Pivot Point Trading Strategies
Pivot points are a widely recognized trading tool which have long been used by financial traders. They allow for a quick and easy calculation to be made which identifies the expected market bias and potential support and resistance levels either side of the current market price.
They were first developed by floor traders to give them a quick and easy way to calculate near term market direction. This calculation looks at the previous periods high, close and low to produce the core ‘Pivot Point’.
The Pivot Level provides the central focus of the Trading Strategies. Where the price trades in relation to the pivot is important. This displays the dominant market sentiment.
- If the price trades above the pivot level then the market is seen to have bullish sentiment.
- If the price trades below the pivot level then the market is seen as having bearish sentiment.
The calculation used to determine the Trading Strategies pivot point comes from the open, high, low and close price of the preceding candles. This can be made for daily, weekly or even monthly charts allow multiple time-frames to be traded.
In addition to the central pivot the calculation also yields levels of resistance and support either side of the Trading Strategies pivot. These are referred to as R1, R2, R3 and S1, S2, S3. The three most important levels are R1, S1 and the actual pivot point.
While many chart packages now offer Pivot Points on your chart at the click of a button, you can manually calculate them from the calculation below if needed: –
Resistance level 3 (R3) = HIGH + 2 * (Pivot – Low)
- Resistance 2 (R2) = PIVOT + (R1 – S1)
- Resistance 1 (R1) = 2 * PIVOT – Low
- Pivot Point (PP) = ( HIGH + CLOSE + LOW ) / 3
- Support 1 (S1) = 2 * PIVOT – HIGH
- Support 2 (S2) = PIVOT – (R1 – S1)
- Support 3 (S3) = LOW – 2*(High – Pivot)
The basic idea behind pivot point trading is to use a move towards or a break of R1 or S1 as an entry point for the trade.
This approach is essentially a form of breakout strategy where you are backing the momentum following the break to continue. The entry is at the point that the break of the R1 or S1 level occurs.
If the price breaks above resistance you place a call trade (backing the direction of the break). Likewise if price breaks lower then you place a Put trade.
A second way to trade Pivot points is to fade out the move and trade the reversal. As the price reaches R2, R3 or S2, S3 it is likely to become increasingly overbought or oversold.
A classic way to play this to enter a position as the market approaches one of these levels in the expectation of a pullback. This can however be quite risky and it is best to seek additional confirmation that the price is ready to pause. Using an RSI indicator is one way of the easiest ways in which you can add validity to an exhausted move. Forex doposit bonus.