Traders use pivot points as an orientation for entering and exiting trades or even as the basis for your trading strategy. Here you can find out how pivot points are calculated and various ways in which you can incorporate them within your trading. The pivot points can be used particularly well for intraday trading. Pivot points are especially useful to short-term 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.
What are Pivot Points?
The pivot points are used by both private and institutional traders, which means that these levels are, of course, observed by many market participants, and there can be opportunities for placing trades based around these price levels.
But let’s start with the basics and a little explanation of what these points are and how they are calculated before we look at how they can be used to form a trading strategy and to generate trading signals.
Initially, these points came from a time when computers were not yet able to take over all of calculations, and it was relatively easy to calculate zones for orientation for the trading day by hand without a large amount of data. The fact that such an old method has survived to this day despite all the possibilities that computers have, it can emphasise the importance of pivot points.
Pivot Point basics
Pivot points are horizontal support or resistance lines in the chart. There is the so-called main pivot point and two additional (some programs also use three) support and resistance lines.
The support lines are shown in the chart as S1 and S2. The abbreviation “S” stands for “support”.
The resistance lines are shown in the chart as R1 and R2. The abbreviation “R” stands for resistance.
How to use Pivot Points?
These points can mark a turning point at which the technical sentiment changes from bullish to bearish or vice versa. You can also use the points to get a rough estimate of the current market situation at a glance.
A price above the main pivot point indicates that the current sentiment is slightly bullish. If the current price is below the main pivot point, the trend is somewhat bearish.
If the underlying breaks through the pivot point upwards, this is interpreted as a bullish signal, if it breaks downwards through the pivot point, this is explained in reverse and interpreted as a bearish signal.
The above support and resistance lines (S1, S2, S3 R1, R2 and R3) can be used, for example, to look for a stop loss or take profit placement before a trade.
The data from the previous trading day is always required for the calculation of these points and zones shown in the next section.
As we can see in the chart below, these are precisely the brands that are drawn by the program. The exact values of the respective line are shown in on the left-hand edge.
Legend for the chart:
Magenta = main pivot point
Red lines = resistance zones
Blue lines = support zones
From the example above in the XAUUSD, you can also clearly see in the chart how the lower resistance level (R1) served well as resistance. The course came over the level briefly, but could not close above it and then it went in the opposite direction again.
You have also noticed in the above chart that the price broke below the main pivot point (magenta line) which signaled as a bearish sign. But the fall in price saw a halt at S1 level where it retraced a little in upward direction.
Extensions in Pivot Points
Some traders also use so-called mid pivots, which are exactly in the middle of the respective pivot points and R / S brands.
- The mid-pivot between the S1 and S2 levels is called M1,
- The mid-pivot between S1 and the main pivot point as M2,
- The mid-pivot between the first resistance level R1 and the main pivot point as M3
- and finally, the mid-pivot between the two resistors R1 and R2 referred to as M4.
Pivot Points trading strategy
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, the price will test the levels repeatedly. The more times a currency pair touches a pivot level then reverses, the stronger the level is.
The key points for using pivot point indicator are:
- Long bias if the price is above the main pivot point
- Short bias if the price is below the main pivot point
- Can be used to place SL and TP
- Can be used for break out and reversal trading strategies
- The more a pivot point holds up, the stronger that level could be
Let’s demonstrate a potential short trade setup in the chart below:
As the price broke pivot point level in the gold chart, we pointed a potential short entry. Our take profit zone would be the S1 level while our stop loss could be M1. However, this stop loss is considered aggressive. Conservative traders may place their stop loss slightly above the R1 level.
Now look at the potential buy setup:
As you the chart of USDCAD, the price broke above the main pivot point line and triggered a potential buy entry. The aggressive stop loss could be the midline below the pivot point while conservative traders can opt for a stop loss level slightly below the S1 level. The profit target can be R1 level for aggressive traders while swing traders may wait for the price to reach R2 as their take profit level.
A disadvantage of the pivot points that should always be considered is that the different brokers can have different daily closing prices which means that traders can be looking at different pivot points. Therefore, I personally would not trade pivot points without conducting further market analysis.
Pivot Points conclusion
Pivot points have been a classic trading indicator that helps in technical analysis for spotting important price levels for entering and exiting positions. Multiple levels also help the traders in understanding the extent of a trend and potential retracements as well.
Pivot points have predictive qualities, so they are considered leading indicators to traders. The main pivot point is the most important price level for the day. Essentially, it represents the balance between bullish and bearish forces.
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