Pivot points are widely used by pro traders, they can spot direction, potential support and resistance and also probable reversal points. A lot of newcomers want to try them because their mathematical formulas are simple for understanding.
The pivot points now are different from that were in the past. If earlier we could see only monthly, weekly and daily calculations, now it is possible to calculate pivot point on smaller timeframes.
For calculating future support and resistance levels and the direction of current period pivot points fix on open and close, high and low prices.
There is a special formula which helps to identify possible turning points on current candlesticks:
Resistance 3 = High + 2*(PP – Low)
Resistance 2 = PP + High – Low
Resistance 1 = 2*PP – Low
Pivot Point(PP) = (High + Low + Close) / 3
Support 1 = 2*PP – High
Support 2 = PP – (High – Low)
Support 3 = Low – 2*(High-PP)
First of all, calculate the main pivot point. After that, using ((High + Low + Close) / 3) – the most recent candlestick’s typical price, calculate possible support and resistance levels.
Use support and resistance levels and the pivot point together and you will get an intraday “guide” to the financial markets.
There is a rule that the prices are likely to move in an upwards direction when the market is moving in a bullish direction, i.e. when prices are above the pivot point. And, contrarily, if prices are below the pivot point and the direction is bearish, the prices are likely to continue moving in a downward direction.
How to Trade With Pivot Points
How to become rich fast? You need to get higher resistance levels for gaining more profit opportunities. The resistance of the first level (R1) can be met when long positions are opened above the pivot point. The higher the resistance levels are the more opportunities you get. There is a risk of unexpected volatility, that is why for avoiding losses we recommend to set a protective stop-loss below the pivot point.
Vice versa, the support of the first level (R1) can be met when short positions are opened below the pivot point. The lower the support levels are the more opportunities you get. There is a risk of unexpected volatility, that is why for avoiding losses we recommend to set a protective stop-loss above the pivot point.
Between the pivot point and the first level resistance there are sideways movements, range traders have here buy and sell opportunities. The prices move from the pivot point and return back from R1.
The pivot point can support the prices when they go above R1 and move to R2. If the prices go below the pivot point, there is an opportunity they will drop further towards S1 and the pivot point will work as resistance.
On the other hand, the prices can meet the support of the first level and move back to the pivot point.
Sellers and buyers will have different opportunities depending on the situation. When prices are in a range, in other words, between the pivot point and the support of the first level, and the prices bounce off S1 – buyers can have some profits. Vice versa, when prices bounce back from the pivot point there is a probability of opportunities for sellers.
Except for the Standard method of the pivot point calculating there are four more of them.
Camarilla, Fibonacci and Woodie’s techniques are based on the high, low and close prices of the previous period. While the DeMark’s formula is based on using the connection between the open and close price, it uses three different formulas and defines one of them to calculate N in the suitable pivot point calculation. And Camarilla, for example, is based on the open price in the pivot point of the current period.
What technique to use depends on the pivot point, the distance between each point, support and resistance, and the weight assigned to each level.
To Sum Up
The pivot point is very popular among traders and often used in forex trading because it is very easy to understand the future direction of the market using it.
When prices go above the pivot point the market is bullish when the prices are below – the market is bearish.
The pivot point calculates levels of support and resistance. Before the prices will trade sideways or go above and below a range, they may halt in support and resistance.
In the end, we want to say an obvious thing, that every trader should understand that there is no perfect tool for making money online. The best solution is to use a combination of them to prove everything calculated by different tools.