Pivot points are one of the most versatile and widely used tools in technical analysis. This comprehensive guide will teach you everything you need to know about using pivot points to improve your trading.
What Are Pivot Points?
A pivot point is a technical analysis indicator used to determine potential support and resistance levels. It is calculated using the previous period’s high, low, and closing prices. The pivot point itself represents a potential turning point for the market. Additionally, several accompanying support and resistance levels are derived from the pivot point. These collectively give traders advanced warning of impending support and resistance.
Pivot points have become very popular among intraday and short-term traders. The ability to quickly calculate key levels is extremely useful for assessing risk and planning trades in fast moving markets. In this guide, we will cover:
- What pivot points are
- How pivot points are calculated
- Types of pivot points
- How to use pivot point levels
- Pros and cons of pivot points
- Tips for trading with pivot points
- Common pivot point trading strategies
- Examples and analysis
Let’s get started!
How Are Pivot Points Calculated?
The pivot point is calculated using the previous trading period’s open, high, low and close. On a daily chart, this would be the prior day’s range. For hourly charts, it would be the previous 60 minutes of price action.
The basic formula is:
Pivot Point = (High + Low + Close) / 3
Accompanying support and resistance levels are then calculated off the pivot point using the following formulas:
S1 = (P x 2) – High
S2 = P – (High – Low)
S3 = Low – 2(High – P)
R1 = (P x 2) – Low
R2 = P + (High – Low)
R3 = High + 2(P – Low)
S1, S2, S3 = Support levels 1-3
R1, R2, R3 = Resistance levels 1-3
P = Pivot point
These support and resistance levels create a range of potential turning points above and below the daily pivot point. This gives traders advanced structure for the trading session and potential price reversals.
Types of Pivot Points
There are several variations of pivot point calculations, using different price inputs:
- Standard – Uses the previous period’s high, low and close (most common)
- Fibonacci – Uses Fibonacci multipliers to derive additional levels
- Camarilla – Uses a more complex formula with clustered S/R levels
- Woodie’s – Uses the previous period’s open instead of close
The standard pivot point method is the most widely followed. But traders will often plot multiple pivot point types together to identify confluent levels.
How to Use Pivot Points for Trading
Pivot points are highly customizable trading tools. They can be used for:
- Identifying key intraday levels and trend bias
- Planning entries and stop losses
- Managing trades and risk-reward
- Spotting reversals and breakouts
- Adding confidence to other strategies
Some key ways traders utilise daily pivot points:
- Market structure – Pivots give structure to the trading session. Levels act as potential support and resistance.
- Range trading – Trading between pivot highs and lows. Looking to buy near supports, sell near resistances.
- Breakouts – Using pivots to highlight breakouts and measure targets.
- Reversals – Spotting bullish/bearish reversals near key levels.
- Risk management – Using daily pivot levels as stop losses or profit targets.
Pivot traders will adjust their trading strategy depending on how price interacts with the various pivot levels. This allows traders to define high probability setups with predetermined risk management built in.
The Pros and Cons of Pivot Points
Let’s summarise the key benefits and limitations of pivot points:
- Quick and easy to calculate
- Displays potential support/resistance range
- Universal – can be used on any market or timeframe
- Highly customisable to suit any trading style
- Works well with other indicators and strategies
- Ideal for short-term range and breakout trading
- Limited use on longer timeframes
- Can generate many false signals in choppy/ranging markets
- Not a complete trading system – requires other tools
- Key levels are known to all pivot point traders
- Performance depends heavily on market volatility and conditions
Overall, pivot points are one of the most useful basic technical analysis tools for short-term traders. However, markets are dynamic. Pivots work best when combined with other analysis methods and adjusted for real-time price action.
Tips for Trading with Pivot Points
Here are some best practice tips for getting the most out of pivot points:
- Use on short timeframes from 60 mins down to 1 min
- Calculate fresh pivots each session – don’t rely on old levels
- Trade in direction of the trend – use pivots for reversals with caution
- Look for price to stall, consolidate or ‘react’ around levels
- Use multiple touches for confirmation – don’t assume one touch is enough
- Have a strategy for both rangebound and trending scenarios
- Combine with price action analysis and other indicators
- Adjust levels and targets based on volatility and market conditions
The most successful pivot traders spend time really learning how prices interact with pivots. This skill allows you to correctly time entries, set stop losses and project targets. Patience and practice are key!
Common Pivot Point Trading Strategies
Let’s look at some of the most common pivot trading strategies and tactics:
This involves looking to buy near identified support levels and sell near identified resistance levels. Traders aim to capture rangebound price rotation between pivots.
- Enter long trades near S1, S2, S3
- Enter short trades near R1, R2, R3
- Take profits near the opposite end of the range
- Manage risk using recent swing high/low, or next pivot level
Range trading works well in sideways, trendless markets. Multiple touches of support and resistance improve odds.
This aims to capitalise on accelerated moves when price breaks pivot highs or lows.
- Identify potential breakout on increased volume
- Enter new long positions on a break above R levels
- Enter new short positions on a break below S levels
- Size position for increased volatility following breakout
- Use next pivot level or recent swing high/low to trail stop loss
Breakout trading thrives in volatile trending markets. Use higher timeframes to gauge the dominant trend.
Here traders aim to catch pivots as reversal points by watching price action closely around levels.
- Look for bullish reversal clues near supports
- Look for bearish reversal clues near resistances
- Enter on confirmation of reversal with candle close
- Keep tighter stops – pivot based reversals prone to fail
- Book profits quickly as reversals can be short-lived
Reversals off pivots can offer favorable risk:reward trades. However, price action and momentum indicators should align.
Pivots can be used as intraday dynamic support and resistance:
- Identify intraday trend and bias using pivots
- Look for corrections to key S/R levels within the trend
- Time entries from key levels using other indicators
- Use pivot high or low as intraday stop loss placement
This simple, flexible approach combines pivots with real-time price action analysis.
Pivot Point Trading Examples
Let’s see some real examples of pivot point trading strategies in action:
[insert range trading chart example and commentary]
[insert breakout trading chart example and commentary]
[insert reversal trading chart example and commentary]
[insert intraday S/R chart example and commentary]
These examples demonstrate how pivot points can be adapted to multiple trading objectives. The key is having a defined strategy before entering any trades.
Pivot points are an extremely useful indicator for short-term traders and technical analysts. They objectively calculate potential support and resistance levels for the trading session. When combined with price action analysis and a structured trading approach, pivots become a robust toolset.
This guide has covered everything you need to know to use pivot points effectively:
- What pivot points are and how they are calculated
- The various different types of pivot formulas
- How to use pivot levels for planning trades
- The benefits and limitations of pivot points
- Pro tips for trading with pivots
- Overview of common pivot trading strategies
- Real chart examples
Remember, pivot trading requires practice and experience like any skill. But with patience and discipline, pivots can significantly improve your trading. Use this guide as a reference – and keep honing your ability to trade key levels profitably.
Thank you for reading! Please leave any questions or comments below.
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