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- Calculation of Pivot Points
- Reading Pivot Points
- Trading with Pivot Points
- Trading with Pivot Points at AvaTrade
Pivot Points have been used by investors since the early days of technical analysis to map out quality support and resistance zones in the market. Investors have always actively sought areas where an underlying asset can find demand or supply.
These zones offer the best forex trading opportunities and clearly a reason why Pivot Points have passed the test of time and remain one of the most popular and effective technical analysis tools.
When plotted, the Pivot Points indicator derives multiple support and resistance lines, which can help traders determine optimal entry and exit points in the market.
Calculation of Pivot Points
The standard Pivot Points indicator that is available on most trading platforms consists of 7 lines: 3 support lines (S1, S2 and S3), 3 resistance lines (R1, R2 and R3) and 1 Pivot Point (PP). The PP acts as a reference point and is used in the computation of the other lines.
Here is the formula for calculating standard Pivot Points:
PP = (High + Low + Close)/3
S1 = (PP * 2) – High
S2 = PP – (High – Low)
S3 = Low – 2(High – PP)
R1 = (PP * 2) – Low
R2 = PP + (High – Low)
R3 = High + 2(PP – Low)
The above is the formula for calculating standard Pivot Points and it uses the High, Low and Close prices of the previous trading period. There are other variations of Pivot Points used by investors, but they all derive support and resistance lines that are watched for trading opportunities.
Here are the formulas for other Pivot Point variations:
Woodie Pivot Points
PP = (H + L + 2C) / 4
R2 = PP + High – Low
R1 = (2 X PP) – Low
S1 = (2 X PP) – High
S2 = PP – High + Low
As the calculations show, Woodie Pivot Points give more weight to the previous closing price when deriving the PP.
Camarilla Pivot Points
PP = (H + L + C) / 3
R4 = C + ((H-L) x 1.5000)
R3 = C + ((H-L) x 1.2500)
R2 = C + ((H-L) x 1.1666)
R1 = C + ((H-L) x 1.0833)
S1 = C – ((H-L) x 1.0833)
S2 = C – ((H-L) x 1.1666)
S3 = C – ((H-L) x 1.2500)
S4 = C – ((H-L) x 1.5000)
Where C = Closing Price, H = High and L = Low
As the calculations show, Camarilla Pivot Points focus more on the previous closing price rather than the PP. All support and resistance lines are derived using a multiplier, with the basic philosophy of Camarilla Pivot Points being that prices will tend to revert to the mean.
Fibonacci Pivot Points
PP = (H + L + C) / 3
R3 = PP + ((High – Low) x 1.000)
R2 = PP + ((High – Low) x .618)
R1 = PP + ((High – Low) x .382)
S1 = PP – ((High – Low) x .382)
S2 = PP – ((High – Low) x .618)
S3 = PP – ((High – Low) x 1.000)
Fibonacci PP are calculated in the same way as standard Pivot Points. The support and resistance levels are then derived by multiplying previous period ranges (High – Low) with corresponding Fibonacci levels, such as 38.2%. 61.8% and 100%.
Reading Pivot Points
Interpreting Pivot Points is very straight forward. PP provide a trend bias; prices above the PP imply a bullish bias; while prices below PP denote a bearish bias. The support and resistance lines provide definitive areas where traders will watch out for price action objectively.
This means that the lines can provide traders with trade entry and exit points. Pivot Points are pretty accurate and relevant because they use previous period price action to forecast probable current price behaviour.
Trading with Pivot Points
As mentioned, Pivot Points show trend direction as well as provide definitive areas to watch for demand and supply. As a trend indicator, Pivot Points aid primarily in sentimental analysis. Prices above PP indicate a bullish sentiment, while prices below PP indicate a bearish sentiment in the market.
Aside from trend bias, Pivot Points (as support and resistance lines) are traded using two strategies: Bounces and Breakouts.
When trading bounces, traders wait for the price to literally bounce off the pivot lines. By waiting for a bounce off of a support or resistance pivot line, traders get the necessary confirmation before placing a buy or sell order in the market. Traders can go long when prices bounce off support lines, or they can go short when prices bounce off resistance lines.
Still, support and resistance lines do not hold forever; which is why pivot lines can also be used to trade breakouts. It is important to watch out for price action around the pivot lines. As a rule of thumb, the more a pivot line (support or resistance) is tested, the weaker it becomes. A breakout, therefore, illustrates that the price has gained momentum in the direction of the new trend. For instance, if the price is above the PP, and manages to break above R1, traders can place aggressive buy orders with anticipation of a momentous bull trend.
When trading, Pivot Points can also be used to place objective stop loss and take profit levels. For instance, when prices are above PP, resistance lines can act as objective Take Profit orders, whereas Stop Losses can be placed below support lines.
When using Pivot Points, it is important to understand that support and resistance lines are action areas. When watching the lines, it is important to trade after confirmation is received. Pivot Points can be used together with the Fibonacci tool, candlestick patterns such as pin bars and Marubozu, as well as indicators such as Oscillators that will provide a confluence of signals for high probability trades.
Trading with Pivot Points at AvaTrade
Here is why you should trade with the powerful and effective Pivot Points indicator at AvaTrade:
- Licensed and Regulated. AvaTrade has achieved regulatory approval in 5 jurisdictions across the world.
- Numerous Indicators. Pivot Points deliver quality, high probability signals when combined with other indicators. AvaTrade has a selection of over 150 indicators you can combine with Pivot Points to enhance your trade analysis.
- Advanced Trading Platforms. AvaTrade’s platforms have advanced charting capabilities to allow for the accurate plotting of pivot lines for efficient trading.
- Demo Account. AvaTrade offers a free demo account so traders can try out strategies, such as Pivot Points, in the market without any monetary risks.
Main Pivot Points Trading Strategies FAQ
What are Pivot Points?Pivot Points are used to predict the support and resistance levels in trading sessions for financial markets. These support and resistance levels are then used to determine entry and exits from positions, as well as where to place stop loss orders and where to place limit orders to take profits. In general when the market is trading above the pivot point it indicates bullish market sentiment, and when it trades below the pivot point it is bearish market sentiment.
How do you trade with Pivot Points?Pivot points can be used by traders in two different ways. The first is for determining the broader market trend. This is useful because it lets a trader know whether market sentiment is bullish or bearish. The second way is in determining suitable entry and exit points in trades. These come from the support and resistance levels indicated by the Pivot Points. Traders can make the signals given by Pivot Points even more accurate by combining this indicator with others such as moving averages or the MACD.
Which Pivot Points are best for day trading?The Pivot Points are calculated using the previous day’s high, low, and close and don’t change throughout the trading session. The basic pivot point in the middle is the most important as it sets the level at which the market is equilibrium. Above this level indicates bullishness and below it indicates bearishness. Because day trading typically looks to capture smaller moves the R1 and S1 levels are most important as resistance and support. The R2 and S2 levels can also be considered quite important as they denote where breakouts are likely to occur.
** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.