What is Pivot Point and How to use in Trading

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. This article explains what a pivot point is and how to use it in forex trading. 

What is Pivot Point

Pivots Points are significant levels chartists can use to determine directional movement and potential support/resistance levels. Pivot Points use the prior period's high, low, and close to estimate future support and resistance levels. In this regard, Pivot Points are predictive or leading indicators.

The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance.

Calculation of Pivot Points

Pivot 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 pivot points for a weekly or monthly interval. But the standard indicator is plotted on the daily level.

The central price level – the pivot point – is calculated as a function of the market’s high, low, and close from the previous day (or period, more generally). These values are summed and divided by three. This is the same concept as the “typical price”.

Pivot Point = [High (previous) + Low (previous) + Close (previous)] / 3

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. You may also see them called by their shorthand forms – S1, S2, S3, and R1, R2, R3, respectively.

These values are calculated as follows:

• Resistance 1 = (2 x Pivot Point) – Low (previous period)
• Support 1 = (2 x Pivot Point) – High (previous period)
• Resistance 2 = (Pivot Point – Support 1) + Resistance 1
• Support 2 = Pivot Point – (Resistance 1 – Support 1)
• Resistance 3 = (Pivot Point – Support 2) + Resistance 2
• Support 3 = Pivot Point – (Resistance 2 – Support 2)

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.

Continue reading or start playing around in a ​risk-free forex demo account for a better understanding of Pivot Points in real-time.

Uses of Pivot Points

The Pivot Point sets the general tone for price action. This is the middle line of the group that is marked (P). A move above the Pivot Point is positive and shows strength. Keep in mind that this Pivot Point is based on the prior period's data. It is put forth in the current period as the first important level. A move above the Pivot Point suggests strength with a target to the first resistance. A break above the first resistance shows even more strength with a target to the second resistance level.

The converse is true on the downside. A move below the Pivot Point suggests weakness with a target to the first support level. A break below the first support level shows even more weakness with a target to the second support level.

Support and Resistance

Source: Forex Trading MasterClass

Support and resistance levels based on Pivot Points can be used just like traditional support and resistance levels. The key is to watch price action closely when these levels come into play. Should prices decline to support and then firm, traders can look for a successful test and bounce off support. It often helps to look for a bullish chart pattern or indicator signal to confirm an upturn from support. Similarly, should prices advance to resistance and stall, traders can look for a failure at resistance and decline. Again, chartists should look for a bearish chart pattern or indicator signal to confirm a downturn from resistance.

The second support and resistance levels can also be used to identify potentially overbought and oversold situations. A move above the second resistance level would show strength, but it would also indicate an overbought situation that could give way to a pullback. Similarly, a move below the second support would show weakness, but would also suggest a short-term oversold condition that could give way to a bounce.

Pivot Points for MetaTrader 5 (MT5)

How to install a custom indicator to your MetaTrader 5 platform

1. Download the Pivot-Point indicator from Traders Room
2. Locate and copy the MT5 custom indicator file on your computer. These are the MT5 indicator files that you would have downloaded 
3. Open the data folder
4. Open the MQL5 file
5. Open the indicators folder
6. Paste the files
7. Restart MetaTrader 5

How to use a custom indicator on your charts

1. Open your MetaTrader 5 platform
2. Locate the Navigator panel, as below
3. On the navigator, find Custom Indicators
4. Click Custom indicators, and you should see your newly installed indicator
5. Double click the indicator and the Indicator Properties window will appear
6. Click OK

Pivot Points Trading Tips

• The London session is still the most liquid of all sessions traded, especially during its start and during the overlap period with the start of the New York session. You want to calculate your pivots points using the GMT session high, low, and close. Why? Much like any Support or Resistance level created during a high liquid session, the highs and lows of the day are more significant during these forex market hours.
   
• Just like all traditional Support/Resistance price levels, the pivot levels can reverse roles also. An old resistance can turn into new support once it is violated, and vice versa.
   
• You can also use indicators (Bollinger Bands, Stochastics, RSI, Commodity Channel Index, etc.) to time your entries around these levels. A very useful print is the 161,8% extension of the Fibonacci tool: when this level matches with one of the S&R pivot levels, price is likely to be attracted by this confluence. This is especially helpful for breakout trades making them much more effective. Pivot points act as veritable price magnets for the next day's trading.
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• Pivot points can also be used on weekly and monthly charts to get a perspective of where the price is trading in reference to the previous week's or month's price range.
   
• Any long term pivot point (weekly and monthly) which has not been touched by price for a large period of time gains attractiveness as a target level for counter-trend moves. So if you don't feel comfortable with all the trend following techniques mentioned, this one is for you.
   
• On high volatile market conditions, a break of the first support or resistance pivot level will mostly lead to a move to the next level (S2 and R2 respectively). This phenomenon is observed in pairs with higher volatility as well.
   

Conclusion

Pivot Points offer chartists a methodology to determine price direction and then set support and resistance levels. Price direction is determined by looking at the current period's price action relative to the pivot point: starting above or below the pivot point or crossing it in either direction during trading. The set support and resistance points come into play after price direction has been determined. While originally designed for floor traders, the concepts behind Pivot Points can be applied across various timeframes.

As with all indicators, it is important to confirm Pivot Point signals with other aspects of technical analysis. A bearish candlestick reversal pattern could confirm a reversal at second resistance. Oversold RSI could confirm oversold conditions at second support. An upturn in the MACD indicator could be used to confirm a successful support test.

Understanding how to use Pivot Points is important, but if you want some help, MetaTrader 5 AM Broker offers a useful Pivot Points toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how Pivot Points can make you serious money.

>> Learn how to Master Support and Resistance

Sources:

Pivot Point - http://www.pivot-point.com/

Apple Stock Is at a Key Pivot Point - https://cmtassociation.org/apple-stock-is-at-a-key-pivot-point/

Candlestick and Pivot Point Trading Triggers: Setups for Stock, Forex, and Futures Markets - https://www.amazon.com/Candlestick-Pivot-Point-Trading-Triggers/dp/0471980226

Pivot Point Trading - https://www.investopedia.com/terms/p/pivotpoint.asp#:~:text=A%20pivot%20point%20is%20a,from%20the%20previous%20trading%20day.

Pivot Points — Trend Analysis — Indicators and Signals - https://www.tradingview.com/scripts/pivotpoints/