Amongst all of the tools in your trading tool belt, pivot points must be amongst the most useful and simple to use – particularly for short term traders who are looking to benefit from small price movements. Here’s how you can use pivot points to identify possible price movements for your trades.
What are pivot points?
Pivot points are a type of technical analysis
indicator that are available in platforms such as Meta Trader 4. Traders use pivot points as a level of possible price movement. They are calculated based on the high, low and close prices from the previous trading period. Essentially, if the currency is trading above the pivot point in the subsequent period this indicates the price is bullish (that is, moving in an upward direction), and if it is below the pivot point it may suggest the price is bearish (moving in a downward direction).
Pivot points can be useful for both range-bound traders and breakout traders. For range-bound traders, they can use these levels to buy and sell at the times they deem best. For breakout traders, pivot points can help to identify specific levels that would need to be broken to indicate a true breakout.
The five pivot point levels
There are five pivot point levels to work with, including the central pivot point, two higher pivot point resistances (R1 and R2) and two lower pivot point supports (S1 and S2).) R1 and S1 are based on the range between the pivot point and the low or high prices of the previous period. R2 and S2 are based on the full range between low and high prices of the previous period.
These support and resistance levels help traders to choose their exit points more than entry. If the market is trending upwards and breaks through the pivot point, for example, traders will sometimes choose to close their position at the first resistance level as the likelihood of resistance and reversal will significantly increase.
Choose your pivot point periods to suit
Pivot points can be viewed in monthly, weekly, daily, hourly or even minute values. Depending on the level of detail and sensitivity you need you might choose to use monthly pivot points on a weekly chart, or refer to daily pivot points on a one hour chart. The most common pivot points used tend to be daily, weekly and monthly.
Using pivot points with other tools
Pivot points will often be used together with other trend indicators, such as the 50 day moving average and 200 day moving average. If a pivot point coincides with these moving averages then it’s considered a stronger support or resistance level.