Pivot Points Forex Trading Strategy: Trade Pivot Lines

What Is A Pivot Point

Pivot Points represent levels that are used by floor traders to determine directional movement and potential support/resistance levels. They became popular once traders on the floor exchanges began to use them.

A pivot point is a price at which the direction of price movement changes. It is calculated using data from the previous trading day. By analyzing the high, low, and close of the day, floor traders were able to calculate the next day’s pivot point, as well as potential support and resistance levels.

Pivots Points are an accurate indicator, as the most market participants are watching and trading these key levels. Part of what makes the Pivots Points so reliable is the fact that they are based purely on price. Pivot points are especially useful to short-term traders who are looking to speculate small price movements (scalping).

How To Calculate Pivot Points In Day Trading

Pivot point (PP) = (High + Low + C)/3

First support (S1) = (2 * Pivot) – High

First resistance (R1) = (2 * Pivot) – Low

Second support (S2) = Pivot – (High – Low)

Second resistance (R2) = Pivot + (High – Low)

Third support (S3) = Low – 2(High – Pivot)

Third resistance (R3) = High + 2(Pivot – Low)

Pivot Lines Types

Floor Trader’s Pivot Points (Standard Pivot Points)

Floor Trader’s Pivot Points are the most popular pivot points among traders.

The central Pivot Point represents the intraday point of balance between the buyers and sellers and is usually where the largest amount of trading volume takes place. The reason is that the floor-traders are using the central Pivot Point as the main level of the day and most market orders are usually placed between the Pivot Point (PP) and the first levels of support (S1) and resistance (R1).

When traders/investors place their order into a specific market, the price will often exceed the first levels of support (S1) and resistance (R1) and will move on to test the second and third levels (S2, S3 and R2, R3).

When the price exceeds a level of support or resistance, this will affect the rest of the trading day, as floor traders will adjust their intraday valuations of the price. A break of a support or resistance level will have a pronounced effect on when and where a rally or a pullback would occur.

The main reason why the Pivot Points are working so well on a trading chart is that many traders are tracking the S/R levels and are executing their orders when price approaches each specific level.

Woodie’s Pivot Points

Woodie’s Pivot Points give more weight to the closing price of the previous period. This gives the most recent price more emphasis when calculating the main pivot point (PP) level. This is explained by the fact that a part of traders believe that the high and low of a day are a result of emotions of market participants, while the opening and closing prices are a more accurate representation of the market sentiment.

Woodie’s Pivot  Point = (High + Low + 2 x Close)/4

S1 = (2 x Pivot) – High

S2 = Pivot – (High – Low)

S3 = Low – 2 * (High – Pivot)

R1 = (2 x Pivot) – Low

R2 = Pivot + (High – Low)

R3 = High + 2 * (Pivot – Low)

The support and resistance levels are calculated the same as the Floor Trader’s Method, but they are different because they are based on the Woodie pivot point (PP) level.

Camarilla Pivot Points

Camarilla Pivot Points were developed in 1989 by Nick Stott. The central pivot point (PP) is calculated using the same formula as the Floor Trader’s Pivots while the support and resistance levels are calculated using the closing price and the trading range of the previous period.

Camarilla Pivot Points method puts more emphasis on the 3rd and 4th levels of support and resistance (S3, S4, R3, R4).

S4 and R4 levels are believed to provide strong support and resistance, and if the price moves beyond these levels it is considered a strong signal that the price may move significantly higher or lower.

Camarilla pivot point = (High + Low +Close)/3.

S1 = Close – (High – Low) * 1.1/12

S2 = Close – (High – Low) * 1.1/6

S3 = Close – (High – Low) * 1.1/4

S4 = Close – (High – Low) * 1.1/2

R1 = Close + (High – Low) * 1.1/12

R2 = Close + (High – Low) * 1.1/6

R3 = Close + (High – Low) * 1.1/4

R4 = Close + (High – Low) * 1.1/2

Demark Pivot Points

Demark Pivot Points are different compared to the other methods discussed above. Demark Pivot Points has only one level of support/resistance, S1 and R1. The calculations for the S1 and R1 levels differ from day to day, depending on whether the previous period’s close was higher, lower, or equal to the previous period’s open.

If Close > Open => more weight is applied to the High

X = ((High * 2) + Low + Close)

If Close < Open => more weight is applied to the Low

X = (High + (Low * 2) + Close)

If Close = Open => more weight is applied to the Close

X = (High + Low + (Close * 2))

Demark PP = X / 4

R1 = X / 2 – Low

S1 = X / 2 – High

Fibonacci Pivot Points

Fibonacci Pivot Points method uses the same formula to determine the central Pivot Point level as the Floor Trader’s Pivots method. The support and resistance levels are calculated by using Fibonacci retracements and extension levels of the previous session’s trading range.

Fibonacci Pivot Point = (High + Low + Close) / 3

S1 = Fibonacci Pivot – 0.382 * (High – Low)

S2 = Fibonacci Pivot – 0.618 * (High – Low)

S3 = Fibonacci Pivot – 1.000 * (High – Low)

R1 = Fibonacci Pivot + 0.382 * (High – Low)

R2 = Fibonacci Pivot + 0.618 * (High – Low)

R3 = Fibonacci Pivot + 1.000 * (High – Low)

How To Read Pivot Points

Pivot points are one of the few leading indicators and should be the first tool a trader should look at to enter a trade. Only when prices reach a certain point the trader will be able to determine whether to go long or short and set his profit objectives and stops accordingly.

Generally, the Pivot Points can be interpreted as follows:

• if the price is above the Pivot, the outlook is considered bullish
• if the price is below the Pivot, the outlook is considered bearish.
• if the price decreases below the Pivot, the first target is S1. If the price continues to decrease the next target is S2. If the price continues to plunge the next target is S3.
• if the price rises above the Pivot, the first target is R1. If the price continues to increase the next is R2. If the price continues to increase the next target is R3.

How To Trade Pivot Points – Signals and Trading Strategies

Daily Pivot Point Trading Strategy: Determine The Intraday Outlook

The central pivot point is the most important part of the whole setup. The location of the main pivot point on the chart represents an important information to be aware because there is a high probability that it will be reached.

I prefer to compare the value of the main pivot point with the value of the previous day.

• If the current pivot point is higher than the previous one, I only consider taking long entries
• If the current pivot point is lower than the previous one, I consider taking only short entries

I also take into account the distance between the main pivots (the range)

• pivots drawn at a short distance one from another, indicate a possible range. I avoid trading on markets where the most recent pivots are close, as it will most likely stay flat and offer low probability entries
• pivots drawn with a larger distance between them indicate a trending market

Forex Pivot Point Trading Strategy

This strategy is very simple, but it is one of the most powerful ways that you can take away from trading with pivots. The trading rules are straightforward:

• if we are in an upward trend, you will look to buy at support at either S1 or the main pivot point, with your target set at either R1 or R2.
• if we are in a downward trend, you will look to sell at resistance at either R1 or the main pivot point, with your target set at either S1 or S2.

TIP: don’t focus on S2, S3 level or R2, R3 level in a strong upward/downward trending market, since these levels are not often tested during a strong bullish/bearish advance. This is a trend following strategy, not a pivot reversal strategy.

In the Bitcoin pivot points chart above, you see the power of pivot points and their accuracy. In this example, we determined the main trend with a simple moving average crossover (MA21 and MA55). During this rally, we have 4 consecutive days of higher Pivots. The main pivots are well separated and are acting as a perfect area of support. S2 and S3 are never touched during these four days.

Considering your trading style and indicators used (RSI, CCI, ADX , Stochastic Oscillator, Momentum indicator, Chaikin Money Flow etc), all you have to do is to pinpoint your entries around PP and S1 levels.

Best Pivot Points Trading Strategy for Scalping/Day Trading

Scalping and Day trading with the Pivot points is a good choice for the traders that enjoy lower timeframes.

In order to be profitable when trading with pivot points, you first need to determine the main trend, or at least the main trend on the smaller timeframes. We don’t want to gamble or trade blindly, just for the sake of it, we need a solid pivot points trading technique.

For this purpose, we’ll add a moving average to estimate the main trend.

We will make our entries based on divergences between the price and an oscillator. The trick is the divergence must occur very close to a pivot point, in the direction of the main trend.

So, we won’t trade all divergences, just the ones that are in line with the current trend.

Let’s see the main rules of this strategy:

• As we are scalping or day trading, we will use lower timeframes, the 5-min chart being the most suited
• Plot the daily pivot points
• Add a 200-period exponential moving average, in order to estimate the current trend. When the price trades below the 200 EMA, we will start looking to short the market. When the price trades above the 200 EMA, we are interested in buying only.
• Plot the Stochastic Oscillator, with 8.3.5 settings. The Stochastic Oscillator will help us to spot divergences and will offer our entry points
• Start looking for divergences in the direction of the EMA. We ignore the divergences that occur on the pullbacks or corrections of the main trend.
• If the price is below 200 EMA, look for divergences on the upper side of the Stochastic Oscillator. If the price is above 200 EMA, look for divergences on the lower side of the Stochastic Oscillator.
• We enter the trade if the divergence occurs near a pivot point
• Use tight stop-losses below the pivot point we are making our entry
• Aim for at least 1:1 risk/reward ratio

Let’s see some examples to see this system in action.

Here’s a Dow Jones Index pivot points chart on the 5-min timeframe.

When we start analyzing the chart, we first look at the 200-period exponential moving average. We look for short entries below 200 EMA and long positions above it.

After we determined the direction we will be trading, we look at the Stochastic Oscillator to spot divergences.

As you can see, a first signal occurred after a hidden divergence between the Stochastic Oscillator and the price.  We had lower highs of the price accompanied by higher Stochastic values, during a downtrend. This was a clear bearish sign.

The divergence occurred right on the central pivot point of the day. So, the signal was valid and short positions under the pivot were safe.

The second signal occurred around the S1 level. The price recorded higher highs, but the Stochastic Oscillator registered higher lows. As the price was still below 200 EMA and around S1 pivot, the short signal was valid.

This was most likely a break-even trade for the day traders and a successful trade for the scalpers, as the market didn’t move as much.

In the last part of the day, we spotted another divergence. However, the price was below 200 EMA and the divergence occurred on the lower side of the Stochastic Oscillator. So, this was a no trade.

Stick to the rules and don’t enter countertrend positions.

Here’s another example, this time we have SP500 Index on the 5-min chart.

This setup generated 2 short positions.

The first signal occurred right on the central pivot point, after a divergence between Stochastic and the price. As the price was traded below 200 EMA, this was a high probability setup.

The second short occurred around S1 pivot, when a hidden divergence was spotted on the Stochastic chart.

As you can see, this system offers fewer signals during the day, but they are high probability setups.

How to Use Pivot Points for Swing Trading/Position Trading

If you have a 9-to-5 job or don’t like spending all day in front of charts, the pivot points can also assist you if you prefer swing trading or position trading.

In order to profit from trading with pivot points, it’s imperative to have a disciplined approach to trading. It is also important to keep things simple and don’t over-complicate your trading.

So, for this strategy, we’ll keep our price charts clean, without plotting a lot of indicators. We will focus on reading price in order to increase our chances to swing trade the right way.

For this setup, we’ll plot 2 indicators: pivots points and the Bollinger Bands.

We want to trade in the direction of the main trend the pullbacks on the lower or upper Bollinger band. The area must coincide with a pivot level.

It’s simple: we want to trade the rejection of that area, in the direction of the main trend.

Here are the main rules of this strategy:

• As we are swing trading or position trading, we will use higher timeframes like H4 or D1
• Plot the weekly pivot points in order to spot relevant levels on the chart. This way, we’ll know in advance were the buying and selling pressure are located on the chart
• Add the Bollinger Bands, with a 50-moving average and a standard deviation of 3. This way, we will eliminate the market noise
• Look for trades when the price is near one of the Bollinger Bands.
• We are looking for confluence areas, with a pivot point and a Bollinger band
• The stop loss will be placed outside the Bollinger Band, or below a relevant pivot point
• Aim for a risk/reward ratio of at least 2:1. Using a trailing stop is also a good idea.

The rules are simple, we just have to read the price and identify levels when the price might stop. We will trade only in the direction of the prevailing trend on the market.

Let’s see some examples.

Above we have a DAX30 Index pivot chart on the H4 timeframe. We plotted the weekly pivot points and added the Bollinger Bands.

As we were in a strong upward trend, we started looking for buy entries around confluence areas.

The first signal occurred when the price retraced to the lower Bollinger band. This area coincided with S1 pivot level. Once we saw the rejection of that area, we were safe to enter long around S1 pivot.

Few candles later we almost had another buying opportunity. Unfortunately, the price didn’t retrace to the confluence area. Just a few points were needed.

A valid signal occurred when the price retraced to the middle Bollinger Band, area which coincided with the central weekly pivot point.

The last 2 signals were spotted on the lower Bollinger Band, around S2 pivot levels.

During strong trends, the price won’t retrace to the lower Bollinger Bands. So, you must be prepared to enter at the middle Bollinger Band.

Look at the Brent Crude Oil H4 pivot points chart, the trend was so strong that it retraced just once at the lower Bollinger bands.

The rest of the signals occurred at the confluence between the middle Bollinger band and the central weekly pivot point.

All of the trades were successful, as the price rejected the confluence areas and continued its upward movement.

Pivot Points Pros And Cons

• ↑  one of the most accurate leading indicators
• ↑  offers excellent support/resistance levels
• ↑  most market participants are watching and trading with pivots
• ↓  should be complemented by other technical indicators for better entries
• ↓  during non-trading days will offer false signals