HOW TO USE PIVOT POINTS

PIVOT POINTS

Historically, pivot points are one of the most used technical tools by Forex traders regardless of their level of experience in the markets. Basically, as a price level that indicates the direction (or feeling) of the market, pivot points are indicators represented by a line in a price chart that divides support and resistance. If they are used properly, then they can be an essential tool for traders.

What Exactly are Pivot Points?

In short, pivot points (PP) are reference points that traders use to get an idea of how the market moves and if the financial instrument they are trading has an upward or downward trend. A bearish sentiment is formed when the price falls below the PP level and, on the contrary, the bulls are in control if the price is above the pivot points (PP) level.

To calculate the pivot points (PP), an average of the maximum, minimum and closing price of the last completed sail formation is made. This is its formula:

Pivot Point (PP) = (Previous Maximum + Previous Minimum + Previous Close) / 3

Once the PP is found, the resistance levels (R1, R2 and R3) and support (S1, S2 and S3) are calculated as follows:

R3 = Maximum + 2 * (PP – Minimum)

R2 = PP + Maximum – Minimum

R1 = 2 * PP – Minimum

PP

S1 = 2 * PP – Maximum

S2 = PP – (Maximum – Minimum)

S3 = Minimum – 2 * (Maximum – PP)

Depending on the movement of the price, each level of resistance and support can take on the role of a pivot point. So, for example, if the price breaks through the R1 barrier, traders can trust that it is a bull market and the probability of a potential gain increases. If the price continues to rise, R1 essentially becomes the support for R2, which assumes the role of R1 and so on.

Conversely, if the price moves below the PP, then all eyes will be on S1, while the PP essentially becomes R1. If the prices oscillate within this narrow space, between the PP and the S1, the currency traders can be found buying in the S1 and selling in the PP.

Here is another important tip: if the market seems bullish, a stop loss order below R1 would provide potential protection against unexpected price movements. After all, there is no technical tool in this world that can guarantee with absolute certainty in which direction the market will move!

PIVOT POINT METHODS

While most Forex traders and investors use the Standard method (described above) to calculate PP, technical traders today use four more methods. These are those of Fibonacci, DeMark, Woodie and Camarilla.

The Standard, Fibonacci and Woodie methods are similar in their formulas because all three take into account the closing, maximum and minimum prices of the previous period. Camarilla is different since it also takes into account the opening price of the current period, while the DeMark formula depends on the ratio between the opening and closing price of the previous period and does not take into account the main PP.

The distance between each level (whether PP, S or R) depends on the method used for the calculation and, as such, the amount of confidence deposited in each level differs according to the formula. Therefore, giving an adequate amount of weight to the market sentiment can be difficult for both experienced traders and beginners. With this in mind, they can be used as a pivot point strategy as an educational tool that is not based solely on pivot point calculations to determine the direction and sentiment of the market. Using data from the three most widely used indicators, the MACD (Moving Average Convergence Divergence), Impulse and Moving Average, the aim of the tool is to offer the trader a clearer overall picture of the market, so that he (or she) can take more informed decisions.