Taking Advantage of the Pivot Point

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Taking Advantage of the Pivot Point

I started watching the USD/CHF right after 1:30AM EST and price was hovering just below the pivot level of 0.94204 (purple line). Of course, with price under that level that would suggest that the pivot could provide an area for put options, with the expectation that price would come up, bounce off, and continue lower.

I was able to get into a put option on the 1:50 candle, which ended up as a small red doji, which is usually a potential candlestick reversal signal. As always, I didn’t just trade the first touch of the level. I waited for an initial touch of the pivot on the 1:45 candlestick, which closed right at 0.94204. I got into the put option right near the beginning of the 1:50 candle when price was simply staying put right at around the pivot point. The next candle, which also happened to be the expiration candle, actually turned out to be green, so this trade finished as a one-pip loser. However, you can see from the below screenshot that my belief that we would see some resistance at the pivot (hence my reason for taking the put option) eventually turned out to be true and price began to retrace back down. But quite a few trades do turn out that way – your general expectation about where the market is headed is correct yet you fall victim to a too-soon expiry. Of course, a lot of the time the opposite has held true and your trade finishes ITM just in time before it starts going against you. It works both ways.

After that, I began considering 0.94131 as an area for call options based on the level of support that had formed there earlier. This was also before the European session even opened up, so price levels tend to be respected a bit more than in more volatile sessions (e.g., European/U.S. Crossover). The 0.94131 level was touched on the 2:10 candle, before getting a decent bullish 2:15 candle. Price rejected the level again on the 2:20 candle, so I got into the call option at the touch of the 2:25 candle when I was finally confident in the level holding.

In the meantime, I was actually able to get into another put option pivot level trade on the 2:40 candle after rejection on the 2:35. In essence I was basically playing bounces off support and resistance within the channel that had been formed between 0.94131 and 0.94204 (pivot level). My call option trade (taken at 0.94131) won by about two pips, while my put option trade (taken at the pivot) won by almost ten pips and broke the 0.94131 support in the process.

After these trades, price continued lower to 0.94079 before heading back up to the pivot level once again. Oftentimes, when the market is hitting a certain price level multiple times, it can be an indication that it could break through. But in this case, being the USD/CHF had actually just made a new low for the morning, it was signaling that an actual downtrend could construct itself instead. When price touched the pivot level on the 3:30 candle, it went about 2-3 pips above it before wicking back down below. I got in a put option on the 3:35 candle on the re-touch of 0.94204 and had an eight-pip winner by expiration.

After the retrace back down from the pivot, it reached the low for the day at 0.94079 just before 4:00. However, I was not interested in taking a put option here for a couple of reasons:

a. the trend was giving evidence of a downward bias by making a new low for the morning;

b. when price re-touched 0.94079 on the 3:50 candle, downward momentum was relatively strong; and c. the 61.8% Fibonacci retracement (relevant to the price move 0.91748-0.97500) was sitting underneath that area. The market has a tendency to gravitate to notable Fibonacci areas as banks like to test the liquidity at those price levels. Therefore, I did not take a put option at 0.94079 and itstead waited for potential call option set-ups at the 61.8% Fibonacci level.

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

Pivot points are one of the most widely used indicators in day trading. The tool provides a specialized plot of seven support and resistance levels intended to find intraday turning points in the market.

Below is a view of how they appear on a one-hour chart of the AUD/JPY currency pair. All seven levels are within view.

While traders often find their own support and resistance levels by finding previous turning points in the market, pivot points plot automatically on a daily basis. Since many market participants track these levels, price tends to react to them.

Calculation of Pivot Points

Pivots points can be calculated for various timeframes in some charting software programs that allow you to customize the indicator. For example, some programs may allow you to calculate pivots points for a weekly or monthly interval. But the standard indicator is plotted on the daily level.

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, R3, respectively.

These values are calculated as follows:

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

Uses of Pivot Points

Pivot points were initially used on stocks and in futures markets, though the indicator has been widely adapted to day trading the forex market.

Pivot points have the advantage of being a leading indicator, meaning traders can use the indicator to gauge potential turning points in the market ahead of time. They can either act as trade entry targets themselves by using them as support or resistance, or as levels for stop-losses and/or take-profit levels.

For example, below we can see multiple cases of S1 acting as support.

The pivot point, being the middle line and the level off which everything else is calculated, is the primary focus. If price is trading above the pivot point, market sentiment might be considered bullish for the day (even though it’s still possible for a market to be down for the day if this is true).

If the market is flat, price may ebb and flow around the pivot point. We can observe this type of price behavior in the chart below.

Though R1, R2, and R3 are termed in the sense that they may likely act as resistance as the market rises, if price runs above them they can also act as support if price were to move down. The same holds true for S1, S2, and S3, which can act as resistance on any move back up when they break as support.

For instance, here we see a resistance level acting as support.

Using Pivot Points for Gauging Probabilities

Pivot points are also used by some traders to estimate the probability of a price move sustaining itself. Though it depends on the market, the following probabilities are generally reported in terms of how likely price is to close the trading day above or below the following levels:

  • Closes higher than R1 40% of the time
  • Closes lower than S1 40% of the time
  • Closes higher than R2 15% of the time
  • Closes lower than S2 15% of the time
  • Closes higher than R3 5% of the time
  • Closes lower than S3 5% of the time

These, of course, are simply rough approximations. Simply because price is moving above or below the outer levels doesn’t necessarily mean the moves aren’t valid or sustainable. For example, it should never be assumed that, based on the above information, that you have an 85% chance of winning a trade if you take a long position when price hits S2. That certainly will not be true on its own.

Pivot Points as Stop Losses

Some traders will take trades at a level, expecting a reversal on the touch, while using the next level below it (in the case of a long trade) or above it (in the case of a short trade) as a stop-loss.

Here we see a short entry at R1 and a stop-loss at R2.

Trading Using Pivot Points

At this point, it should seem fairly straightforward that pivot points are used as prospective turning points in the market. Taking trades at these levels in the direction of the expected reversal is a very common technical strategy.

To improve the viability of this strategy, traders will tie the pivot points strategy to other indicators. For instance, one might use a 50-period simple moving average to gauge the trend and bias one’s trades only in the direction of that trend.

Moreover, instead of taking the first touch of a pivot level, one might require a secondary touch for confirmation that the level is valid as a turning point. Below is an example of why “confirming” the validity of a level is best before taking a trade on a basic touch. This is a five-minute chart of the EUR/USD.

When data or news is coming out, volume markedly picks up and the previous trading movement and intraday support and resistance levels can quickly become obsolete. On the big green bar, price did indeed hold between the two pivot levels. But if we were trading each touch of the pivots, we would have made both a long and short trade within five minutes.

After that point, the market became firmly bearish and fell steadily, showing no sensitivity to pivot points.

So you need to be careful and make sure you aren’t trying to trade levels that the market has no intention of respecting when big volume is present in the market.

If we were to write out our rules for this system:

1. a) If the 50-period simple moving average is positively sloped, take long trades only.

b) If the 50-period simple moving average is negatively sloped, take short trades only.

2. Take trades upon a secondary touch of the pivot level after first affirming that the primary touch is a rejection of the level.

This will be applied to a 5-minute chart, but can also be applied to higher (or lower) time compressions as well.

For day traders, who use daily pivot points, using the 5-minute to hourly chart is most reasonable. Swing traders might use weekly pivot points would be best to apply the strategy on the four-hour to daily chart. Position traders would probably best be suited to use monthly pivot points on either the daily or weekly chart.

But this is a fairly simple system that can be effective.

Example

Here we have a 5-minute chart of the EUR/USD currency pair.

Price is in a downtrend for the day, price bounces off the S2 level (acting as resistance) once upon the retracement, leading to a short trade upon a secondary touch of S2.

This trade worked itself out well, after continuing the downtrend shortly thereafter.

Now, of course, the question is, how do you determine where to get out?

Before placing a trade, you have to have an exit plan. This can take multiple forms.

Several options are displayed in the diagram below.

A level of resistance forms shortly after the trade begins moving in our direction. Naturally, expecting resistance to form there again in the future can be reasonable.

Moreover, if price begins consolidating and any momentum in the trend – or volume in the market as a whole – has faded, then we can simply choose to exit the trade then.

Or we can take a touch of the moving average. Some traders use some of the more popular moving averages – 50-, 100-, and/or 200-period – as support and resistance levels or consider a change in the trend if price were to get above whichever moving average is being tracked.

A natural take-profit in a pivot points system is also, of course, at the next level in the hierarchy. In this case, if we’re taking a short trade at S2, our take-profit level might be S3. But as aforementioned, getting to the outermost levels, like S3 and R3, is generally rare.

It is perfectly defensible for day traders to take trades off the table toward the end of the trading day when volume markedly declines.

A Word on Time Zones

It should also be noted that pivot points are sensitive to time zones. Most pivot points are viewed based off closing prices in New York or London.

Therefore, someone using charting software using a closing time based in San Francisco or Tokyo or some other time zone may have different pivot points plotted on their chart that may not be followed on any large scale internationally. This could potentially render them of muted or no value.

Accordingly, it’s recommended that your charting times are set to either New York hours or London hours. How these relate to GMT or UTC specifically depends on where each is in the calendar, as both cities employ daylight savings time.

Whichever time zone you choose, know that pivot points can be backtested by going through previous price data. It is important to ensure that price is sensitive to these levels in the market you’re trading.

Conclusion

Pivot points provide a glance at potential future support and resistance levels in the market. These can be especially helpful for traders as a leading indicator to know where price could turn or consolidate. They can also be used as stop-loss or take-profit levels.

While daily pivot points are the most common and most appropriate for day traders, some charting platforms will allow you to plot them for other timeframes as well (e.g., weekly, monthly).

As with all indicators, they should not be used as the only thing that you’re basing your trades on. They should be used in addition to other forms of analysis and/or other technical indicators.

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