Using and Interpreting Intra-day Pivot Points

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Using and Interpreting Intra-day Pivot Points

Pivot Points are a popular tool used by day traders. Pivot Points use yesterday’s price action to provide potentially important price areas today. Therefore, traders run the calculation at night or in the morning to provide themselves with the Pivot Points for the upcoming session. That makes Pivot Points a “predictive” indicator, similar to Fibonacci Retracements or Fibonacci Extensions. There are a number of applications and chart platforms that calculate the Pivot Points for you, but we’ll go through the basic calculation as well.

Pivot Points are a day trading tool, and therefore typically applied to chart time-frames of 15-minutes or less (1-min, 5-min, etc). The Pivot Point levels change from day to day, but don’t change during the day.

There are typically 5 lines using Standard Pivot Points (please note, over the years a number of Pivot Point variations have been developed). All calculations are based on the last trading session.

  • Pivot Point (P) = (high + low + close) / 3
  • Support 1 (S1) = (P x 2) – high
  • Support 2 (S2) = P – (high – low)
  • Resistance 1 (R1) = (P x 2) – Low
  • Resistance 2 (R2) = P + (high – low)

Figure 1 shows how these are applied to a chart.

Figure 1. Pivot Points Applied to Apple (AAPL) – 5-Minute Chart

As the example shows, sometimes several of the levels will not be relevant, as the price doesn’t even come close them. In this case, the price opens at the Pivot (P) and quickly drops, never moving toward R1 and R2.

Interpreting Pivot Points

The Pivot (P) provides a context for the day. When the price is above P it shows strength. When the price is below P it shows weakness. In figure 1 the price drops below P immediately after the open, showing initial weakness. This set a bearish tone and indicated that traders should be more inclined to take short positions (buying puts). The price won’t always stay on one side, but crossing above or below still indicates strength or weakness respectively.

If the price crosses below P, the first target is S1. If the price continues to decline the next target is S2.

If the price crosses above P, the first target is R1. If the price continues to advance the next is R2.

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Additional Pivot Points can also be added, such as R3 or S3 to create even more levels to watch.

S1 and S2 can also act just like normal support. If the price reaches S1 or S2 and stops, traders can look for trade setups or patterns that indicate a bounce, and then take a long position as the price bounces off the support level. Typically traders wait for the price to pause and bounce, and not just assume that these levels will act as support.

In figure 1 the price shows no respect for S2, and just keeps dropping. When this occurs it indicates weakness, and therefore isn’t used as an opportunity to go long (buy calls).

The price does stall at S1, and possibly some traders may have viewed this as a bullish sign. But with overall momentum down, and no strong moves higher, even here traders should be more inclined to look for short positions (buy puts) than look for longs.

R1 and R2 act the same way. They provide areas of potential resistance. If the price reaches and stalls at a resistance area, traders can look for trade signals to go short (buy puts) once the price has shown respect for the resistance level. Don’t assume resistance will hold, rather wait for price to respect it and provide a trade signal.

Figure 2. R1 and R2 Acting as Resistance In GE – 5 minute chart

Pivot Points can be a useful tool for gauging intra-day momentum and providing some potentially important areas which traders can use to filter trade signals. Don’t assume to know what the price will do at a pivot point. You’ll need to watch price action so you can act quickly when signals materialize near these levels.

How to use Pivot Point in intraday trading? Find out the most effective Pivot Point trading strategy to trade with, and get profitable results!

Do you want to know what is Pivot Point? Watch our latest video to find out how to use Pivot Point in intraday trading.

How to use Pivot Point in intraday trading – a simple, but effective guide

Now, Pivot Points are pretty common, they’re probably one of the first things that new traders learn about, along with moving averages and Bollinger Bands and the MACD or the Moving Average Convergence Divergence indicator. But if you’ve never used Pivots and you are using TradingView, we go to indicators, and then we just type in Pivot and we want the standard version and that will put it on our screen. Now, personally, I like to change the color to black and thicken the lines just a tad. And there we have our pivots. And also, if you go to inputs you can see that there are various different types of pivots that we can use. My personal favorite is using Woodies Pivots.

Now, Pivots, they just represent an area of support and resistance and they’re labeled. This is resistance one, this is the main pivot and this is support. So, resistance one means that when price is trading up it needs to break through this zone to go higher and support means when price is trading down to it, that the price will bounce off of it. Now, when you’re looking at this, it seems fairly easy to just say, “Well, when price goes up to a pivot line, we just short, or when it comes down to pivot line, we go long.” That doesn’t work. It doesn’t work for a lot of reasons, because we don’t know when it’s going to fail or not. So we need to use another tool in our trading toolbox. And what I like to use is the Relative Strength Index, that’s probably a very popular one, that people learn about right away in their trading, and then the other one is a less well-known called, The Composite Index. It’s essentially the RSI… If this is Windows 3.0, this is Windows 10, or whatever the best version of Windows is. This is better.

Now, how we use an oscillator in addition to pivot points is that we look for conditions that tell us that we’re going to have a type of reversal. For instance, when price was here and it was trading down, what did we see in our oscillator? We saw it was near the default oversold condition and that in the Composite Index the red line was below both of the averages so that creates a buying signal. So price was sitting on a pivot, we were near the default oversold condition and we had a buying signal. So yes, we could buy off that. And then when it came back down we still had a buying signal and we were at little trader’s discretion, whether you want to keep going long here. And then, we traded up. But then, what happened up here? What happened at this resistance line where it traded above it and came back down, which is normal. Generally, when you cross a new pivot line, above or below, price really just goes through it and then retest it again. It will retest frequently. So we did a retest, came back down, and we traded in. Instead, this line turned into support, but we didn’t find support. What if we did buy here? Price we know went down, but if we didn’t have the oscillators to confirm entry and we bought here, we would have lost some money on that trade.

Looking at our indicators, we are neutral in the RSI and we don’t have a sell signal on the Composite Index. And we can keep looking forward more and more and seeing more. This is a good short opportunity, because price came up to the pivot and then, look at our oscillators. Especially when they have a similar structure, that is something to pay attention to. So, we’re up near this resistance pivot and we are overbought on our RSI and we are extended above the two averages in the Composite Index, creating a sell signal. And so, this would be a good short opportunity, okay?

Again, if you put this into practice with your regular trading or if you don’t have a system that is working, this is not a system itself. This is just one simple strategy that you can use to trade and it can be very effective, especially if you are using longer time frames, on hourly and higher time frames, this is going to be the most effective and I hope you found this video helpful. Hope it helps you with your trading and have a wonderful day!

Discover how to use Pivot Point in intraday trading.

Using Pivot Points for Predictions

Pivot points are used by traders in equity and commodity exchanges. They’re calculated based on the high, low, and closing prices of previous trading sessions, and they’re used to predict support and resistance levels in the current or upcoming session. These support and resistance levels can be used by traders to determine entry and exit points, both for stop-losses and profit taking.

Key Takeaways

  • A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames.
  • The pivot point itself is simply the average of the high, low and closing prices from the previous trading day.
  • On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.
  • Here we go over how to calculate pivot point levels and use them in practice.

How to Calculate Pivot Points

There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day’s high, low, and close, along with two support levels and two resistance levels (totaling five price points), to derive a pivot point. The equations are as follows:

For stocks, which trade only during specific hours of the day, use the high, low, and close from the day’s standard trading hours.

In 24-hour markets, such as the forex market in which currency is traded, pivot points are often calculated using New York closing time (4 p.m. EST) on a 24-hour cycle. Since the GMT is also often used in forex trading, some traders opt to use 23:59 GMT for the close of a trading session and 00:00 GMT for the opening of the new session.

While it’s typical to apply pivot points to the chart using data from the previous day to provide support and resistance levels for the next day, it’s also possible to use last week’s data and make pivot points for next week. This would serve swing traders and, to a lesser extent, day traders.

Pivot Points

Alternative Methods

Another common variation of the five-point system is the inclusion of the opening price in the formula:

Here, the opening price is added to the equation. The supports and resistances can then be calculated in the same manner as the five-point system, except with the use of the modified pivot point.

Yet another pivot-point system was developed by Tom DeMark, founder and CEO of DeMARK Analytics. This system uses the following rules:

As you can see, there are many different pivot-point systems available.

While knowing how to calculate pivot points is important for understanding what you’re using, most charting platforms calculate pivot points for us. Simply add the pivot-point indicators to your chart and choose the settings you prefer.

Interpreting and Using Pivot Points

The pivot point itself is the primary support and resistance when calculating it. This means that the largest price movement is expected to occur at this price. The other support and resistance levels are less influential, but they may still generate significant price movements.

Pivot points can be used in two ways. The first way is to determine the overall market trend. If the pivot point price is broken in an upward movement, then the market is bullish. If the price drops through the pivot point, then it’s is bearish.

The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop loss at or near a support level.

While at times it appears that the levels are very good at predicting price movement, there are also times when the levels appear to have no impact at all. Like any technical tool, profits won’t likely come from relying on one indicator exclusively.

The success of a pivot point system lies squarely on the shoulders of the trader and depends on their ability to effectively use it in conjunction with other forms of technical analysis. These other technical indicators can be anything from a MACD to candlestick patterns, or using a moving average to help establish the trend direction. The greater the number of positive indications for a trade, the greater the chances for success.

The Bottom Line

Pivot points are a great way to identify areas of support and resistance, but they work best when combined with other kinds of technical analysis

Pivot points are based on a simple calculation, and while they work for some traders, others may not find them useful. There is no assurance the price will stop at, reverse at, or even reach the levels created on the chart. Other times the price will move back and forth through a level. As with all indicators, it should only be used as part of a complete trading plan.

The Technical Analysis Course on the Investopedia Academy provides a comprehensive overview of both chart patterns and technical indicators, as well as how they can be used to make educated projections and manage risk.

Using and Interpreting Intra-day Pivot Points

A pivot point is a price level which is used to forecast significant market support and resistance based on the prior day’s trading range. Most people use daily and weekly pivot points especially for intraday trading to pick out good reversal points in the market.

Here at The Forex Army, we take it one level further by introducing our own Fibonacci Pivot Points which is an adaptation from the standard pivot point and is historically more accurate in picking out reversal points than standard pivot points.

2. Is a pivot point enough to trade as a strategy?

Absolutely 100% not. The daily fibonacci pivot point combined with even the weekly pivot points is not enough to standalone as a trading strategy that will prove profitable in the long run. You need a couple more indicators to complement it for it to become a highly profitable trading strategy.

One of our live traders (2nd Lieutenant Jimmy) has developed a strategy that has proven tremendously profitable (hence we naming it after him). Here’s a preview of his profits in January on a live ATC account :

3. What other indicators are required to achieve these fantastic results?

The key point is to find indicators that point out key levels which reversals could potentially happen. As a combination of these indicators around pivot points can greatly increase your accuracy in picking an extremely high risk : reward trade (think 1 : 10+). In this section, we’ll cover what are the recommended indicators to be combined with the Fibonacci Pivot Point indicator.

3.1. The RSI

The Relative Strength Index (RSI) is one of the best oscillator indicator and perhaps the only one I ever use. With an adapted period of 13 (because of it’s fibonacci sequence), it helps pick out market tops and bottoms with great ease.

I’ve been trading long enough to know that every single market/currency responds differently to different key levels in RSI and in this tutorial on RSI Explained, I’ll explain more in-depth on the various ways you can use RSI to trade properly. For now, here’s one of the ways (and my preferred way) to use RSI in this trading setup, the key here is not to use the standard 20/80 rule as overbought and oversold and instead plot them out and find the specific levels and areas yourself :

3.2. The TFA Advanced Fibonacci Waves

The TFA Advanced Fibonacci Waves is what drives all the calculations behind the TFA Sniper, you can see how price responds almost magically to many of the waves. There are usually 2 areas of focus when observing the TFA Sniper on a single time frame :

  1. Areas of consolidation
  2. Wide Fibonacci Lines

Areas of consolidation

You can see in the above picture the areas of consolidation of the TFA Advanced Fibonacci Waves prove as great resistance even if just observing on a single time frame. While others have traded purely off these fibonacci waves by themselves, it is highly recommended to combine it with other indicators to give clearer confirmation of entry valid entry signals. In this case, we are looking for a combination of :

  1. Fibonacci pivot point
  2. RSI
  3. Area of consolidation

With these 3 combined, you have a good chance of seeing price reverse.

Wide Fibonacci Lines

Wide fibonacci lines usually stand by themselves, but they hold a lot of power in them. These are key reversal points and the wider they are, the stronger they are in forecasting reversals.

It’s important not to trade these by themselves too, instead, combine it with the above mentioned fibonacci pivot points and RSI to pick out good reversal trades.

3.3. Candlestick Reversal Patterns

An additional point you can look out for to add further conviction to your trade are candlestick reversal patterns. There are a lot of information out there on candlestick reversals and I urge everyone to read up on them as much as possible. I personally love it when the candles have long “wicks” or “shadows”. couple of my favorites and which I personally think are the clearest are the following :

4. What about the take profit, stop loss and trade management?

There are numerous ways we can target take profit levels and manage our trades. Here are a couple of ways that are suggested :

4.1. Jimmy’s Method

Jimmy’s method is the most straightforward method, it involves setting a take profit at the first pivot point in the opposite direction. Meaning if you’re on the first resistance pivot point, you set your take profit on the first support pivot point. If you’re on the second resistance pivot point, you similarly set your take profit on the first support pivot point. Here’s an example :

4.2. Use Fibonacci Retracement Levels

One other effective way to take profit is to use fibonacci retracement levels, especially those that coincide with graphical overlap levels (refer to the breakout pullback strategy to understand what a graphical overlap level means)

What are the recommended fibonacci retracement levels to use? We recommend the golden ratio (0.618) to be used when taking such profits.

Below is an example of a good AUDUSD trade opportunity with the JT strategy. Notice how the 61.8% retracement coincides with the breakout level too. In this case, it would be fine to use either the 61.8% and the 50% level. We can even take half our position at 50% and the other half at 61.8%.

5. Conclusion to using pivot points for intraday trading

In conclusion, using pivot points is a very profitable way to trade but it’s not recommended to use them exclusively by themselves to trade. They should be combined with the really powerful advanced fibonacci waves we have here, along with a knowledge on using RSI correctly to pick reversal points. On top of that, it’s important you equip yourself with the knowledge of learning how to use fibonacci retracements to pick certain levels to take your profits at.

There are many websites out there that teach you how to use pivot points like those at investopedia and stockcharts but sadly, they are usually insufficient as they do not help you see the market holistically.

Now that you’re done with this tutorial on how to use pivot points in intraday trading, I highly recommend you check out our other scalping strategies like our famous breakout pullback strategy that brought in 134% in 1 month on a live account.

© 2020 – 2020 TFA Global Pte. Ltd. All rights reserved. All other trademarks appearing on this Website are the property of their respective owners.

Disclaimer and Risk Warning: Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. Information on this website is general in nature. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks.

The information on this site is not directed at residents of countries where its distribution, or use by any person, would be contrary to local law or regulation.

Pivot Points

Pivot points are one of the most widely used indicators in day trading. The tool provides a specialized plot of seven support and resistance levels intended to find intraday turning points in the market.

Below is a view of how they appear on a one-hour chart of the AUD/JPY currency pair. All seven levels are within view.

While traders often find their own support and resistance levels by finding previous turning points in the market, pivot points plot automatically on a daily basis. Since many market participants track these levels, price tends to react to them.

Calculation of Pivot Points

Pivots points can be calculated for various timeframes in some charting software programs that allow you to customize the indicator. For example, some programs may allow you to calculate pivots points for a weekly or monthly interval. But the standard indicator is plotted on the daily level.

The central price level – the pivot point – is calculated as a function of the market’s high, low, and close from the previous day (or period, more generally). These values are summed and divided by three. This is the same concept as the “typical price”.

Pivot Point = [High (previous) + Low (previous) + Close (previous)] / 3

The other six price levels – three support levels and three resistance levels – all use the value of the pivot point as part of their calculations.

The three support levels are conveniently termed support 1, support 2, and support 3. The three resistance levels are referred to as resistance 1, resistance 2, and resistance 3. You may also see them called by their shorthand forms – S1, S2, S3, and R1, R2, R3, respectively.

These values are calculated as follows:

  • Resistance 1 = (2 x Pivot Point) – Low (previous period)
  • Support 1 = (2 x Pivot Point) – High (previous period)
  • Resistance 2 = (Pivot Point – Support 1) + Resistance 1
  • Support 2 = Pivot Point – (Resistance 1 – Support 1)
  • Resistance 3 = (Pivot Point – Support 2) + Resistance 2
  • Support 3 = Pivot Point – (Resistance 2 – Support 2)

Since the price levels are based on the high, low, and close of the previous day, the wider the range between these values the greater the distance between levels on the subsequent trading day. Likewise, the smaller the trading range, the lower the distance between levels will be the following day.

It should be noted that not all levels will necessarily appear on a chart at once. This simply means that the scale of the price chart is such that some levels are not included within the viewing window.

Uses of Pivot Points

Pivot points were initially used on stocks and in futures markets, though the indicator has been widely adapted to day trading the forex market.

Pivot points have the advantage of being a leading indicator, meaning traders can use the indicator to gauge potential turning points in the market ahead of time. They can either act as trade entry targets themselves by using them as support or resistance, or as levels for stop-losses and/or take-profit levels.

For example, below we can see multiple cases of S1 acting as support.

The pivot point, being the middle line and the level off which everything else is calculated, is the primary focus. If price is trading above the pivot point, market sentiment might be considered bullish for the day (even though it’s still possible for a market to be down for the day if this is true).

If the market is flat, price may ebb and flow around the pivot point. We can observe this type of price behavior in the chart below.

Though R1, R2, and R3 are termed in the sense that they may likely act as resistance as the market rises, if price runs above them they can also act as support if price were to move down. The same holds true for S1, S2, and S3, which can act as resistance on any move back up when they break as support.

For instance, here we see a resistance level acting as support.

Using Pivot Points for Gauging Probabilities

Pivot points are also used by some traders to estimate the probability of a price move sustaining itself. Though it depends on the market, the following probabilities are generally reported in terms of how likely price is to close the trading day above or below the following levels:

  • Closes higher than R1 40% of the time
  • Closes lower than S1 40% of the time
  • Closes higher than R2 15% of the time
  • Closes lower than S2 15% of the time
  • Closes higher than R3 5% of the time
  • Closes lower than S3 5% of the time

These, of course, are simply rough approximations. Simply because price is moving above or below the outer levels doesn’t necessarily mean the moves aren’t valid or sustainable. For example, it should never be assumed that, based on the above information, that you have an 85% chance of winning a trade if you take a long position when price hits S2. That certainly will not be true on its own.

Pivot Points as Stop Losses

Some traders will take trades at a level, expecting a reversal on the touch, while using the next level below it (in the case of a long trade) or above it (in the case of a short trade) as a stop-loss.

Here we see a short entry at R1 and a stop-loss at R2.

Trading Using Pivot Points

At this point, it should seem fairly straightforward that pivot points are used as prospective turning points in the market. Taking trades at these levels in the direction of the expected reversal is a very common technical strategy.

To improve the viability of this strategy, traders will tie the pivot points strategy to other indicators. For instance, one might use a 50-period simple moving average to gauge the trend and bias one’s trades only in the direction of that trend.

Moreover, instead of taking the first touch of a pivot level, one might require a secondary touch for confirmation that the level is valid as a turning point. Below is an example of why “confirming” the validity of a level is best before taking a trade on a basic touch. This is a five-minute chart of the EUR/USD.

When data or news is coming out, volume markedly picks up and the previous trading movement and intraday support and resistance levels can quickly become obsolete. On the big green bar, price did indeed hold between the two pivot levels. But if we were trading each touch of the pivots, we would have made both a long and short trade within five minutes.

After that point, the market became firmly bearish and fell steadily, showing no sensitivity to pivot points.

So you need to be careful and make sure you aren’t trying to trade levels that the market has no intention of respecting when big volume is present in the market.

If we were to write out our rules for this system:

1. a) If the 50-period simple moving average is positively sloped, take long trades only.

b) If the 50-period simple moving average is negatively sloped, take short trades only.

2. Take trades upon a secondary touch of the pivot level after first affirming that the primary touch is a rejection of the level.

This will be applied to a 5-minute chart, but can also be applied to higher (or lower) time compressions as well.

For day traders, who use daily pivot points, using the 5-minute to hourly chart is most reasonable. Swing traders might use weekly pivot points would be best to apply the strategy on the four-hour to daily chart. Position traders would probably best be suited to use monthly pivot points on either the daily or weekly chart.

But this is a fairly simple system that can be effective.

Example

Here we have a 5-minute chart of the EUR/USD currency pair.

Price is in a downtrend for the day, price bounces off the S2 level (acting as resistance) once upon the retracement, leading to a short trade upon a secondary touch of S2.

This trade worked itself out well, after continuing the downtrend shortly thereafter.

Now, of course, the question is, how do you determine where to get out?

Before placing a trade, you have to have an exit plan. This can take multiple forms.

Several options are displayed in the diagram below.

A level of resistance forms shortly after the trade begins moving in our direction. Naturally, expecting resistance to form there again in the future can be reasonable.

Moreover, if price begins consolidating and any momentum in the trend – or volume in the market as a whole – has faded, then we can simply choose to exit the trade then.

Or we can take a touch of the moving average. Some traders use some of the more popular moving averages – 50-, 100-, and/or 200-period – as support and resistance levels or consider a change in the trend if price were to get above whichever moving average is being tracked.

A natural take-profit in a pivot points system is also, of course, at the next level in the hierarchy. In this case, if we’re taking a short trade at S2, our take-profit level might be S3. But as aforementioned, getting to the outermost levels, like S3 and R3, is generally rare.

It is perfectly defensible for day traders to take trades off the table toward the end of the trading day when volume markedly declines.

A Word on Time Zones

It should also be noted that pivot points are sensitive to time zones. Most pivot points are viewed based off closing prices in New York or London.

Therefore, someone using charting software using a closing time based in San Francisco or Tokyo or some other time zone may have different pivot points plotted on their chart that may not be followed on any large scale internationally. This could potentially render them of muted or no value.

Accordingly, it’s recommended that your charting times are set to either New York hours or London hours. How these relate to GMT or UTC specifically depends on where each is in the calendar, as both cities employ daylight savings time.

Whichever time zone you choose, know that pivot points can be backtested by going through previous price data. It is important to ensure that price is sensitive to these levels in the market you’re trading.

Conclusion

Pivot points provide a glance at potential future support and resistance levels in the market. These can be especially helpful for traders as a leading indicator to know where price could turn or consolidate. They can also be used as stop-loss or take-profit levels.

While daily pivot points are the most common and most appropriate for day traders, some charting platforms will allow you to plot them for other timeframes as well (e.g., weekly, monthly).

As with all indicators, they should not be used as the only thing that you’re basing your trades on. They should be used in addition to other forms of analysis and/or other technical indicators.

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