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Lesson 10: Pivot Points

Lesson 10: Pivot Points

Pivot points can be used in trading to help judge uptrends and downtrends and identify the best points to enter or exit a trade.

Pivot points are one of the most widely used technical indicators in day trading. There are several strategies that can be used with pivot points since the indicator is highlighting potentially important price areas for the day. By monitoring pivot points for certain signals, pivot points can be used to generate a strategy composed of an entry, stop-loss, and profit target.

How to use this guide

To get the most out of this guide, it’s recommended to practice putting these Pivot Point indicator trading strategies into action. The best risk-free way to test these strategies is with a demo account, which gives you access to our trading platform and $50,000 in virtual funds for you to practice with. Get your free demo account.

Once you’ve found a strategy that consistently delivers positive results, it’s time to upgrade to a fully funded live account where you can apply your newfound edge.

What is a Pivot Point

Pivot Point is a significant level chartists can use to determine directional movement and potential support/resistance levels. Pivot Points use the prior period's high, low, and close to estimate future support and resistance levels. In this regard, Pivot Points are predictive or leading technical indicators.

The indicator includes one pivot point that sets the upward or downward bias for the day, as well as three support and three resistance levels intended to find intraday turning points in the market.

The pivot point itself is simply the average of the intraday high and low, and the closing price from the previous trading day. On a subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates the bearish sentiment.

What is a Pivot Point
Source: CAPEX MT5

The Pivot Point indicator can be added in our online trading platform, MetaTrader 5. The award-winning platform allows traders to customize technical indicators and tools, add drawing tools to price charts and graphs, and identify chart patterns in order to improve their trading strategy.

Calculation of Pivot Points

Pivot points can be calculated for various timeframes in some of the best trading platforms like MT5 that allow you to customize the indicator. For example, some programs may allow you to calculate pivot points for a weekly or monthly interval. But the standard indicator is plotted on the daily level.

Classic Pivot Point

The central price level – the pivot point – is calculated as a function of the market’s high, low, and close from the previous day (or period, more generally). These values are summed and divided by three. This is the same concept as the “typical price”.

Pivot Point = [High (previous) + Low (previous) + Close (previous)] / 3

The other six price levels – three support levels and three resistance levels – all use the value of the pivot point as part of their calculations.

The three support levels are conveniently termed support 1, support 2, and support 3. The three resistance levels are referred to as resistance 1, resistance 2, and resistance 3. You may also see them called by their shorthand forms – S1, S2, S3, and R1, R2, and R3, respectively.

These values are calculated as follows:

  1. Resistance 1 = (2 x Pivot Point) – Low (previous period)
  2. Support 1 = (2 x Pivot Point) – High (previous period)
  3. Resistance 2 = (Pivot Point – Support 1) + Resistance 1
  4. Support 2 = Pivot Point – (Resistance 1 – Support 1)
  5. Resistance 3 = (Pivot Point – Support 2) + Resistance 2
  6. Support 3 = Pivot Point – (Resistance 2 – Support 2)

Since the price levels are based on the high, low, and close of the previous day, the wider the range between these values the greater the distance between levels on the subsequent trading day. Likewise, the smaller the trading range, the lower the distance between levels will be the following day.

It should be noted that not all levels will necessarily appear on a chart at once. This simply means that the scale of the price chart is such that some levels are not included within the viewing window.

Camarilla

Camarilla levels are located much closer to the current price, therefore, interactions with them occur much more often. This is more suitable for the scalping technique.

  1. R1 = C + RANGE * 1.1 / 12
  2. R2 = C + RANGE * 1.1 / 6
  3. R3 = C + RANGE * 1.1 / 4
  4. R4 = C + RANGE * 1.1 / 2
  5. S1 = C – RANGE * 1.1 / 12
  6. S2 = C – RANGE * 1.1 / 6
  7. S3 = C – RANGE * 1.1 / 4
  8. S4 = C – RANGE * 1.1 / 2
  9. PP = (S1 + R1) / 2

Please note, the above pivot formula is somewhat different from the generally known Camarilla method. Here we offer you a modified calculation, as using the traditional approach, we get a level that does not correspond to the logic of other support and resistance levels.

Woodie

This technique is similar to the classical one, but more attention is given to the closing price of the period while calculating the basic pivot line.

  1. PP = (H + L + (C * 2)) / 4
  2. R1 = (2 * PP) – L
  3. R2 = PP + RANGE
  4. R3 = R1 + RANGE
  5. R4 = R3 + RANGE
  6. S1 = (2 * PP) – H
  7. S2 = PP – RANGE
  8. S3 = S1 – RANGE
  9. S4 = S3 – RANGE

Fibonacci

The theory of Fibonacci numbers is commonly used in the Forex market. Pivot Points is not an exception. According to this method, the levels of resistance and support are determined by multiplying the range (R) by the corresponding Fibonacci retracement and Fibonacci expansion levels.

  1. PP = (H + L + C) / 3
  2. R1 = PP + (R x 0.382)
  3. R2 = PP + (R x 0.618)
  4. R3 = PP + (R x 1.000)
  5. R4 = PP + (R x 1.618)
  6. S1 = PP – (R x 0.382)
  7. S2 = PP – (R x 0.618)
  8. S3 = PP – (R x 1.000)
  9. S4 = PP + (R x 1.618)

Which of these Pivot Points calculation methods is the best? There is no best or worst method. In fact, each of them can work, and you should make a choice based on your beliefs in trading.

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.

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

Uses of Pivot Points in Trading

Pivot points are an intraday indicator for trading futures, commodities, and stocks. Unlike moving averages or oscillators, they are static and remain at the same price throughout the day. This means traders can use the levels to help plan out their trading in advance.

The basic functions of the pivot point indicator are the following:

  • If the price is above the pivot point, the bias is to the upside for the current session’s trend. If the price is below, the bias is to the downside.
  • If the price falls through one of the levels on the indicator, the next level lower can be used as a profit target or estimate of where the price may go next. If the price rises through one of the levels, the next level higher can be used as a profit target or estimate of where the price may be heading.
  • The indicator levels may act as possible trade areas, as the price moves through or bounces off them. Ideally, trades could be opened in the overall trending direction for that day.

How to Trade with the Pivot Points

When you see the Pivot Points and you want to place a trade, you can do so via derivatives such as CFDs. Derivatives enable you to trade rising as well as declining prices. So, depending on what you think will happen with the asset’s price when one of the Pivot Points levels is confirmed, you can open a long position or a short position.

Follow these steps to trade with Pivot Points:

  • Trading any type of technical indicator requires patience and the ability to wait for confirmation. Pivot Points are used most to find intraday entry and exit levels.
  • To get started trading with Pivot Points, open an account. Choose between a live account to trade CFDs straight away or practice first on our demo account with virtual funds.
  • Choose your financial instrument. Pivot Points can be applied in all financial markets, especially those that are more volatile, such as forex, cryptocurrencies, and stocks.
  • Explore our online trading platform. We offer a wide range of technical indicators that are not limited to Pivot Points, as well as providing a range of order execution tools for fast trading, which in turn helps you to manage risk.

The below strategies for trading with Pivot Points are merely guidance and cannot be relied on for profit.

Pivot Point as Support and Resistance

Support and resistance levels based on Pivot Points can be used just like traditional support and resistance levels. The key is to watch price action closely when these levels come into play. Should prices decline to support and then firm, traders can look for a successful test and bounce-off support.

Pivot Point as Support and Resistance
Source: CAPEX MT5

It often helps to look for a bullish Japanese candlestick pattern or indicator signal to confirm an upturn from support. Similarly, should prices advance to resistance and stall, traders can look for a failure at resistance and decline. Again, chartists should look for a bearish candle pattern or indicator signal to confirm a downturn from resistance.

Pivot Point as Support and Resistance
Source: CAPEX MT5

The second support and resistance levels can also be used to identify potentially overbought and oversold situations. A move above the second resistance level would show strength, but it would also indicate an overbought situation that could give way to a pullback. Similarly, a move below the second support would show weakness, but would also suggest a short-term oversold condition that could give way to a bounce.

Pivot points in forex

The forex market is open 24 hours a day during the week. The official forex trading day starts and ends at 5 PM Eastern Standard Time (EST) at the end of the US trading session. This is the daily close, yet most retail day traders have finished trading before that time, and the last couple of hours of the US session is typically quiet with not a lot of price fluctuations.

Forex pivot points are calculated based on the high and low for the entire 24-hour period, and the close at the end of the US session is used in most pivot point calculators. While the pivot point indicator can provide key areas to watch over the following 24-hour period, the levels are not always relevant to someone who is only trading during the London or US session. They are only trading a small portion of the day, yet using an indicator based on 24 hours of price action.

Pivot points can also be applied based on four-hour or hourly high, low, and closing prices (or any other timeframe), as opposed to daily figures. The chart below shows this for EUR/USD trading. On our platform, you can add pivot points to your price chart and change the timeframe of the indicator. This will provide more potential areas to watch during the 24-hour period. Over this 24-hour period, six sets of pivot points are generated. This may provide more potential trades or greater insight for forex day traders, in particular.

Pivot points in forex
Source: CAPEX MT5

Final words about Pivot Points

Pivot points are easily applied to a chart and are based on the high, low, and close prices of a particular timeframe, often in a one-day period. To create a pivot point trading system, a trader will need the indicator, a market or trading instrument of their choice, and a trading strategy. This includes an entry method, as well as a stop-loss and profit target.

The drawback of pivot points is that the daily pivot levels may not always be relevant to a day trader who is only trading for a short time during the day. Hourly high, low, and close prices can be used to generate more pivot points, yet these are arbitrary timeframes and may not always be useful.

Therefore, it is important to wait for a price action signal before trading off a pivot point. The engulfing patterns and chart pattern breakouts provide one other piece of evidence that the price is moving in a certain trend direction.

As with all indicators, it should only be used as part of a complete trading plan.

Free trading tools and resources

Remember, you should have some trading experience and knowledge before you decide to trade with indicators. You should consider using the educational resources we offer likeCAPEX Academyor ademo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader.

Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.

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