Traders use the help of many different indicators and key levels to find the best trading opportunities. Pivot points and the support and resistance levels you can identify thanks to them will assist you in recognising the areas where the price can change its direction. “Pivoting” translates to reaching support or resistance level and reversing afterwards. Let’s see how to use pivot points to get the best results on the Olymp Trade platform.
Pivot points introduction
Pivot points are quite similar to Fibonacci levels. But unlike the latter, they are very objective. With Fibonacci levels, you can pick different Swing Highs and Lows. Here, most traders calculate pivot points the same way.
Their worth is bigger for short-term traders who wants to trade small movements of the price. And it is possible, like with regular support and resistance levels, to trade the bounce and break from the levels.
How to calculate pivot points
To calculate pivot points and correlated support and resistance levels you will need open, high, low and close from the last session. Typically, 5 pm EST (the New York closing time) is used and the close from the past day for the forex market. I just use O, H, L, C from the previous day on my Olymp Trade platform.
(High + Low + Close) / 3 = Pivot Point
Then you are able to calculate the support and resistance.
(2 x PP) – High = First support (S1)
(2 x PP) – Low = First resistance (R1)
PP – (High – Low) = Second support (S2)
PP + (High – Low) = Second resistance (R2)
Low – 2 (High – PP) = Third support (S3)
High + 2 (PP – Low) = Third resistance (R3)
There is no Pivot points indicator built in the Olymp Trade platform so the best way is to use the spreadsheet.
Then, you can use a tool called the horizontal line and add 7 price levels to your chart.
Below, you will find an exemplary chart with the levels PP, S1, S2, S3, R1, R2 and R3 drawn.
Trading with the use of pivot points
Pivot points often act the same way as standard support/resistance levels. It simply means that you can trade with the same techniques you were using when trading support/resistance lines. The price will test these levels frequently and the more time they are tested the stronger the levels are.
There are generally two methods of trading with pivot points.
The first type is when the price is constantly moving between any two lines. What you can do then? You can open trades at the end of the range having in mind that it is highly possible that the price will bounce back from the line.
The second method is used when the market is trending meaning that the price is breaking level after level. The common name for that is trading breakouts. Usually, when the support level is broken, it turns into resistance and vice versa.
You can also utilise pivot points to read the market sentiment that is to determine whether traders will more likely buy or sell the instrument. You just have to observe your chart.
You should be ready to buy when the price breaks through the pivot point on its way up. The bearish sentiment is signalled when the pivot point is broken by the price to the bottom. Prepare to sell.
Pivot points types
The first type you have just got to know. It is standard calculations. But there are 3 more types.
- Woodie Pivot Point that puts more weight on the closing price of the past period.
- Camarilla Pivot Point where you calculate 8 major levels (4 support and 4 resistance) and they are multiplied by a multiplier. Similarly to Woodie pivot point, more emphasis is given to the closing price.
- Fibonacci Pivot Point where first you calculate standard pivot points, then multiply the previous day’s range with its corresponding Fibonacci levels and next subtract or add the results to the pivot point.
The method of using all types of pivot points is basically the same and is based on the mathematical conversion of the prices O H L C from the previous day. The formulas for calculations are just distinct so the levels will somewhat differ.
Pros and Cons of Using Pivot Points in Trading
- ✅ Pivot points provide objective support and resistance levels, aiding in identifying potential price reversals.
- ✅ They are effective for short-term traders who want to capitalize on small price movements.
- ✅ Pivot points can be used in various markets, including forex, stocks, and commodities.
- ✅ Traders can employ pivot points in both ranging and trending markets.
- ❌ Pivot points are not infallible and can fail to accurately predict price movements.
- ❌ They are best used in conjunction with other technical indicators for confirmation.
- ❌ Pivot points require regular monitoring and adjustment as new price data becomes available.
- ❌ Market sentiment and unexpected news releases can impact the effectiveness of pivot points.
Pivot points are used as support and resistance lines. They can be traded in both, ranging and trending markets. You can use the rebounds from the lines, breakouts or as a method of reading market sentiment.
Remember that news releases can significantly influence price behaviour so make sure you follow the economic calendar.
Combine pivot points with some other tools such as, for example, moving averages crossovers, candlestick patterns or the Relative Strength Index. It is always a good idea to get an extra confirmation for your position.
There are 4 main types of pivot points. No one is better than the other. It all depends on your knowledge and skills. Try them all in the Olymp Trade demo account. You will not risk your money there. Instead, you will get demo currency that can be replenished at any time.
Share your thoughts on pivot points in the comments section. Is this concept new to you? Or maybe you have some experience trading with it and you would like to tell us about it. Anyway, I would be happy to hear from you!
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