One of the main tasks of a trader is to determine the key resistance and support levels, as well as the points where the trend can reverse with the highest probability.
One of the options for calculating these levels is the use of the Pivot Points indicator. Depending on the Pivot Points method specified in the settings, the indicator automatically plots several resistance and support lines for High (Max), Low (Min) and Close prices. Learn about what pivot points are, how pivot points are calculated and how to use them in your trading systems.
In this article, we will analyze:
- What are Pivot Points?
- Methods of Establishing Pivot Points
- Pivot Points indicator signals in trading
- How to add Pivot Points in MT4?
- How to use Pivot Points with LiteFinance?
- Pivot Points Trading Strategies
- How Pivot Points are calculated
- How are Pivot Levels useful in trading?
- Advantages and disadvantages of the Pivot Point indicator
- Support & Resistance Levels
- Key points
- Conclusion on the use of Pivot Point
- FAQ on Pivot Point Indicator
What are pivot points?
“Pivot” is a French word adopted in English and literally means “pivot”. In trading, Pivot points are turning points from which price pushes back and starts moving in the opposite direction.
In other words, a Pivot is a level at which a bullish price direction changes to a bearish one and vice versa.
The tool will be useful for those who:
- Determines market entry and exit points by resistance and support.
- Selects the methods of calculation of stop-loss and take-profit lengths.
- Uses strategies for trading inside the price range.
The principles of classical levels construction on Forex based on extremums are subjective. But if we take levels based on a specific mathematical formula, we will obtain a tool that is not subject to different interpretations. These will be the Pivot levels.
Methods of drawing pivot points
The classical formula for constructing pivot points implies the use of the average value of three price types – candlestick extremums and closing price. The difference between other calculation methods and the classical one is in the number of lines being plotted, application of additional correction coefficients and use of weighting coefficients.
1. Classical calculation formula.
6 horizons are calculated: 3 resistance levels (R1-R3) and 3 support levels (S1-S3). The formula for calculation of the Pivot central level – arithmetic mean of three price levels.
Pivot = (Max + Min + Close)/3
R1 = Pivot + (Pivot – Min)
R2 = Pivot + (Max – Min)
R3 = Max + 2*(Pivot – Min)
S1 = Pivot – (Max – Pivot)
S2 = Pivot – (Max – Min)
S3 = Min – 2*(Max – Pivot)
Max and Min – maximum and minimum prices, Close – closing price.
Fibonacci coefficients are used for calculation of deviation levels from the Piwot base line. The formula for calculating the base line is similar to the classical variant.
Pivot = (Max + Min + Close)/3
R1 = Pivot + (R*0.382)
R2 = Pivot + (R*0.618)
R3 = Pivot + (R*1,00)
R4 = Pivot + (R*1.618)
S1 = Pivot – (R*0.382)
S2 = Pivot – (R*0.618)
S3 = Pivot – (R*1,00)
S4 = Pivot – (R*1,618)
R = Max – Min
The formula assumes calculation of 8 resistance and support lines without calculation of the Pivot base level. Coefficients are added to the calculation, with them the price contacts the levels more often, that is why this method is recommended for scalping and short-term transactions at short timeframes.
R1 = (Max – Min)*1.1/12 + Close
R2 = (Max – Min)*1,1/6 + Close
R3 = (Max – Min)*1,1/4 + Close
R4 = (Max – Min)*1,1/2 + Close
S1 = Close – (Max – Min)*1,1/12
S2 = Close – (Max – Min)*1.1/6
S3 = Close – (Max – Min)*1,1/4
S4 = Close – (Max – Min)*1,1/2
The formula is similar to the variant of the classical calculation, the resistance and support lines are calculated similarly here. But the standard calculators use only four levels instead of six. And the second difference is the increased weight of the price closure in the calculation of the base horizontal.
Pivot = (Max + Min + 2*Close)/4
R1 = Pivot + (Pivot – Min)
R2 = Pivot + (Max – Min)
S1 = Pivot – (Max – Pivot)
S2 = Pivot – (Max – Min)
The formula assumes the calculation of only two horizons. The approach to calculation of the base pivot line is also changed.
If Close is less than Open, Pivot = Max + 2*Min + Close.
If Close is larger than Open, Pivot = 2*Max + Min + Close.
If Close = Open, Pivot = Max + Min + 2*Close
S1 = Pivot/2 – Min
R1 = Pivot/2 + Max
The difference in approaches to the calculation of the Pivot, resistance, and support levels shows that there is no single “best indicator”. Each method can be better in a specific situation for a specific asset. This can only be determined by testing a strategy.
Pivot Points indicator signals in trading
The indicator constructs the following horizontals:
P (PP) – pivot level, reversal level.
S – support levels.
R – resistance levels.
The ideal market behavior is considered to be when a candle opens below the P point, starts growing, stays a bit longer at the R1 point, then slowly reaches the R2 point and turns around.
The Pivot point trading strategy is based on the following idea: price tends to return to the level of the previous day’s close more often than it tends to go beyond the previous day’s range. Therefore, it is recommended to specify a daily timeframe in the indicator settings. This means that levels for the next day will be calculated on the basis of the previous day’s closed candle.
Pivot Point indicator signals:
The price fluctuates between R1 and S1, several times crossing in both directions Pivot Point – there is no certainty on the market, a flat.
The price breaks through points S3 or R3 – a strong downtrend or uptrend is outlined on the market.
On the uptrend, the price after correction rests against resistance R and bounces upward from it – a signal of continuation of the uptrend and opening a long position. For a short position, the situation is mirrored on a downtrend in relation to support S.
How do I add Pivot Points to MT4?
The Pivot Points indicator for MT4 is not one of the basic tools. But it can be added to the platform, having previously downloaded its installation file on the Internet for free.
1. In Google in the search box, ask “download pivot points indicator MT4”. A few points:
The versions offered on different websites may be different. You can download several versions and choose the most suitable one.
As sources, give preference to investment blogs, sites with updated information and lots of tabs. This will eliminate the likelihood that there will be a virus in the file you run.
Do not download a file if you are asked to enter personal information before doing so.
The extension of the downloaded indicator file is .ex4.
How do I use Pivot Points in LiteFinance?
Unlike MetaTrader, LiteFinance platform has a built-in pivot points indicator by default.
Open the terminal. If you have not registered yet, you can practice working with the indicator without registration on a demo account. On the main page in the top menu, click “Beginners / Open a demo account.
There are two tools in the list, named Pivot Points.
Pivot Points High/Low. It marks extrema on the price chart and displays their High/Low values. The range length (number of candlesticks) where extremum is automatically located is specified in the settings. The smaller is the value of the range, the more extrema will be shown by the indicator, but the less significant they will be. It is possible to specify different length of the period separately for highs and lows.
The tool is necessary for determining the local and key resistance and support lines.
Pivot Points Standard. In the settings of the indicator levels you can select any type of calculation: classic, Woody, Camarilla, etc.
The indicator helps calculate the most probable price reversal points. For example, you can overlay several indicators with different calculation methods on a chart. If resistance or support levels coincide, they can be considered key.
Strategies of trading by pivot levels
Trading by Pivot Points. Here are several examples when Pivot levels have become a confirmatory indicator determining possible reversal points.
As I mentioned at the beginning, it is desirable that a trader has more than one technique for defining resistances and supports. If levels detected by them coincide or are close to each other and the quotes start to fluctuate near the control zones, even a beginner can start preparing the next order. Thus, in the case of sterling, if the Fibonacci and consolidation levels on the price chart are close to the Pivot levels, it means that everything has been done correctly
Combination of Pivot levels with a descending or ascending trading channel can be quite effective. A break-up of the upper boundary of the first of them on the daily chart of GBP/USD near 1.26 will strengthen the risks of GBP/USD rally continuation.
How Pivot points are calculated
Formulas for calculating the main types of Pivot lines are given in one of the sections above. You should know the theory of their calculation at least to understand the principle of their construction. In practice, they are never calculated manually – you either use indicators that automatically build pivot points according to input parameters, or use calculators. An example of such a calculator can be found on the analytical portal Investing.
The calculator clearly shows the number of levels built by each method and the difference in the calculated values.
Calculation of pivot points in Excel.
Do not trust the calculators of analytical portals and downloaded indicators – use Excel for Pivot points, where you can see the formula and adjust it to your liking. Download quotes for Pivot Point from MT4 in the appropriate format or enter them manually.
How are Pivot Points useful in trading?
How to use Pivot Points:
Determining the points of a possible breakout or trend reversal. If one of the levels is broken, it is very likely that price will go to the next one. If a reversal occurs, a pullback to at least the previous level is possible.
Psychological effect. The “crowd effect” works. If everyone simultaneously sets take-profits at the R2 level by the Pivot Point indicator on the uptrend, the reversal will occur at the R2 point. Thus, it is not the Pivot Point indicator that predicts a trend reversal, but its use by the majority affects the change in price movement.
Setting take profit, stop loss, pending orders.
Pivot Point is another variant of the tool for trading strategies by levels and channel strategies with Bollinger Bands or Keltner Channel indicators. It is neither better nor worse than other tools, it complements them. Although, it is not ideal. Trade options – scalping on the price movement between levels, trend trading on the breakdown.
Advantages and disadvantages of the Pivot Point indicator
Advantages of the Pivot Point indicator:
Allows you to quickly automatically calculate the most likely price reversal points using various techniques.
It combines well with other confirming tools: Fibonacci levels, channel indicators, pivot patterns.
Suitable for strategies with pending orders. The indicator is used to calculate indicative levels; the price will touch these levels or break them with a further rapid reversal.
Disadvantages of the Pivot Point indicator:
Difficulty of setting and selection. The “Pivot Points” indicator has six techniques for constructing levels and several timeframes. The selected parameters at the moment do not guarantee the effectiveness of the indicator in the future.
The complexity of analysis. During the day, the price can several times cross the reversal level plotted on the daily timeframe. This confuses beginner investors and complicates the analysis.
To reduce the probability of error, use several tools to find the reversal points. For example, build horizontals based on extrema, watch for patterns, add channel indicators. The more levels that coincide with Pivot Point data, the higher the accuracy of the forecast.
Support and Resistance Levels
Rules for working with Pivot in Forex are classic for trading with Fibonacci levels or level strategies. If price is currently above the P-line, a central Pivot level, it is likely to continue its upward movement. If it is lower, it will continue downward. The nearest reversal points are R1, S1. If the price passes these points, the next target level is R2, S2. The farther the price goes from the central line P, the higher the market volatility and the higher the probability of the price reversal to the central level. That is why the points R3 and S3 are considered the most significant – their breakthrough indicates a strong movement. But more often the price turns to the P line.
At the beginning of the period the price was above the P line, confirming the uptrend. Then the price breaks through R2, but the candle closes just below it, showing a strong level. For the next candles R3 turned out to be a strong resistance line – the price almost touched it and consolidated again at R2. If we are talking about a correction, the next move to the R3 line and higher is possible. If the price passes at least 50% of the distance between R1 and R2, we can talk about a downtrend with a target to the P line.
Pivot levels are key horizons that traders consider as points of trade opening. Breaking through the levels is a signal to open a deal in the direction of the main movement. Rebound from the levels is a possible correction or reversal trend start.
Pivot Point calculation is based on a mathematical formula that uses prices of High (Max), Low (Min) and Close of the previous period.
The Pivot Point indicator plots key levels on the chart using several methods: classical method, Woody, Camarilla, Fibonacci, DeMarker. The choice of the method for calculating pivot points is determined individually depending on the market situation and the asset.
Description of signals of the indicator: movement between R1 and S1 points is a flat. Upward breakdown of R2 or R3 levels is a signal for an uptrend, S2 or S3 – for a downtrend. The Pivot Points indicator can also be used in swing trading. For example, if the uptrend starts a correction at the level of R3, a trade opens when the correction ends at the point R2.
Conclusion on the use of Pivot Point
Thus, Pivot Points are a great help in defining resistances and supports, and their combination with other instruments of technical analysis allows developing effective trading strategies. Pivot Point is an auxiliary indicator, supplementing trend or channel tools. It has an advantage – there is no need in horizontal lines drawing by hand, but it has a disadvantage – it does not draw trend lines, showing only horizontal levels. When trading with Pivot Point, consider fundamental factors and look for trend reversal confirmation using patterns.
FAQ on Pivot Level Indicator
How to use the Pivot Point Indicator?
Apply Pivot Point with other indicators that help to build horizons. For example, with Fibonacci levels plotted against extrema. If the levels coincide, they may be considered as the key level.
Watch for the emergence of a trend. The price breaks through the points S2 downwards or R2 upwards – this is a signal to open the deal. The pending order is established slightly below point S3 or slightly above point R3. If a reversal occurs at S3/R3, the order will not trigger and the trader will not lose anything.
Which type of Pivot point indicator is the most accurate?
It all depends on the market situation, the asset, the timeframe:
The Camarilla method is more suitable for scalping.
Each version of the indicator has a timeframe in the settings.
Its change leads to the expansion or contraction of levels.
The accuracy of levels may be affected by the current volatility.
When constructing levels in trading with Pivot Point, take into account fundamental factors affecting the quotes.
How are Pivot Points calculated?
In the classical variant the basic level is calculated by dividing the sum of maximum, minimum and closing prices by “3”. The calculation methods differ in the methods of calculating the “R” and “S” levels. For example, the Close price may be in priority or distances to levels may be corrected by Fibonacci coefficients.
How to Determine the Pivot Levels?
You should use the calculator for calculating pivot points. The input data are prices High, Low and Close.
It is possible to use ready-made calculations. For example, this information is available on the Investing site.
Add the Pivot Point indicator to the chart. It will automatically build levels according to the methods specified in the settings.
Which Pivot Point Indicator is optimal for intraday trading?
Any trading strategy requires the setting of indicators depending on the type of asset, the current market situation, and the timeframe. Each version of the Pivot Point indicator can be ideal – it all depends on the conditions and parameters of the strategy. You can determine the optimality of the indicator settings for intraday trading only by testing the system on the quotes history.