Pivot Points in Trading

Pivot point trading is a tool used for technical analysis of the market’s trends. It is based on a calculation that uses the previous period’s low, high and close. The main reason to use pivot points is to determine potential uptrends and downtrends. That way, traders can define entry and exit points to maximize their revenue.

Traders use this indicator when analyzing different financial markets. The most common application of the indicator is during Forex trading, but traders can use it with stocks and indices. Keep reading the article to know more about pivot points. You will learn about the formula and how to create a pivot point strategy in Forex.

Understanding Pivot Points

Traders often use the phrase “pivot points” when in reality, there is just one pivot point that helps users to identify potential price trends. It’s an indicator used in technical analysis, and it determines the trend within a market over specific time frames.

Overall, the indicator is just an average of the intraday high, low, and closing prices are taken from the previous period. The data from the previous period is used to calculate the pivot point to use it to identify price trends.

If the price on a subsequent day is moving above the pivot point, then it’s an indication of bullish sentiment (buy signal). If the price goes below, then it’s a bearish sentiment (sell signal).

Calculating pivot point enables traders to determine two support and resistance levels. These levels help traders to understand where the price is moving, which could be an indication of an upward or downward trend. Let’s see the formula of the indicator.

Pivot Point Trading Formula

​The formula to calculate pivot points is as follows:

(High + Low + Close) / 3 = P

​When the trader calculates the P number, it’s time to calculate two resistance and two support levels. Use the following calculations:

  1. (P x 2) − Low = R1.
  2. (High − Low) + P = R2.
  3. (P x 2) − High = S1.
  4. P − (High − Low) = S2.

In these calculations, R1 is Resistance 1, R2 is Resistance 2, S1 is Support 1, and S2 is Support 2. Note, this method is mainly used by day traders. It means that they use high, low, and close from the previous period. So, in all the formulas described above, traders use data from the previous period.

For example, if you want to calculate P for Saturday, take data from the close period on Friday.

Pivot Points in Trading

How to Calculate Pivot Points: Pivot Point Strategy in Forex

If you prefer Forex trading, then you may add the indicator to your chart, and it will automatically adjust the levels. But you can also easily calculate levels yourself. The calculation is simple as long as a trader can determine the previous period’s high, low, and close.

So, how to determine previous period levels? Use high, low, and close levels just before the market should open on the day you want to start using the indicator. Or, if you were trading the previous day, indicate high, low, and close levels right after the market closes.

Now you have everything to calculate pivot point for the current day:

The main part is to determine the “P” number. As soon as you have it, it’s easy to calculate everything else. But what does it tell you? Keep reading to find out how to interpret the indicator and what actions to take.

How to Interpret Pivot Points?

You should figure out how to interpret the indicator to trade successfully. It’s an intraday indicator used when trading stocks, futures, or commodities. It doesn’t work like moving averages or oscillators — pivot points are static and stay unchanged during the entire day. Traders utilize the indicator to plan their actions during the day.

Two support and resistance levels are used as target points to determine when to enter or exit the market. But the pivot point is used as the basis to make decisions.

For example, if a price goes above the pivot point, the best action is to start buying stock. But if the price goes below the pivot point, it’s a clear sign to start selling stock to avoid losses. Resistance and support levels, in this case, are used as stop-loss levels.

Traders get the best results when they combine this indicator with other trading tools. Traders can use pivot points with the Fibonacci extension level or moving averages to be positive about their decisions.

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author

Carolyn Huntington is an economist, professional trader, and analyst. She made her first big deal in her student years with a profitable investment in Facebook stock. Now the total experience of her trade is 18 years. Over the years of trading, Carolyn has developed its own strategy that allows even those who have never traded on the stock exchange before to earn money. She also creates market forecasts and advises major shareholders, compiles investment portfolios, and teaches how to work with automated advisors.

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