R1 and place a stop loss below R1, and target at R2.
The next break occurred on R2 and the trader placed a stop loss below R2 and the target on R3.
On the break of R3, the trader places a stop loss below R3 and the profit target is at the next resistance.
But since the pivot point level only reaches R3, for the next resistance the Fibonacci extension level can be used.
But in the example above after the break of R3, the price turns down and touches the stop loss.
Traders must also realize that not always breakouts that occur are strong trends.
Sometimes it is only a temporary change due to the news.
So it is also important for traders to read the economic calendar to see if there is important news or not.
It will help in observing whether the breakout is real or fakeout.
How to use pivot point to measure market sentiment
Pivot points are also used by traders to measure market sentiment.
Market sentiment is the tendency of whether market participants are more inclined to buy or sell.
Basic pivot points act as middle lines, thus measuring market sentiment is to use basic pivot points as a reference.
Like a balance sheet, the pivot point is the midpoint of the balance sheet, if one side gets a load, then the weight will lean there.
So the rules for using pivot points to measure market sentiment are as follows.
- If prices cross the pivot point upward, then the sentiment market is a buy, then the trend is going up.
- But if prices cross the pivot point down, then the sentiment market is selling, then the trend is down
Let’s try with an example
Take a look at the image above, we use the EURUSD pair image on the M15 timeframe, we see that there has been a gap above the PP, and prices continue to rise and rise even higher.
That’s when the PP as the middle line shows that bullish is filling the market, if you open a buy position above the PP, then get a sweet fruit.
But on the contrary, if the nutrient is below the PP then notice how the price reaction at the pivot level is.
In theory, if the price is below the pivot, it is an indication that the bearish is filling the market, sell signals are more recommended.
Now take a look at the chart below!
Look at the image above, it is a GBPUSD pair with an M15 timeframe.
The price looks retest at the PP level, where it acts as a resistance, then the price goes down and goes down even further.
In theory, prices below the PP indicate stronger bearish sentiment fills the market, short positions are recommended in this case.
However, prices can move dynamically, sometimes prices are below the PP.
Then retest, the pivot level, but the decline occurs only temporarily and eventually bounces higher and through the PP level.
Take a look at the chart below
The chart above shows the price initially passed the PP down, but after passing S1 the price then bounced higher and passed the level of the PP upwards.
If you open sell when the price is below the pivot level, if it is too late to determine the exit point, it may be dragged down by rising prices.
Then the exit point is very important, in addition to the stop loss, setting targets too far will be difficult to achieve, and we can use PP levels for targets.
Although basic PP, in theory, is the centerline of market trends, they are not standard measures.
Because of the complexity of the forex market, sometimes making unexpected moves.
You can combine with other indicators as filters.
Three types another pivot point
Apart from using standard formulas, there are three other types of PP.
- Woodie PP
- Camarilla PP
- Fibonacci PP
Woodie pivot point
The formula is
R2 (resistance2) = PP + (High – Low)
R1 (resistance 1) = ( 2 X Pivot Point ) – Low
PP (pivot point) = ( L + H + 2C ) / 4
S1 (support 1) = ( 2 X Pivot Point ) – High
S2 (support 2)= PP( – High + Low)
Here is example woodie pivotpoint.
Camarilla has four support and resistance, the calculation method also uses day close, high and low, It’s just that he uses multiplied by a multiplier.
R4 (resistance 4)= C + ((H-L) x 1.5000)
R3 (resistance 3)= C + ((H-L) x 1.2500)
R2 (resistance 2)= C + ((H-L) x 1.1666)
R1 (resistance 1) = C + ((H-L) x 1.0833)
PP (pivot point)= (H + L + C) / 3
`S1 (support 1)= C – ((H-L) x 1.0833)
S2 (support 2) = C – ((H-L) x 1.1666)
S3 (support 3)= C – ((H-L) x 1.2500)
S4 (support 4)= C – ((H-L) x 1.5000)
Here is example camarilla
Like Camarilla, Fibonacci pivot points are multiplied by multipliers, but the multiplier used is the golden ratio of Fibonacci.
R3 (resistance 3)= PP + ((High – Low) x 1.000)
R2 (resistance 2)= PP + ((High – Low) x .618)
R1 (resistance 1)= PP + ((High – Low) x .382)
PP (pivot pont) = (H + L + C) / 3
S1 (support 1)= PP – ((High – Low) x .382)
S2 (support 2)= PP – ((High – Low) x .618)
S3 (support 3)= PP – ((High – Low) x 1.000)
Here is example fibonacci pivot pont
What is a pivot point?
This is one of the trading indicators for tools to determine short or buy positions.
Although there are other variations besides the standard PP, finding the best is not an easy matter
Depending on the user’s perspective, we can choose what is suitable and profitable.
For scalping trading, it might be suitable with a standard or with a camarilla.
Long term or swing traders can use woodie pivot points, and daily traders can use Fibonacci pivots or standard pivot points’
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