Using Pivot Points

Sorry folks, I really hadn't had the time to trade much these two weeks, and markets were pretty much consolidating... well at least until the bad NFP news came out and the dollar tanked to all time lows.

But rather than getting into some forecasts today, I thought I could share about a nifty little tool that I use from time to time when not using Elliott Wave. In fact, its one of the first few tools that I had been using, just that I got lazy and stopped using it. But its really a pretty good tool.

What are pivot points?
Pivot point is a tool that actually provides potential support and resistance and helps minimize risk. Originally employed by floor traders on equity and futures exchanges, pivot point have proved exceptionally useful in the FX market. In fact, the projected support and resistance generated by pivot points tends to work better in FX (especially with the most liquid pairs) because the large size of the market guards against market manipulation. In essence, the FX market adheres to technical principles such as support and resistance better than less liquid markets.

How do I calculate pivot points?
Pivot points can be calculated for any time frame. That is, the previous day's prices are used to calculate the pivot point for the current trading day for daily pivot points, and the previous week's prices are used to calculate the pivot point for the current trading week for weekly pivot points.

There are a few formulas for calculating pivot points, but the classic one is as follows:

• Pivot Point for Current = High (previous) + Low (previous) + Close (previous)
• 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)

We can create our own pivot calculator by putting these formulas into an excel spreadsheet, or use one of the free online pivot calculators. Of course, it will be so much easier if our charting program generates the pivot points automatically for us. If you use metatrader, you can find the pivot point tool to add into your list of indicators.

How do I use pivot points?
As mentioned above, pivot points actually provide potential support and resistance (S&R) levels. So one can use this for any S&R type analysis - clustering of S&R levels, breakouts...etc.

But before we go into that, lets look at some interesting statistics:
Of the 2,026 trading days since the inception of the euro as of October 12, 2006. (* Source: Investopedia )

• The actual low has been lower than S1 892 times, or 44% of the time
• The actual high has been higher than R1 853 times, or 42% of the time
• The actual low has been lower than S2 342 times, or 17% of the time
• The actual high has been higher than R2 354 times, or 17% of the time
• The actual low has been lower than S3 63 times, or 3% of the time
• The actual high has been higher than R3 52 times, or 3% of the time

How can we use this information? Well, if a pivot point coincides with a previous high/low, and the price moves near the pivot point, we now have the probabilities we need to make a long/short trade and place our stops behind one of these pivot points. Be careful though, if we use a daily pivot, these levels are only good for their respective days. So we will have to monitor our position daily. If we intend to do longer term trades, we may consider using the weekly or monthly pivot points.

There are a few other interpretations of using pivot points. Some say that prices will tend to move towards the central pivot point, so if prices are below the pivot point one should look for opportunity to long, vice versa.

Others wait for the price to break the pivot point and use the breakout strategy on that.

Identifying Trends using Pivot Points
The pivot points are sometimes useful in identifying trends. Simply look at the sequence of central pivots to see if it has an up- down- trend. And we can use it to you advantage by following the trend. For example, if the trend is up, we can always look to long at either the S1 or S2 levels, and if the trend is down, we can look to short at either the R1 or R2 levels.

This coupled with our other tools for analysis can help to identify good risk-reward trades.

Are pivot points related to Elliott Waves?
Being a supporter of Elliott Waves, is there a relationship between the two? No, there isn't. Elliott Waves utilises Fibonacci levels rather than pivot points, and doesn't use pivots in any way. But there's nothing to stop a trading from using pivot points together with EW. In fact, pivot points are sometimes found to cluster togther with other fibonacci levels - making for good trades!

Video on Pivot Points
Here is an interesting video on using pivot points. Please note that I'm in no way affiliated to the author of the video, and am not suggesting you sign up for anything.



I just want to take you readers for visiting my blog, and hope you find the information here useful. Happy trading!