by Max Munroe
Posted 14th March 2013
First things first. What exactly is a pivot point?
The simple lines that can predict market changes
Well it couldn’t actually be easier. Pivot points are just the average of highs, lows and closing prices from a previous trading range.
It’s really that simple.
The pivots themselves are normally marked using R1, R2, R3 to highlight average highs (R for ‘resistance’), P to mark the average closing price and S1, S2, S3 to calculate lows (S for ‘support’).
(So to answer Joe in his comment on the Support and Resistance piece, yes these pivots are tied in with the support/resistance idea…)
On the chart below, just to show you what they look like, I’ve plotted weekly pivot points on a daily chart.
So more importantly what are they used for.
Well there are two real ways to use them.
The first is using them to highlight current market trends – always useful.
If the market is currently trading above P, the main pivot point, then the market is considered bullish, i.e. is going up.
If the market is trading below P, the market is considered bearish, i.e. is going down.
Again very simple, but nice and easy to understand, which I like, don’t you?
OK, so pivot points give us a sense of the overall trend of the market. But there’s more to them than that…
See how price reacts at these important levels
The second way of using them links back to support and resistance. Let’s look at some charts to show you what I mean.
What I’ve done on the first chart, is simply draw wider pivot lines across the screen, keeping the same settings as before.
What is interesting here is how price reacts to these key levels.
As you can see, they work like good support and resistance levels. As price comes down to an S level, it tends to bounce. As it approaches a P level, it bumps its head and either falls back, or at least pauses.
Of course, not every time. If the move is powerful enough, it can go straight through those points – just like any support/resistance line. But these are useful points of potential turns none the less.
So let’s come onto something you can try and use. I hesitate to call it ‘homework’. Let’s just say something to practice on your own.
(And if you’re reading this and you’re already a dab hand with pivots, do please let me know what you think by sharing your thoughts on the comments section below. It’s great to get some other opinions going.)
Try spotting some turning points yourself
OK, so let’s look at a simple strategy using pivot points.
It works on multiple timeframes, but I suggest looking at 30-minute charts and daily pivot points.
I’m going to give you a couple of basic steps – we’ll use EURUSD for this exercise.
1) Check the Daily and Weekly charts for overall trend and write this down. This will be the only direction you are allowed to trade in (remember from my “3 Essential Forex Indicators report” that you can use our EMAs for highlighting the trend quickly);
2) Then on the 30-minute chart plot your daily pivot points (most MT4 platforms come with this as a standard indicator – and your spread betting company software may well have them).
So what are we looking for?
Well, if we determine the market is in a downtrend on the daily timeframe then we will look for price to move up and test the R1 level, fail to break it and move lower.
We will then initially aim for the main pivot point P and if we break this we will then aim for S1 and S2.
On the other hand, if we determine the market is in an uptrend on the daily timeframe then we will look for price to move down to S1, fail to break it and move higher.
We then initially aim for the main pivot point P and if we break this we aim for R1 and R2.
I hope that’s clear.
Let’s go through some examples. And then I’ll tell you about a simple pivot point strategy you can try out.
How pivot points picked moves in the EURUSD this week
I’m going stick with the EURUSD charts over the past couple of weeks.
So firstly let’s work out the trend (one glance should do it right now!) Look…
That’s the daily chart. And it’s clear that we’re in quite an obvious down trend. See how the fast EMA (red) is lower than my slow EMA (green) as a confirmation.
Therefore, according to my step 1 in the list above, for this exercise, I’m only allowed to take short positions.
Next, we move down to the 30-minute chart. We plot the pivot points using Daily Bars.
So in the chart below we can see a random day and our first potential play.
The higher blue circle shows our price hitting our R1 line. We then target the main pivot point (lower blue circle) and it duly hits this before pushing higher.
Now let’s look at the next day – see the chart below.
You can see that price doesn’t quite reach R1, but then breaks lower through the main pivot point straight down to S1.
There was nothing for the next day, as the price barely moved from the main pivot point. So I’ve left that out.
But the following day we get a nice test of R1 (top blue circle) and a move back to the main P pivot.
Hopefully, you are starting to see how this can be built into a good little strategy.
I know it won’t be obvious to every reader. And for some more experienced readers, this will be like teaching your grandmother to suck eggs. I’m sure you do this all the time.
But I wanted to put this out there and see your reaction. It’s very important that you let me know what you thought of this piece. Was it helpful? Will you try it? Do I need to make it more basic – or would you like me to take it further.
Please – let me know your thoughts by leaving a comment below.
Of course, this is not the full picture. You need to work out a good stop placement and risk/reward strategy for this.
You also need to look at which pairs it works well for and consider the timeframes you want to trade on.
But as a simple trick for picking potential moves in the forex market, pivot points are great.
Let me know how you get on and we can come back to this – if there is interest.
Thanks for reading,
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