Pivot points:

A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.

The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.

In many ways, forex pivot points are very similar to Fibonacci levels. Because so many people are looking at those levels, they almost become self-fulfilling.

The major difference between the two is that with Fibonacci, there is still some subjectivity involved in picking Swing Highs and Swing Lows.

Pivot points are especially useful to intraday traders who are looking to take advantage of small price movements.
Just like normal support and resistance levels, forex traders can choose to trade the bounce or the break of these levels.

Range-bound traders use pivot points to identify reversal points. They see pivot points as areas where they can place their buy or sell orders.

Breakout forex traders use pivot points to recognize key levels that need to be broken for a move to be classified as a real deal breakout.

Here is an example of pivot points plotted on a 1-hour EUR/USD chart

Pivot Point Lingo: Here’s quick rundown on what those acronyms mean

• PP stands for Pivot Point
• S stands for Support
• R stands for Resistance

But don’t get too caught up in thinking “S1 has to be support” or “R1 has to be resistance.

How to Calculate Pivot Points

The first thing you’re going to learn is how to calculate pivot point levels.

The pivot point and associated support and resistance levels are calculated by using the last trading session’s open, high, low, and close.

These are basically mini levels between the main pivot point and support and resistance levels.

If you hated algebra, have no fear because you don’t have to perform these calculations yourself. This Indicator is available in Market.

How to use Pivot Points for Range Trading

The simplest way to use pivot point levels in your forex trading is to use them just like your regular support and resistance levels.

Just like good ole support and resistance, price will test the levels repeatedly.

The more frequently a currency pair touches a pivot level then reverses, the stronger the level is.

Actually, “pivoting” simply means reaching a support or resistance level and then reversing.
If you see that a pivot level is holding, this could give you some good trading opportunities.

• If price is nearing the upper resistance level, you could SELL the pair and place a stop just above the resistance.
• If price is nearing a support level, you could BUY and put your stop just below the level.

Let’s take a look at an example so you can visualize this. Here’s a 15-minute chart of GBP/USD.

In the chart above, you see that price is testing the S1 support level.

If you think it will hold, what you can do is buy at market and then put a stop loss order past the next support level.

If you’re conservative, you can set a wide stop just below S2. If price reaches past S2, chances are it won’t be coming back up, as both S1 and S2 could become resistance levels.

If you’re a little more aggressive and confident that support at S1 would hold, you can set your stop just below S1.

As for your take profit points, you could target PP or R1, which could also provide some sort of resistance. Let’s see what happened if you bought at market.

For example, if you see that a double bottom candlestick has formed over S1, or that the stochastic oscillator indicator is indicating oversold conditions, like that check some parameters for additional confirmation, then the odds are higher that S1 will hold as support.

Also, most of the time, trading normally takes place between the first support and resistance levels.

Occasionally, price will test the second levels and every once in a while, the third levels will be tested.

How to use Pivot Points to Trade Breakouts
Just like your normal support and resistance levels, pivot point levels won’t hold forever.

Using pivot points for range trading will work, but not all the time. During the times that these levels fail to hold, you should have some tools ready in your forex toolbox to take advantage of the situation!

As we showed you earlier, there are two main ways to trade breakouts: the aggressive way or the safe way. Either method will work just fine. Just always remember that if you take the safe way, which means waiting for a retest of support or resistance, you may miss out on the initial move.

Using Pivot Points to Trade Potential Breakouts

Let’s take a look at a chart to see potential breakout trades using pivot points. Below is a 15-minute chart of EUR/USD.

Here we see EUR/USD made a strong rally throughout the day.

We see that EUR/USD opened by gapping up above the pivot point. Price made a strong move up, before pausing slightly at R1. Eventually, resistance broke and the pair jumped up by 50 pips!

If you had taken the aggressive method, you would have caught the initial move and been celebrating like you just won the World Cup.

On the other hand, if you had taken the safe way and waited for a retest, you would have been one sad little trader. The price did not retest after breaking R1. In fact, the same thing happened for both R1 and R2

Notice how EUR/USD bulls tried to make a run for R3 as well.

However, if you had taken the aggressive method, you would have gotten caught up in a fake out as the price failed to sustain the initial break. If your stop was too tight, then you would have gotten stopped out.

Later on though, you’ll see that the price eventually broke through. Notice how there was also a retest of the broken resistance line.

Also, observe how when the pair reversed later in the day and broke down past R3. There was an opportunity to take a short on the retest of resistance-turned-support-turned resistance (read that again if you have to!).

“Role Reversal”

Remember that, when support levels break, they usually turn into resistance levels also applies to broken resistance levels which become support levels. These would have been good opportunities to take the “I think I’ll play it safe” method.

Where do you place stops and pick targets with breakouts?
One of the difficult things about taking breakout trades is picking a spot to place your stop.

Unlike range trading where you are looking for breaks of pivot point support and resistance levels, you are looking for strong fast moves.

If you were going long and price broke R1, you could place your stop just below R1.

Let’s go back to that EUR/USD chart to see where you could place your stops.

As for setting targets, you would typically aim for the next pivot point support or resistance level as your take profit point.

It’s very rare that price will break past all the pivot point levels unless a big economic event or surprise news comes out.

Let’s go back to that EUR/USD chart to see where you would put those stops and take profit.

If you believed that price would continue to rise, you could keep your position and move your stop manually to see if the move would continue. You’d have to watch carefully and adjust accordingly. You’ll learn more about this in later lessons.

As with any method or indicator, you have to be aware of the risks with taking breakout trades.

First of all, you have no idea whether or not the move will continue. You might enter thinking that price will continue to rise, but instead, you catch a top or bottom, which means that you’ve been faked out!

Second, you won’t be sure if it’s a true breakout or just wild moves caused by the release of important news. Spikes in volatility are a common occurrence during news events, so be sure to keep up with breaking news and be aware of what’s on the economic calendar for the day or week.

Lastly, just like in range trading, it would be best to pop on other key support and resistance levels. You might be thinking that R1 is breaking, but you failed to notice a strong resistance level just past R1. Price may break past R1, test the resistance and just fall back down.

After reading this, I hope you get the clear idea about pivot point calculation like how it works and how to use it.

Though this method is used by most traders some traders also use different types of pivot calculations. A few other types of pivot points are listed for your reference.

Note: Ideology of all pivot types is similar only the calculation method varies.

Pivot Points Types

• Standard Pivot Point
• Woodie Pivot Point
• Camarilla Pivot Point
• Fibonacci Pivot Point
• Demark Pivot Point
• Frank Pivot Point
• Shadow Pivot Point
• The Central Pivot Range

Which pivot point method is best?

As I already said standard pivot point calculation is used by most of the traders but it doesn’t mean it is the best, you can refer and analyse all types and find which one works better for your trading style.

However the truth is, just like all the variations of all the other indicators that you’ve learned so far, there is no single best method.

It really all depends on how you combine your knowledge of pivot points with all the other tools in your forex trading toolbox.

Just know that most charting software that do automatic calculations normally use the standard method in calculating for the pivot point levels.

But now that you know how to calculate for these levels on your own, you can give them all a swing and see which one works best for you.

Summary: Pivot Points

Here re some easy-to-memorize tips that will help you to make smart pivot point trading decisions:

Pivot points are a technique used by many traders to help determine potential support and resistance areas.

Pivot points can be used by range, breakout, and trend traders.

• Range-bound traders will enter a buy order near identified levels of support and a sell order when the pair nears resistance.
• Pivot points also allow breakout traders to identify key levels that need to be broken for a move to qualify as a strong momentum move.
• Sentiment (or trend) traders use pivot points to help determine the bullishness or bearishness of a trading instrument.

The simplicity of pivot points definitely makes them a useful tool to add to your trading toolbox.