Pivot Points

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What are Pivot Points

A pivot point is a significant price level in a financial market that is used primarily by day traders as a future indicator of market sentiment. It is a point at which the price action can change direction, or sentiment may indicate a continuation on it's course. It is calculated using data from the previous trading day. By looking at the high, low, and close, you can calculate the next day's pivot point as well as support and resistance levels. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.

Calculating Pivot Points

Pivot point = (H + L + C)/3
First support = (2 * Pivot) - H
First resistance = (2 * Pivot) - L
Second support = Pivot - (H - L)
Second resistance = Pivot + (H - L)

{where H = last period high; L = Last period low; C = Last period Close}

Many good charting packages will calculate pivot points for you, or you can calculate them here. Below is an example of pivot points in an hourly chart.  The pivot, support & resistance all relate to the latest period (23rd Mar) all calculated from the 22nd March data.

Nasdaq Comp index - Pivot Point Example.

The Significance of Market Opens

One of the key points to understand when trading pivot points in the FX market is that breaks tend to occur around one of the market opens, due to the immediate influx of traders entering the market at the same time. 

There are three market opens in the FX market: the Asian open which occurs at Midnight GMT (7pm EDT), the European open, which occurs at 7am GMT (2am EDT) and the U.S. open, which occurs at approximately 13:00 GMT (8am EDT).

During the quieter time periods, such as between the U.S. close at 9pm GMT (4pm EDT) and the Asian open at midnight GMT (7pm EDT) (and sometimes even throughout the Asian session, which is the quietest trading session), prices may remain confined for hours between the pivot level and either the support or resistance level. This provides the perfect environment for range-bound traders.

Using Pivot Points in a Trading Environment

Generally speaking, the pivot point is seen as the primary support or resistance level with up to 3 other support and resistance levels in support. They are short term levels (for day trading) and can be used in three main ways. 
  • For determining overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until they need to be recalculated. 
  • Break-Out Strategy: Use pivot point price levels to enter and exit the markets. For example, a trader might place a limit order to buy if the price breaks a resistance level (R1 in our above chart). Alternatively, a trader might set a stop-loss for his active trade if a support level is broken.
  • Use as strong levels of support & resistance:  Eg. Pivot Bounce Strategy - Here you wait for the price action to bounce off of The Pivot or any of the pivot support or resistance levels. After a reversal candle you enter the market.
To explain more - Trader's can use pivots to confirm price moves.  If prices obey the pivot levels this can be a validation that the levels are solid support or resistance zones. For instance if the price breaks the pivot level from below, continues higher for a while, reverses back towards the pivot level, but fails to break the pivot level (especially with indecision candlesticks) then this can be a validation of the trend - The pivot now becomes short term support.  However, If the price proceeds to drive below the pivot point, this is an indication that the pivot level is not very strong and is therefore less useful as a trading signal.

Many strategies can be developed using the pivot level as a base, but the accuracy of using pivot lines increases when Japanese candlestick formations can also be identified. For example, if prices traded below the central pivot (P) for most of the session and then made a foray to the pivot while simultaneously creating a reversal formation (such as a shooting star, doji or hanging man), you could sell short in anticipation of the price reversing back below the pivot - your target could be S1.

To Sum Up

Pivot points are yet another useful tool that can be added to any trader's toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the day trader, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis. These other technical indicators can be anything from MACD crossovers to candlestick patterns - the greater the number of positive indications, the greater the chances for success.

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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What are Pivot Points

A pivot point is a significant price level in a financial market that is used primarily by day traders as a future indicator of market sentiment. It is a point at which the price action can change direction, or sentiment may indicate a continuation on it's course. It is calculated using data from the previous trading day. By looking at the high, low, and close, you can calculate the next day's pivot point as well as support and resistance levels. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.

Calculating Pivot Points

Pivot point = (H + L + C)/3
First support = (2 * Pivot) - H
First resistance = (2 * Pivot) - L
Second support = Pivot - (H - L)
Second resistance = Pivot + (H - L)

{where H = last period high; L = Last period low; C = Last period Close}

Many good charting packages will calculate pivot points for you, or you can calculate them here. Below is an example of pivot points in an hourly chart.  The pivot, support & resistance all relate to the latest period (23rd Mar) all calculated from the 22nd March data.

Nasdaq Comp index - Pivot Point Example.

The Significance of Market Opens

One of the key points to understand when trading pivot points in the FX market is that breaks tend to occur around one of the market opens, due to the immediate influx of traders entering the market at the same time. 

There are three market opens in the FX market: the Asian open which occurs at Midnight GMT (7pm EDT), the European open, which occurs at 7am GMT (2am EDT) and the U.S. open, which occurs at approximately 13:00 GMT (8am EDT).

During the quieter time periods, such as between the U.S. close at 9pm GMT (4pm EDT) and the Asian open at midnight GMT (7pm EDT) (and sometimes even throughout the Asian session, which is the quietest trading session), prices may remain confined for hours between the pivot level and either the support or resistance level. This provides the perfect environment for range-bound traders.

Using Pivot Points in a Trading Environment

Generally speaking, the pivot point is seen as the primary support or resistance level with up to 3 other support and resistance levels in support. They are short term levels (for day trading) and can be used in three main ways. 
  • For determining overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until they need to be recalculated. 
  • Break-Out Strategy: Use pivot point price levels to enter and exit the markets. For example, a trader might place a limit order to buy if the price breaks a resistance level (R1 in our above chart). Alternatively, a trader might set a stop-loss for his active trade if a support level is broken.
  • Use as strong levels of support & resistance:  Eg. Pivot Bounce Strategy - Here you wait for the price action to bounce off of The Pivot or any of the pivot support or resistance levels. After a reversal candle you enter the market.
To explain more - Trader's can use pivots to confirm price moves.  If prices obey the pivot levels this can be a validation that the levels are solid support or resistance zones. For instance if the price breaks the pivot level from below, continues higher for a while, reverses back towards the pivot level, but fails to break the pivot level (especially with indecision candlesticks) then this can be a validation of the trend - The pivot now becomes short term support.  However, If the price proceeds to drive below the pivot point, this is an indication that the pivot level is not very strong and is therefore less useful as a trading signal.

Many strategies can be developed using the pivot level as a base, but the accuracy of using pivot lines increases when Japanese candlestick formations can also be identified. For example, if prices traded below the central pivot (P) for most of the session and then made a foray to the pivot while simultaneously creating a reversal formation (such as a shooting star, doji or hanging man), you could sell short in anticipation of the price reversing back below the pivot - your target could be S1.

To Sum Up

Pivot points are yet another useful tool that can be added to any trader's toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the day trader, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis. These other technical indicators can be anything from MACD crossovers to candlestick patterns - the greater the number of positive indications, the greater the chances for success.

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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