# How to Use Pivot Points in Trading

EDT, and the Asian open which occurs at 7 P. If you go long here, you should place a stop right below R1. Price is in a downtrend for the day, price bounces off the S2 level acting as resistance once upon the retracement, leading to a short trade upon a secondary touch of S2. Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. I just want to introduce another possible way for you to trade.

Candlestick and Pivot Point Day Trading Strategy. By Galen Woods in Trading Setups on January 9, Trading Rules – Candlestick and Pivot Point Long Trading Strategy. Doji at a support level; Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial.

## What Are Pivot Points?

Pivot Point Trading Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels.

The pivot level, support and resistance levels calculated from that are collectively known as pivot levels. Every day the market you are following has an open, high, low and a close for the day some markets like forex are 24 hours but generally use 5pm EST as the open and close. This information basically contains all the data you need to use pivot points.

The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade present day. Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.

Before I go into how you calculate pivot points, I just want to point out that I have put an online calculator and a really neat desktop version that you can download for free HERE. As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position. Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3. Pivot points are one of the most widely used indicators in day trading. The tool provides a specialized plot of seven support and resistance levels intended to find intraday turning points in the market. All seven levels are within view.

While traders often find their own support and resistance levels by finding previous turning points in the market, pivot points plot automatically on a daily basis. Since many market participants track these levels, price tends to react to them.

Pivots points can be calculated for various timeframes in some charting software programs that allow you to customize the indicator. For example, some programs may allow you to calculate pivots points for a weekly or monthly interval. But the standard indicator is plotted on the daily level. These values are summed and divided by three. The other six price levels — three support levels and three resistance levels — all use the value of the pivot point as part of their calculations.

The three support levels are conveniently termed support 1, support 2, and support 3. The three resistance levels are referred to as resistance 1, resistance 2, and resistance 3. Since the price levels are based on the high, low, and close of the previous day, the wider the range between these values the greater the distance between levels on the subsequent trading day. Likewise, the smaller the trading range, the lower the distance between levels will be the following day. It should be noted that not all levels will necessarily appear on a chart at once.

This simply means that the scale of the price chart is such that some levels are not included within the viewing window.

Pivot points were initially used on stocks and in futures markets, though the indicator has been widely adapted to day trading the forex market. Pivot points have the advantage of being a leading indicator, meaning traders can use the indicator to gauge potential turning points in the market ahead of time. The pivot point, being the middle line and the level off which everything else is calculated, is the primary focus. If the market is flat, price may ebb and flow around the pivot point.

We can observe this type of price behavior in the chart below. Though R1, R2, and R3 are termed in the sense that they may likely act as resistance as the market rises, if price runs above them they can also act as support if price were to move down. The same holds true for S1, S2, and S3, which can act as resistance on any move back up when they break as support. Pivot points are also used by some traders to estimate the probability of a price move sustaining itself.

Though it depends on the market, the following probabilities are generally reported in terms of how likely price is to close the trading day above or below the following levels:.

These, of course, are simply rough approximations. That certainly will not be true on its own. Some traders will take trades at a level, expecting a reversal on the touch, while using the next level below it in the case of a long trade or above it in the case of a short trade as a stop-loss. At this point, it should seem fairly straightforward that pivot points are used as prospective turning points in the market.

Taking trades at these levels in the direction of the expected reversal is a very common technical strategy.

## Download Pivot Points strategy indicator

Pivot Points Part II: Three simple pivot point strategies When applied to a price chart, the five key pivot points will look something like this: Last week we looked at three sound strategies that you can apply to pivot point trading. Trading Pivot Points. There are few basic rules when trading pivot points. Be bearish when the price is below the main pivot point. Be bullish when the price is above the main pivot point. Go long if the price bounces from S1, S2, or S3. Go short if the price bounces from R1, R2, or R3. Trading the Pivot Points There are major advantages when trading with support and resistance lines, and they should be a staple in every trader's arsenal. Another effective method of deriving multiple, horizontal based support and resistance lines uses a formula derived from yesterday's high, low and close bar.