Pivot points represent key price levels for a given currency pair. The main pivot point (base) is the average of the last high, low and closing prices. This value will act as support or resistance in the next period. If the pivot point is below the current quotes, it will support prices. If it is above the quotes – it will provide resistance.

PP = (H+L+C) / 3

Where:

PP – Pivot Point

H – High Price

L – Low Price

C – Close Price

Additional levels of resistance and support can be determined from the main pivot point. For this purpose, the following formula is used:

R1 = (P×2) − Low

R2 = P + (High−Low)

S1 = (P×2) − High

S2 = P − (High−Low)

where:

P = Pivot Point

R1 = Resistance 1

R2 = Resistance 2

S1 = Support 1

S2 = Support 2

​If on a given day the high, low and closing prices were 1.11, 1.09 and 1.10 respectively, we would get the following P, R1, R2, S1, S2.

PR1R2S1S2
1.101.111.121.091.08

 

When prices are above the pivot point, the market is considered to have a tendency to rise. In the opposite case, the trend is downward.

Accordingly, in a bull market, prices can be expected to test the first resistance. Its eventual overcoming would turn it into future support on the price path towards R2. In a bear market, overcoming the first support would turn it into future resistance. The next price target would be S2.

Chart 1: Pivot Points Supports/Resistances. Chart: MetaTrader4

Chart 1: Pivot Points Supports/Resistances. Chart: MetaTrader4

In the above chart, the high, low and closing prices of Week 1 have defined the main pivot point and hence its derivatives for Week 2. During the second week, S1 was tested unsuccessfully several times. The subsequent upward movement broke the pivot point and attempted to overcome R1. The resistance has held.

It is believed that overcoming each level opens a space for movement to the next price target. In the example, weekly data is viewed on a one-hour chart. Traders often calculate pivot points based on different time intervals (day, 4 hours, hour). Thus, they fix different key levels for the purpose of optimal position management.

Pivot points are most commonly used in intraday trading. For longer time periods, their importance decreases under the influence of other factors.

The presence of supports and resistances makes it easier to develop a trading strategy. Different entry points for opening a position and placing stop-loss and take-profit orders will be present. This is precisely one of the main advantages of pivot points. They are calculated under clear rules. This creates the conditions for their consistent application within a trading strategy. If most TA methods carry a dose of subjectivism, pivot points are product of mathematical calculations.

It is evident from the PP formula that the method will often be ineffective. In practice, it uses important moments in the previous period and defines the market as bullish or bearish, depending on current prices relative to the main pivot point. Like most technical tools, it should be used in combination with other analytical techniques. For example, previous highs and lows, trend lines and indicators would further refine the picture.

Pivot points should be used with an appropriate degree of criticality. At the same time, their greatest advantage is objectivity in their determination. They are most effective in shorter-term trading. 

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