Pivot Points were created by parket traders on commodity markets. Today they are still used for futures trading, as well as Forex and Indices trading. Their aim is to set the Support and Resistance levels for the traded assets. They are still more and more popular as an indicator of technical analysis.
The Pivot Points are mainly used on markets with wide High/Low range. Such markets are very volatile.
Pivot Points calculation looks like follows:
PP = [(H + L + C) / 3] or[(H + L) / 2] or[(O n+1 + H + L + C) / 4]
R1 = 2*PP – L
R2 = PP + H – L
R3 = 2*PP + H – 2*L
S1 = 2*PP – H
S2 = PP – H + L
S3 = 2*PP + L – 2*H
S1, S2, S3 = First, Second, Third level of Support
R1, R2, R3 = First, Second, Third level of Resistance
O, H, L, C = Open, High, Low, Close
Pivot Points can be calculated on any time period. The calculation doesn't have to be in days. It can be based on weeks, months or e.g. 30-minutes graphs. If two Pivot Points, calculated on different time scales, do meet on the same level, such Pivot Point becomes much stronger. That's the reason why it is recommended to calculate them on more time scales, to confirm our trade decisions.
How to use the Pivot points:
It is important to realize that Pivot points calculated from today's prices are valid for the next day. Pivot point represents Support or Resisstance. If the price breaks through PP downwards, the crossed PP becomes Resistance. There are 3 basic levels of Support below the Pivot Point. The price can bounce off these supports upwards. The analogy is true should the price cross the Pivot point upwards. Then the Pivot Point becomes Support for the price and it can bounce downwards mainly on the 3 basic Resistance levels.
We shouldn't enter trades immediately after the Price/Pivot Point crossing. There is a possibility of testing this Pivot point level and its strength again. The price moves in the desired direction just after such testing.
As you may understood from the section above, the Pivot Points are primarily used to identify:
- when to enter a trade,
- where to place our Stop Loss and
- where to place our Profit Target.
Note: There is more ways how to calculate the Pivot Points. You can choose from Fibonacci, Camarilla, Woodies Pivot Points etc. You don't have to calculate it yourself, just click here.