Pivot Points: Find Support and Resistance Levels
The concept of support and resistance levels is one of the central points in trading. These levels help investors define the price reversal, enter and exit trades. Knowing support and resistance points, you can build an effective strategy.
However, support and resistance are subjective. Thus, traders apply indicators to draw them correctly. Pivot points are one of the most reliable ways to set perfect support and resistance.
Pivot Point: Definition
Pivot point is a technical indicator that is used to define support and resistance levels as well as clear the market trend. This instrument is calculated on close, high and low prices of the previous period regarding the timeframe.
Pivot point is a technical indicator that is used to define support and resistance levels as well as clear the market trend.
Unlike other tools, it was invented not by one author but by a group of floor investors. They took the previous day's high, low, and close prices to determine a current day's pivot point.
Pivot Points: Structure
The pivot point indicator consists of several horizontal lines. The number of them depends on the type of instrument and varies from five to 10. Later, we will explain the types of pivot levels. As pivot point is a trend indicator, it's implemented directly on the price chart. Look at the picture below.
Pivot points consist of support, resistance, and central lines.
No matter what type of pivot points you use, there are always support, resistance, and central lines. The price moves around these points, most of the time, and is anticipated to consolidate near them as they work as a boundary for future movements.
The central pivot point is located between the equal number of support and resistance levels, serving as a barrier. It is a crucial point that is used to determine the market trend.
Pivot Points Indicator in MT4
Although traders widely use the pivot point tool, it's not implemented in MetaTrader by default. That's why if you want to use this tool, download it from the Internet.
The pivot point tool is not implemented in MetaTrader by default.
When you download the indicator, you need to insert it in the MetaTrader. For that, you need to do several steps. They will differ from standard steps.
Click "File" in the upper tab of the platform's window, then "Open Data Folder." You need to find an MQL4 folder that contains the "Indicators" folder. You will need to paste the downloaded indicator there.
As soon as you do these steps, restart the MetaTrader platform. After that, click "Insert" – "Indicators." Choose the "Custom" tab. Find the pivot point tool. It's worth mentioning that any other indicator you will download from the Internet should be set the same way.
Pivot Points: Types and Calculations
There are different types of indicators, and the calculation method varies depending on the type. Although the pivot points indicator isn't a standard instrument in MetaTrader, it doesn't mean traders have to calculate the levels themselves. The calculation is done automatically.
However, if you want to understand how the instrument works, you should know how it's built. Moreover, the types' differences will be explained more effectively if we highlight the differences in their calculations.
Classic Pivot Points
Let's start with the classic pivot points. This type consists of five levels and can be called a five-point system. To calculate the levels, we need to take high, low, and closing prices of the previous trading day.
First, we calculate the central pivot point. To get its meaning, we should find a sum of high, low, and close prices and divide the result by 3.
Pivot Point (or PP) = (High + Low + Close)/3
Knowing the central line, we can get both support and resistance levels.
The first support line results from the subtraction of the previous high from the doubled central pivot point.
Support 1 (or S1) = (PP x 2) – Previous High
To find the second support, you need to subtract the previous low price from the previous high one. After that, subtract the result from the central line.
Support 2 (or S2) = PP – (Previous High – Previous Low)
The formula for resistance levels is almost the same. To find the first resistance, you need to subtract the previous candlestick's low price from the doubled central pivot.
Resistance 1 (or R1) = (PP x 2) – Previous Low
The second pivot will be calculated as a sum of the central pivot and the subtraction of the previous low and high prices.
Resistance 2 (or R2) = PP + (Previous High – Previous Low)
It's also possible to include the opening price in the formula. The formula looks as follows:
PP = ((Open of Today) + Yesterday's (High + Low + Close)) / 4
Support and resistance points are calculated the same as explained above.
It's the easiest way to get the pivot points. However, there are other methods that are used in specific trading strategies. Let's look at how the calculations vary.
Woodie Pivot Points
If you need to add additional weight to the last prices, you better use Woodie pivots.
This type consists of five levels as well. Firstly, you should calculate the central point. The central pivot looks like a sum of high, low, and doubled close prices divided by four.
PP = (High + Low + 2Close) / 4
The first resistance level is a subtraction of the low price from the doubled central pivot.
R1 = (2 X PP) – Low
The second resistance results from the subtraction of the low price from the sum of the central point and high price.
R2 = PP + High – Low
The support levels are calculated as follows:
The first support is a subtraction of the high price from the doubled central pivot.
S1 = (2 X PP) – High
The second level will be a sum of the low price and subtraction of the high price from the main pivot level.
S2 = PP – High + Low
Camarilla Pivot Points
As we said above, pivots vary in number. For example, the Camarilla type is presented by eight levels. To calculate them, you need a specific coefficient. Moreover, it's not necessary to start a calculation with the middle line. The formula for all the resistance and support levels is similar. The only difference is the coefficient.
You need to multiply the difference between the high and low prices by a coefficient and sum the result with the close price for all resistance levels.
R4 = C + ((H-L) x 1.5000)
R3 = C + ((H-L) x 1.2500)
R2 = C + ((H-L) x 1.1666)
R1 = C + ((H-L) x 1.0833)
To get support levels, you need to multiply the difference between the high and low prices by a coefficient. The next step is to subtract the result from the close rate.
S1 = C – ((H-L) x 1.0833)
S2 = C – ((H-L) x 1.1666)
S3 = C – ((H-L) x 1.2500)
S4 = C – ((H-L) x 1.5000)
The central line is calculated as follows. You need to sum high, low, and close prices and divide the result by 3.
PP = (H + L + C) / 3
Although all the levels are significant, you should pay attention to the third and fourth supports/resistances. One of the strategies recommends trading against the trend when the price rebounds from the third level. The stop loss can be located near the fourth pivot. If the price breaks the fourth level, you are supposed to trade within the current trend.
Fibonacci Pivot Points
As you can discover from the type's name, the calculation is based on Fibonacci retracements. This type has seven lines.
Again the calculation starts with the central pivot level. To get it, you need to divide the sum of high, low, and close prices by three.
PP = (H + L + C) / 3
The resistance levels are calculated as the sum of the central pivot and the result of the following calculations. You need to multiply the difference between the high and low prices by the coefficient (similar to Fibo levels).
R3 = PP + ((High – Low) x 1.000)
R2 = PP + ((High – Low) x 0.618)
R1 = PP + ((High – Low) x 0.382)
The support levels have the same formula as resistance pivots, but you need to take not the sum but the difference between high and low prices.
S1 = PP – ((High – Low) x 0.382)
S2 = PP – ((High – Low) x 0.618)
S3 = PP – ((High – Low) x 1.000)
Pivot Point Indicator: Settings
Usually, we don't focus on the settings of the indicators. They can vary significantly and don't require a lot of information about them.
Using pivot points, you should consider the period of them as it affects the levels the indicators will present. Usually, you can choose from daily, weekly, monthly, and yearly levels.
The period of the indicator doesn’t change until it ends. For instance, the levels of the weekly pivots won’t change until the next day.
You may wonder why we don't have pivots for smaller timeframes. But the levels are tricky. If you want to apply the indicator on the 30-minute chart and smaller ones, you should apply daily pivots. Weekly levels are usually used on hourly, four-hour, and daily charts. When trading on monthly charts, you better use the weekly pivots. And for monthly charts, it's possible to set yearly pivots.
There is another crucial point you should know about. If you apply weekly levels, for instance, they won't change until the next week starts. The same rule applies to all periods.
Pivot Points in Trading
The primary function of the pivot points in trade is to determine support and resistance levels. However, you can also use the tool to predict the market trend.
Support and Resistance Levels
We will start with the key function – support and resistance levels. Range-bound traders widely use pivot levels. The strategy is simple: you need to open a buy trade when the price is near the support levels; you can open a sell position if the price is near the resistance points.
The more times the price touches the pivot point, the stronger the level is.
Pivot points are a perfect tool for pending orders. For instance, if you see the price is climbing towards the resistance level, you can place a sell limit order. Pivot points can help you set a stop loss too. Just put this order several pips above the resistance. Usually, traders use a 5-10 pip stop order. Nevertheless, the size depends on many factors, including the position size.
In case you see the price is falling, you should place a buy limit order. A stop loss order should be several pips below the support.
There is an interesting fact – the support pivot turns into resistance when the price falls below it; the resistance pivot becomes support if the price breaks above it.
Breakout Levels
Breakout traders implement this technical tool on the chart to determine the levels that should be broken ahead of the future position.
For example, if you think there is a strong bullish market trend, you can wait until the asset jumps above the first resistance. Then you can open a buy position and place a take profit order at the level of the next resistance. In this case, you can place a stop loss order just below the first resistance. It's also possible to replace your stop loss if you see the price moves in the direction you predicted.
The same strategy can be applied to the sell trade. Wait until the price breaks the support pivot upside down. You can place a take profit order at the level of the second support. Stop loss can be set above the broken support level. You can also move the stop loss regarding the price movements.
Although the strategy seems easy, there are pitfalls. It would be best if you were sure it's a breakout, not fakeout. That's why you should use other indicators that can provide confirmation.
It's also worth checking the news and economic events. The market fluctuates significantly when there are important market events.
Trend
Pivot points indicator can be used to define the current market trend. Usually, when the price breaks below the central pivot, it's a sign of the downtrend. If the price is above the mid-level, the market can be considered bullish. Still, you should remember about confirmation.
Pivot Points: Trade Examples
To better understand how the pivot points work, we will show you an example of Forex trading. We applied the pivot levels on the price chart of the EUR/USD pair.
The price broke the central pivot (1), so we could open a sell position. The first take profit could be placed on the first support level (2). After the breakout, we could either set the second take profit level at the following pivot point (3) or close the trade at the first level and reopen it after the break. Still, you should remember every time you open a trade; a broker takes a fee.
Usually, when the price breaks the first and second levels, we can expect the touch of the third one and the subsequent rebound. It means the last take profit can be located in the third line. After that, you should close the trade, as there is a high chance the price will turn around.
Stop loss orders should be placed slightly above the previous levels if we talk about the sell trade. Vice versa, place stop loss orders below the last level when there is a buy trade.
Sessions
We want to highlight a critical point in using this technical tool. It's market sessions. As you may know, during 24 hours, the market goes through four sessions. These are Australian, Japanese, UK, and American.
An experienced trader knows that when the new trading session starts, the market volatility increases as investors enter the market. It means the pivot levels can be easily broken. It would be best if you avoided trading on signals of pivot levels when the market opens.
At the open of trading sessions, the volatility increases. Thus, the pivot levels can be easily broken.
At the same time, you can enter the market with a range-bound strategy between the sessions because the market is anticipated to stay stable. The price is supposed to move in a range between two pivot levels.
Pivot Points: Strategies
We have already mentioned several methods you can use to trade on pivot points levels. Still, we would like to share one more strategy.
This strategy will work for the London or US sessions.
- Step 1. Choose the asset you want to trade.
- Step 2. You should open the trade at the open of the session. Choose the 15-minute timeframe.
- Step 3. After the first 15 minutes, you should check whether the price breaks below the central pivot. If this happens, you may suppose the market will move down so that you can open a sell trade. However, if the price is too close to the first pivot support, we should open the trade.
- Step 4. Stop loss order should be placed 5-10 pips above the central level.
- Step 5. You can place the first take profit at the first support. If you are sure the downtrend is strong, it's possible to increase the take profit order until the second support.
This strategy can be applied to both sell and buy positions.
Use Pivot Points in Your Favor
To implement the indicator in your strategy effectively, it is not enough to learn how to read its signals. It's vital to know its strengths and weaknesses.
Advantages | Limitations |
Easy to use. Pivot points are simply applied to the chart and provide clear signals. | Not a standard setting. The pivot point indicator isn't a standard indicator in MetaTrader. However, other trading platforms may have it by default. |
Plenty of signals. Besides one of the most significant functions – support and resistance levels, the indicator provides many other signs such as the trend direction. | Many types. Although it seems like an advantage that the indicator is presented in different ways, it isn't easy for beginner traders to choose the best type. |
Static. It's an advantage for long-term traders as the pivot points don't change during the day. | Accuracy. As with any other indicator, pivot levels can provide fake signals, especially on longer timeframes. If you remember, earlier, we said the indicator changes regarding the period you choose. The daily pivots will change every day, while the weekly pivots will move only once a week. |
Simple calculation. Even if you want to calculate the levels yourself, you can easily do that if you know several figures. |
Tip for Traders – Avoid Mistakes
We want to share some tips that will help you avoid the most common mistakes when using the pivot points indicator.
- Combination. We always recommend combining an indicator with other tools such as other indicators or chart/candlestick patterns. However, pivot points can barely be combined with other tools. If you want to confirm the support or resistance levels, it's unlikely other tools can be used for confirmation.
If you need to find a supportive tool for a trend signal, you can apply trend indicators like Bollinger Bands or Parabolic SAR.
- Period. Although pivot points can be applied to different timeframes, you better avoid the highest ones, such as weekly, monthly, and yearly. The levels change with a low frequency.
Conclusion
To conclude, the pivot points indicator is a useful tool that helps traders find support and resistance levels used in every trading strategy. Moreover, pivots can predict the market trend.
All of these things make pivot levels one of the necessary tools. Still, the indicator has limitations. That's why it's vital to practice before entering the real market. For this aim, you can open a Libertex demo account. It allows not only standard currency pairs but also CFD assets with all useful technical instruments.
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FAQ
Let's sum up our tutorial in the answers to the common questions section about the pivot points.
What Is a Pivot Point in Forex?
Pivot point is a technical indicator that mostly serves to show the levels of support and resistance.
Which Pivot Points Are Best for Intraday?
The daily pivot levels are the best for intraday trading.
What Is the Pivot Strategy?
If the price breaks below the central pivot, there is a chance the trend is bearish. So, you can place take profit orders at the following support levels. The opposite rule applies to a buy position.