Pivot Points Trading

Pivot Points Trading

Pivot point trading is a technique widely used among Forex traders, that allows to determine important support/resistance levels for the day which derived from the previous day's trading range.

Pivot points — the key levels or certain price values for a current day — are points around which traders base their entries and exits. There are 5 major and several additional pivot levels, we are going to learn about them later.

In simple words, it is similar to knowing where the price is going to stop and reverse and how far it will go next time: The knowledge of such support/resistance levels is priceless as it allows to get in / out of the trade, set stop and profit orders with maximum advantage to traders.
In fact, if you have troubles seeing where the market is going, Pivot points can give you a clue!

It is like having a map on your charts!
Compare the two charts below.
That's the way traders would see a chart without Pivot points.


That's the chart with a Pivot "map" on it:


Obviously, the second chart had a great advantage over the first one. As we can see, for the whole trading day a trader was able to accurately predict price's turning points.

Pivot points are calculated daily, weekly and monthly.
The most common are daily Pivot points. But important are all three: daily, weekly and monthly pivots. So, make it a habit once a week to set weekly pivots on a chart, once a month — refresh monthly pivot points.

For intraday trading traders calculate daily Pivots and then use them on the charts they prefer to trade with: hourly charts, 30 minutes, 15 minutes etc. We will learn how to trade with daily Pivot points on 15 minute charts.
Before we speak about how to calculate and use Pivot point levels, let's define a few terms we will be using here:

PIVOT POINT is the point where the market reverses. It is a turning point. If the market is trading above Pivot Point it is considered to be a bull market (buyers are dominant), once it goes below the Pivot Point — it becomes a bear market (sellers are dominant).

RESISTANCE is a high point in the market where buyers meet strong opposition of sellers. A rising market reaching resistance has big potential of falling back down.

SUPPORT is a low point in the market where sellers meet strong opposition of buyers. A falling price reaching support has a big chance of climbing back up.

Support and resistance levels are difficult to break through, but they do fail, otherwise the price would be all the time going in one direction only...
There is a rule that once a support or resistance level is broken it becomes the opposite force: a broken support will become a resistance, and a broken resistance serves as a future support.
Let's look at the picture to see how it works:


Pivot point trading emphasizes on the importance of such support and resistance levels and its theory is based solely around those levels.