- Calculation of Pivot Points
- Reading Pivot Points
- Trading with Pivot Points
- Trading with Pivot Points at AvaTrade
Pivot Points have been used by investors since the early days of technical analysis to map out quality support and resistance zones in the market. Investors have always actively sought areas where an underlying asset can find demand or supply.
These zones offer the best trading opportunities and clearly a reason why Pivot Points have passed the test of time and remain one of the most popular and effective technical analysis tools.
When plotted, the Pivot Points indicator derives multiple support and resistance lines, which can help traders determine optimal entry and exit points in the market.
Calculation of Pivot Points
The standard Pivot Points indicator that is available on most trading platforms consists of 7 lines: 3 support lines (S1, S2 and S3), 3 resistance lines (R1, R2 and R3) and 1 Pivot Point (PP). The PP acts as a reference point and is used in the computation of the other lines.
Here is the formula for calculating standard Pivot Points:
PP = (High + Low + Close)/3
S1 = (PP * 2) – High
S2 = PP – (High – Low)
S3 = Low – 2(High – PP)
R1 = (PP * 2) – Low
R2 = PP + (High – Low)
R3 = High + 2(PP – Low)
The above is the formula for calculating standard Pivot Points and it uses the High, Low and Close prices of the previous trading period. There are other variations of Pivot Points used by investors, but they all derive support and resistance lines that are watched for trading opportunities.
Here are the formulas for other Pivot Point variations:
Woodie Pivot Points
PP = (H + L + 2C) / 4
R2 = PP + High – Low
R1 = (2 X PP) – Low
S1 = (2 X PP) – High
S2 = PP – High + Low
As the calculations show, Woodie Pivot Points give more weight to the previous closing price when deriving the PP.
Camarilla Pivot Points
PP = (H + L + C) / 3
R4 = C + ((H-L) x 1.5000)
R3 = C + ((H-L) x 1.2500)
R2 = C + ((H-L) x 1.1666)
R1 = C + ((H-L) x 1.0833)
S1 = C – ((H-L) x 1.0833)
S2 = C – ((H-L) x 1.1666)
S3 = C – ((H-L) x 1.2500)
S4 = C – ((H-L) x 1.5000)
Where C = Closing Price, H = High and L = Low
As the calculations show, Camarilla Pivot Points focus more on the previous closing price rather than the PP. All support and resistance lines are derived using a multiplier, with the basic philosophy of Camarilla Pivot Points being that prices will tend to revert to the mean.
Fibonacci Pivot Points
PP = (H + L + C) / 3
R3 = PP + ((High – Low) x 1.000)
R2 = PP + ((High – Low) x .618)
R1 = PP + ((High – Low) x .382)
S1 = PP – ((High – Low) x .382)
S2 = PP – ((High – Low) x .618)
S3 = PP – ((High – Low) x 1.000)
Fibonacci PP are calculated in the same way as standard Pivot Points. The support and resistance levels are then derived by multiplying previous period ranges (High – Low) with corresponding Fibonacci levels, such as 38.2%. 61.8% and 100%.
Reading Pivot Points
Interpreting Pivot Points is very straight forward. PP provide a trend bias; prices above the PP imply a bullish bias; while prices below PP denote a bearish bias. The support and resistance lines provide definitive areas where traders will watch out for price action objectively.
This means that the lines can provide traders with trade entry and exit points. Pivot Points are pretty accurate and relevant because they use previous period price action to forecast probable current price behaviour.
Trading with Pivot Points
At their core, Pivot Points serve as reference points that traders can use to judge changes in market sentiment. If the prevailing market sentiment is expected to change or reverse, traders will apply the pivot points bounce strategy.
The pivot points will serve as support and resistance areas where the asset price will bounce off from. They will represent an area in the market where the prevailing market sentiment will shift.
Bulls will have found resistance and cannot push prices any higher, whereas bears will have found pressure at support areas and cannot push prices any lower. This strategy is ideal for ranging markets, but it can also be used for trading trending markets during retracements.
In a ranging market, traders can simply sell (go short) at resistance and buy (go long) at support. For instance, if the market is contained between R1 and S1, buy orders will be placed around S1, with sell orders placed around R1.
In a trending market, relevant Pivot Points will act as reference points for retracing markets to resume the main trend. For instance, if the prices are above PP during an uptrend but below R2. Traders can look to place lucrative buy orders around R1.
Support and resistance levels are bound to be broken in some periods of high volatility in the market. These breakout periods can offer many trading opportunities in the market. Pivot points can also be used to trade potential price breakouts in the market.
Price breakouts occur when the price surges through an existing support or resistance level and effectively switches its role. For instance, if a downward breakout occurs at S2, the pivot line will cease to be a support line and will now be considered a line of resistance.
In this scenario, only sell orders will be considered below S2, and other pivot lines can guide stop loss and take profit placement. Stop losses for sell orders can be placed above S2 and S1, with profit targets placed at S3 and below.
Like every other technical indicator, Pivot Points can generate high probability trade opportunities in the market when it is combined with another complementary indicator.
An ideal combination would be Pivot Points and the RSI (relative strength index). RSI divergences can help qualify the support and resistance lines generated by Pivot Points.
The RSI shows trend strength and momentum, and its divergences highlight when a prevailing trend is losing momentum and a potential reversal is nigh.
A divergence could be highly lucrative because it is an opportunity to ride a new trend from its very beginning or even to trade a bounce at optimal prices. If a divergence happens at a pivot line, this is a strong confluence signal that implies the relevant support or resistance line will hold.
A bullish RSI divergence happens when the price is trending lower (making lower lows), but the RSI makes higher lows in the oversold region (below 30).
If, for instance, this happens on S1, it is a strong signal to buy the underlying market with the expectation that S1 will provide enough support for an uptrend to be kick-started. A stop loss for the buy order can be placed below S2 and S3, with profit targets placed at PP, R1, R2, and R3 or even above.
On the other hand, a bearish divergence occurs when the price is trending higher (making higher highs), but the RSI makes lower highs in the overbought region (above 70). This is a signal that the prevailing uptrend is losing momentum, and a downtrend is about to start.
A bearish divergence happening at the pivot line implies that the price is about to face resistance in the market. For instance, an RSI bearish divergence happening on R1 will prompt sell orders that will target PP, S1, S2, and S3 as profit targets, with stop losses placed above R2 and R3.
When using Pivot Points, it is important to understand that support and resistance lines are action areas. When watching the lines, it is important to trade after confirmation is received.
Pivot Points can also be used together with the Fibonacci tool, candlestick patterns, such as pin bars and Marubozu, as well as indicators such as Oscillators that will provide a confluence of signals for high probability trades.
Trading with Pivot Points at AvaTrade
Here is why you should trade with the powerful and effective Pivot Points indicator at AvaTrade:
- Licensed and Regulated.
AvaTrade has achieved regulatory approval in 5 jurisdictions across the world.
- Numerous Indicators.
Pivot Points deliver quality, high probability signals when combined with other indicators. AvaTrade has a selection of over 150 indicators you can combine with Pivot Points to enhance your trade analysis.
- Advanced Trading Platforms.
AvaTrade’s platforms have advanced charting capabilities to allow for the accurate plotting of pivot lines for efficient trading.
- Demo Account.
AvaTrade offers a free demo account so traders can try out technical trading strategies, such as Pivot Points, in the market without any monetary risks.
Main Pivot Points Trading Strategies FAQ
What are Pivot Points?Pivot Points are used to predict the support and resistance levels in trading sessions for financial markets. These support and resistance levels are then used to determine entry and exits from positions, as well as where to place stop loss orders and where to place limit orders to take profits. In general when the market is trading above the pivot point it indicates bullish market sentiment, and when it trades below the pivot point it is bearish market sentiment.
How do you trade with Pivot Points?Pivot points can be used by traders in two different ways. The first is for determining the broader market trend. This is useful because it lets a trader know whether market sentiment is bullish or bearish. The second way is in determining suitable entry and exit points in trades. These come from the support and resistance levels indicated by the Pivot Points. Traders can make the signals given by Pivot Points even more accurate by combining this indicator with others such as moving averages or the MACD.
Which Pivot Points are best for day trading?The Pivot Points are calculated using the previous day’s high, low, and close and don’t change throughout the trading session. The basic pivot point in the middle is the most important as it sets the level at which the market is equilibrium. Above this level indicates bullishness and below it indicates bearishness. Because day trading typically looks to capture smaller moves the R1 and S1 levels are most important as resistance and support. The R2 and S2 levels can also be considered quite important as they denote where breakouts are likely to occur.
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** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.