Forex pivot point system

How To Trade Pivot Points.

Pivot Point Trading.

You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.

The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.

If you would rather work the pivot points out by yourself the formula I use is below:

Resistance 3 = High + 2*(Pivot – Low)

Resistance 2 = Pivot + (R1 – S1)

Resistance 1 = 2 * Pivot – Low.

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

Support 1 = 2 * Pivot – High.

Support 2 = Pivot – (R1 – S1)

Support 3 = Low – 2*(High – Pivot)

As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2, R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.

The Breakout Trade.

At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1.

The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.

The Pullback Trade.

This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high – peak) and a target set for S2.

The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that, the market sentiment is beginning to change.

Breakout of Resistance.

As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line.

If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.

As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode.

Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.

Martin Chandra is a full-time investor. Learn more about pivot point at here.

Don’t forget you can download various pivot point indicators for metatrader here at Great Trading Systems.

Further more you can trade the Camerilla Pivot Points as shown by surefiretrading by checking out their website here.

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Using Pivot Points In Forex Trading.

Trading requires reference points (support and resistance), which are used to determine when to enter the market, place stops and take profits. However, many beginning traders divert too much attention to technical indicators such as moving average convergence divergence (MACD) and relative strength index (RSI) (to name a few) and fail to identify a point that defines risk. Unknown risk can lead to margin calls, but calculated risk significantly improves the odds of success over the long haul.

One tool that actually provides potential support and resistance and helps minimize risk is the pivot point and its derivatives. In this article, we'll argue why a combination of pivot points and traditional technical tools is far more powerful than technical tools alone and show how this combination can be used effectively in the FX market.

Pivot Points 101.

The pivot point can then be used to calculate estimated support and resistance for the current trading day.

Support 1 = (2 x Pivot Point) – High (previous period)

Resistance 2 = (Pivot Point – Support 1) + Resistance 1.

Resistance 3 = (Pivot Point – Support 2) + Resistance 2.

To get a full understanding of how well pivot points can work, compile statistics for the EUR/USD on how distant each high and low has been from each calculated resistance (R1, R2, R3) and support level (S1, S2, S3).

To do the calculation yourself:

Calculate the pivot points, support levels and resistance levels for x number of days. Subtract the support pivot points from the actual low of the day (Low – S1, Low – S2, Low – S3). Subtract the resistance pivot points from the actual high of the day (High – R1, High – R2, High – R3). Calculate the average for each difference.

The results since the inception of the euro (January 1, 1999, with the first trading day on January 4, 1999):

The actual low is, on average, 1 pip below Support 1 The actual high is, on average, 1 pip below Resistance 1.

Going a step farther, we calculated the number of days that the low was lower than each S1, S2 and S3 and the number of days that the high was higher than the each R1, R2 and R3.

The result: there have been 2,026 trading days since the inception of the euro as of October 12, 2006.

The actual low has been lower than S1 892 times, or 44% of the time The actual high has been higher than R1 853 times, or 42% of the time.

This information is useful to a trader; if you know that the pair slips below S1 44% of the time, you can place a stop below S1 with confidence, understanding that probability is on your side. Additionally, you may want to take profits just below R1 because you know that the high for the day exceeds R1 only 42% of the time. Again, the probabilities are with you.

It is important to understand, however, that theses are probabilities and not certainties. On average, the high is 1 pip below R1 and exceeds R1 42% of the time. This neither means that the high will exceed R1 four days out of the next 10, nor that the high is always going to be 1 pip below R1. The power in this information lies in the fact that you can confidently gauge potential support and resistance ahead of time, have reference points to place stops and limits and, most importantly, limit risk while putting yourself in a position to profit.

Using the Information.

RSI Divergence at Pivot Resistance/Support.

This is typically a high reward-to-risk trade. The risk is well-defined due to the recent high (or low for a buy).The pivot points in the above examples are calculated using weekly data. The above example shows that from August 16 to 17, R1 held as solid resistance (first circle) at 1.2854 and the RSI divergence suggested that the upside was limited. This suggests that there is an opportunity to go short on a break below R1 with a stop at the recent high and a limit at the pivot point, which is now a support:

Sell Short at 1.2853. Stop at the recent high at 1.2885. Limit at the pivot point at 1.2784.

This first trade netted a 69 pip profit with 32 pips of risk. The reward to risk ratio was 2.16.

The next week produced nearly the exact same setup. The week began with a rally to and just above R1 at 1.2908, which was also accompanied by bearish divergence. The short signal is generated on the decline back below R1 at which point we can sell short with a stop at the recent high and a limit at the pivot point (which is now support):

Sell short at 1.2907. Stop at the recent high at 1.2939. Limit at the pivot point at 1.2802.

This trade netted a 105 pip profit with just 32 pips of risk. The reward to risk ratio was 3.28.

The rules for the setup are simple:

1. Identify bearish divergence at the pivot point, either R1, R2 or R3 (most common at R1).

2. When price declines back below the reference point (it could be the pivot point, R1, R2, R3), initiate a short position with a stop at the recent swing high.

3. Place a limit (take profit) order at the next level. If you sold at R2, your first target would be R1. In this case, former resistance becomes support and vice versa.

1. Identify bullish divergence at the pivot point, either S1, S2 or S3 (most common at S1).

2. When price rallies back above the reference point (it could be the pivot point, S1, S2, S3), initiate a long position with a stop at the recent swing low.

3. Place a limit (take profit) order at the next level (if you bought at S2, your first target would be S1 … former support becomes resistance and vice versa).

Pivot Points data provided by IG.

Pivot Points are widely used by day traders to quickly determine where forex market sentiment may change between bullish and bearish. Pivot Points are also commonly used to find likely Support and Resistance levels.

Pivot Points are calculated using the Open, High, Low, and Close prices for the previous period. So, today's Pivot Points use yesterday's Open, High, Low, and Close values. The Trading Day begins and ends at 5pm New York Time. DailyFX shows Classical, Camarilla, and Woodie's Pivot Points.

Sentiment data provided by IG.

Past performance is no indication of future results.

DailyFX is the news and education website of IG Group.

Forex Pivot Points.

Immensely powerful, neglected by the mass of traders, embraced by a savvy few as an extra edge in their forex trading…

Open outcry on the pre-digital trading floor of the New York Stock Exchange.

NB: the following refers to a prototype of the AuthenticFX Paleo Indicator that is now available on the resources page. To get the indicator go to the following link:

AuthenticFX Resources Page.

Pivots originated in the very early days of the grain trading pits, way before computers or electronic devices existed.

The pit traders used the previous session’s trading range prices to draw up a series of levels which they used as reference points for the current day’s trading.

This crude attempt to predict the current session’s price action around certain price levels proved surprisingly successful , and was soon picked up by other traders. Thereafter, the idea of using pivot points gained popular acceptance.

N. B. it took me almost 2 years to refine what I believe to be the best forex pivots indicator for MetaTrader. I have now included it as part of the AuthenticFX Paleo Indicator. Click the following link to get the Paleo indicator:

This in turn made the actual pivot levels even more powerful , as many more traders were now watching “key” levels, ready to place orders when priceapproached them.

This same system of plotting a daily central price level and other price levels stepping off from that, forms the basis of forex pivot trading. Forex pivots are a set of price levels plotted for the current day based on the previous day’s high, low and closing price.

(N. B. The term itself is something of a misnomer as there is only one pivot point: the central pivot. All the other levels are actually offsets from this central pivot.)

The calculation to get the central pivot is to add the previous high, low and close together and divide by three:

Central Pivot = (HIGH+LOW+CLOSE) / 3.

The offsets from this central pivot are considered to be either resistance levels – R1, R2 etc – or support levels – S1, S2 etc. How far you want to take these extra levels away from the central pivot is a matter of choice, personally I go no further than R2 for resistance and S2 for support.

The calculations for these support and resistance levels are mathematically simple, attained by the following method:

R2 = (Central Pivot-S1)+R1.

R1 = (Central Pivot+(Central Pivot-LOW))

Central Pivot = (HIGH+LOW+CLOSE) / 3.

S1 = (Central Pivot-(HIGH-Central Pivot))

S2 = (Central Pivot-(R1-S1))

The result is a chart that looks like this:

There are levels in between these support and resistance levels which can also be plotted, known as Mid-Point Pivots . The calculations to include the mid-point pivots expands our formula to the following:

R2 = (Central Pivot-S1)+R1.

R1 = (Central Pivot+(Central Pivot-LOW))

M3 = (Central Pivot+R1)/2.

Central Pivot = (HIGH+LOW+CLOSE)/3.

M2 = (Central Pivot+S1)/2.

S1 = (Central Pivot-(HIGH-Central Pivot))

S2 = (Central Pivot-(R1-S1))

There are variations to the manner in which the calculations are achieved. Some people factor in the daily open as well. But the methodology described above is the most common, with the exception of the M levels which are rarely used (but powerful just the same!)

In the indicator for plotting forex pivots that I use it is possible to turn these mid-point pivots on or off (as with all the levels in fact). I choose to keep them turned on, and this is what it looks like on my chart:

I have also left the labelling of these pivots turned on for illustration purposes, but I usually turn that feature off for more clarity . I also usually employ only the daily central pivot in trading, for extra clarity on my charts. The exception to this rule is when I trade systems such as the Daily All Pivots Scalp Trade, which requires all daily pivots.

Pivot levels can also be plotted for weekly , monthly and yearly pivots. The weekly and monthly pivots are of especial interest, being more than usually reliable as points where price will react and often turn. In the following forex charting example (with only the central daily pivot plotted and labelling turned off) the the daily central pivot shows as a yellow line, weekly pivots are shown in blue , monthly pivots in green , and yearly pivots in red lines:

The forex trader would do well to investigate the use of pivot levels in their trading if they do not already employ them. The weekly and monthly pivots are especially powerful . Check out the following forex chart of the AUDUSD and note how many times price reacts at and turns from these pivots:

In the above example I have enabled back history display of the pivots, so that you can see several weeks’ worth of forex pivot point levels. Enabling the history – you can choose any number of iterations for each pivot type: weekly, monthly etc – is great for “eyeballing” historic data when backtesting.

N. B. don’t forget to get the best forex pivots indicator for MetaTrader, now incorporated as part of the AuthenticFX Paleo Indicator. Click the following link to get the Paleo indicator:

Which time frame do you get your open, high, low and close from? is it the daily, hourly etc?

Pivots are calculated from the previous corresponding timeframe. For example, today’s daily pivots are calculated from yesterday’s OHLC; this week’s pivots use last week’s OHLC.

which one of the pivot level, would you recommend for trading the daily chart, it is the yearly pivot, monthly, or weekly?

Thanks a lot for your time!

All of them will be useful, although personally I only bother with the central pivot for daily pivots.

Are we to plot the pivot indicator daily on the chart or once and it will cont to updates itself?

It should update itself once set up.

Pls can you throw some light on how you use the central pivot?

I use it to trade the Chris Lori P38 set up, but only when all other factors such as time of day, current fundamentals etc. line up. Other than that, I just use it as a reference point in the sense that if I’m in a trade and price is heading towards the central pivot, I can usually expect some kind of a reaction at that price level if there are other reasons such as a round number or old support/resistance that lend support to that reaction.

Do i have to change the following input.. if my broker daily candle close does not follow NY close.

1. Chart… Hour offset from NY.

2. Daily..end NY hour.

3. Daily Plot end NY hour.

No, it doesn’t seem to make any difference. At least, I’ve never done it myself and the indicator seems to work fine. But please note that I only plot the daily central pivot in the dailies these days, so you may wish to experiment a little if you are plotting all of the dailies.