Pivot points are a vestige of the days before electronic trading that were calculated manually in the past by floor traders. Pivot points are still a key element of technical analysis to many traders today and many pivot point strategies exist to take advantage of these important horizontal support and resistance levels.
In this article, I’m going to explain how pivot points are calculated and show you 3 profitable pivot point strategies that you can use to take advantage of them.
How Are Pivot Points Calculated?
The pivot point (P) itself is simply an average of the high, low, and closing price of the previous day, week, or month (typically the previous day).
P = (High + Low + Close) / 3
The first resistance (R1) and support (S1) levels from the pivot point can be calculated by multiplying the pivot point by 2 and subtracting the Low or High respectively.
R1 = (2 x P) – Low
S1 = (2 x P) – High
The second resistance (R2) and support (S2) levels are calculated subtracting the Low from the High and adding or subtracting the result to/from the pivot point.
R2 = P + (High – Low)
S2 = P – (High – Low)
Finally, the third resistance (R3) and support (S3) levels are calculated by subtracting the Low from the pivot point, multiplying by 2, and then adding the High or subtracting the pivot point from the High, multiplying by 2, and subtracting then subtracting the Low.
R3 = High + 2(P – Low)
S3 = Low – 2(High – P)
If all of this seems a little overwhelming to you, don’t worry – there are pivot point calculators available online. Better yet, there are indicators for your trading platform that do the calculations automatically, like this pivot point indicator for MT4.
3 Profitable Pivot Point Strategies for Forex Traders
Below are 3 profitable pivot point strategies. The examples are geared toward Forex traders but these techniques work in other markets as well.
In these examples, I’m using candlestick trading techniques as entry triggers. Other trading techniques that take advantage of trends and reversals, like divergence trading, will also work well with these pivot point strategies.
Note: Like any strategy, pivot points may not always line up with other indicators or trading signals that you’re combining them with. However, when you do get a confluence of signals along with a pivot point signal, these can be very powerful.
Pivot Point Bounce Strategy
The pivot point bounce is a classic trading strategy. The idea is that if price is above the pivot point, the market sentiment is bullish. If price is below the pivot point, the market sentiment is bearish.
The pivot point bounce takes advantage of market sentiment, buying or selling if price retraces back to the pivot point (which is historically a good horizontal support or resistance level).
Note: In the example above, I used a morning star, which is a strong bullish candlestick pattern, as my entry signal.
Pivot Point Trend Trading Strategy
You can also use pivot points and the various support and resistance levels calculated from them for trend trading. The idea is to take advantage of retracements at significant levels after price has chosen a direction based on the pivot point.
If price breaks through the first support or resistance level convincingly, and then retraces, you can buy or sell the bounce off of that resistance level.
Note: In the example above, I used a bearish engulfing pattern, which is a strong bearish candlestick pattern, as my entry signal.
Pivot Point Reversal Strategy
Pivot point support and resistance levels can also be good places to take reversal trades. If price is showing signs of slowing down near the second or third support or resistance levels, these can be good places to buy or sell respectively – especially if these levels line up with previous market structure.
The idea is that, at support or resistance levels 1 and 2, price is likely to be extended. Since these levels are also typically good horizontal support and resistance levels they are great areas to look for reversal trades.
Note: In the example above, I used a shooting star with a confirmation candle (which is how I prefer to trade them) as my entry signal. The confirmation candle was a strong bearish candlestick that closed in the lower 1/3rd of its range. The entry was taken when price pulled back to the standard entry point.
These 3 pivot point strategies are just a few of the many pivot point strategies that traders use to take advantage of these strong horizontal support and resistance levels. In fact, regardless of which trading strategies you use, pivot points can be a strong addition – especially for intraday trading.
Each level of your pivot point calculations can be significant on their own. However, these levels are particularly powerful when they line up with previous structure (support and resistance levels) in the market.
I don’t recommend trading pivot points alone, but adding these pivot point strategies to your other technical trading systems or combining them with fundamental analysis can work very well.
I hope you enjoyed these 3 profitable pivot point strategies. Be sure to backtest and demo trade any new strategies before live trading them. If you have any questions about these strategies or would like to suggest others, please leave a comment below.