Pivot Points || Essential Tutorial 2020


Pivot Points Essential Tutorial Introduction

With the help of some simple calculations and the monitoring of traditional price indicators (maximum (low), minimum (high), opening (open) and closing (close) of the previous days), it is possible to get different points that can help in identifying the levels of support and resistance.

Well, these points are the so-called “pivot levels,” and they could become your essential ally in predicting market direction.

Understanding these few items well during each day of trading the market, using the pivot levels to achieve your goals, it will be enough to keep track of the price of opening, the maximum and the minimum session, the closing.

Just this simplicity of calculation, together with the predictive nature of pivot point analysis, represents one of the main reasons pivot point analysis has gained so much popularity: traders can use the information relating to the previous day to calculate potential turning points for the current day or a forthcoming day.

pivot points

The Pivot Points are price levels determined by the application of technical analysis and simple mathematical formulas, which are useful in identifying the support and resistance levels.

Introduced in the literature by trader Neil Weintraub, Pivot Points allow the trader to have an unobstructed view of the price movements in the market in the concise term.

Charles Le Beau and David W. Lucas published the first complete formula of pivot points as supports and resistances in their volume analysis of the Future Market.

What are the Pivot Points?

Pivot Points are useful indicators for identifying potential intraday support and resistance areas, valid for the following trading session.

The pivot points, compared to the leading indicators/oscillators of technical analysis, are distinguished from these by their objectivity, in that we entrust their identification to simple mathematical formulas.

The usefulness of Pivot Points is linked to intraday operations. Pivot levels can identify trend reversal points and critical levels that confirm or reinforce a breakout.

Therefore pivot points are essential to where they are also used in auto-trading systems.

Pivot points have existed since trading existed, and even before computers became a means of universal use.

Pivot Points are Support and Resistance

So, Pivot Points are nothing more than support and resistance levels, terms with which even less experienced traders have a certain familiarity.

Compared to used supports and resistances, however, the Pivot Points are more complex, the result of calculations that take into consideration a more significant number of elements.

The supports and resistances as everyone understands them, in reality, are a hyper-simplified version of the Pivot Points. They are nothing but minimum and maximum, usually weekly.

Is it reasonable to use supports and resistances from minimums and maximums, or Pivot Points?

At an operational level, minor changes, in the sense that the same techniques are used to use both.

It is a question. However, that has to do with precision and effectiveness.

Well, Pivot Points are much more precise. This is true because, as mentioned above, they result from calculations that use distinct elements.

The supports/resistances deriving from the minimum are more comfortable to identify, therefore usable. Just a glance sometimes is all that is necessary.

It, therefore, depends on the depth that the trader wants to give to his investment activity, and the approach he adopts towards technical analysis.

If his technical analysis is based on indicators that, for example, found the release of the signals on the statistical study of volumes, the supports/resistances deriving from the minimums are sufficient since his approach does not foresee, in fact, the supports and resistances as the main course of the menu.

How to use?

As you can see from the formulas above, taking the high, low, and closing  prices of the previous days, the trader can have 7 points at his disposal: 3 resistance levels, three levels of support, and an actual point of “breakthrough.”

But how to use this Historical information?

In very exemplary terms, if the market opens above the pivot point, the sign that the trader will get will be that of a long position, provided that the price remains above the pivot point. If the market opens below the pivot point, then the sign will be for taking short positions, as long as the price remains below the pivot point.

Calculation

The calculation of the pivot point is entrusted today to computers, but some want to find them.

The idea behind trading with pivot points is to expect a reversal or a breakdown of the points R1 or S1: when the price reaches R2 and R3 or S2 and S3, the asset to which the analysis refers will already be in an overbought or oversold condition. At the same time, Theseused above all to exit the market rather than enter.

A perfect scenario would exist if the market opened above the actual pivot point, stopped at R1, and continued at R2.

A trader should thus enter R1 by targeting R2, and if the market shows sufficient strength, close half of his position in R2. So the next target for the rest of the position will be R3.

The main benefit of this simple pivot point technique lies because many traders use the same levels based on the same formula, with no discretion, contrary to what happens instead of using other useful methods to draw the levels of support and resistance, and the trend lines, which can be more subjective.

Pivot Points are a graphical indicator of turning points and can be used like other indicators to get buying or selling signals in the markets.

The striking aspect of the pivot points indicator is their ease of use.

Pivot Points are akin to supports and resistances in that they are daily levels that can be touched and broken several times during the day, generating trading signals from time to time.

Pivot Points: How are they calculated?

Below you will find all the information to calculate Pivot Points.

The Pivot Points, we repeat, are indicators that show the direction of the market, and for this reason, they are one of the essential tools of technical analysis.

Pivot levels are also used to generate valid levels on a weekly or monthly basis.

The data necessary to calculate Pivot Points are:

the maximum price (H)  the minimum price (L) the closing price (C)

Average Price (AP) is derived from the other three. The only thing that needs to be done, in this case, adding the maximum price, the minimum price, and the closing price and divide the total by three.

(H + L + C)/ 3

Once you have the average price, it is possible to calculate the actual pivot points.

To calculate the first support pivot (S1), it is necessary to double the midpoint and subtract the maximum price.

S1 = (2 * AP) – H

To calculate the first resistance pivot (R1), it is necessary to double the midpoint and subtract the minimum price.

Therefore: R1 = (2 x AP) – L

To calculate the second support pivot (S2), it is necessary to subtract the midpoint of the difference between the two got pivots.

S2 = AP – (R1 – S1)

To calculate the second resistance pivot, it is necessary to add the first resistance pivot with the difference between the midpoint and the first support pivot.

R2 = R1 + (AP – S1)

This is how the points are interpreted.

The first point of resistance (R1) shows that “resistance rejects prices” and this means that, if touched, this point represents a sell signal.

First support point (S1) shows that “the support rejects prices” and this means that, if touched, this point represents a buy signal.

Second resistance point (R2) shows that an upward trend is about to start, and this means that, if empty, this point represents a buy signal.

The second support point (S2) shows that a bearish trend is about to start, and this means that, if violated, this point represents a sell signal.

The Formulas

AP = (H+ L+ C) / 3

1st support pivot:

S1 = (2 * AP) -H

1st Resistance Pivot:

R1 = (2 * AP) – L

2nd Support Pivot:

S2 = AP- (R1-S1)

2nd Resistance Pivot:

R2 = (AP-S1) + R1

Fibonacci Pivot Points Indicator

To calculate the Fibonacci Pivot Points, we rely on the same base as the standard Pivot Points, which is the calculation of P (Pivot Points Base).

We mark support and resistance levels at a certain distance from this pivot point. We will identify the difference between the maximum and the minimum D again.

The support levels are calculated by extracting multiples of D to P. The resistance levels are calculated by adding multiples of D to P.

We will take the multiples from the sequence of Fibonacci numbers, hence the name of this Pivot Point.

The Pivot Points calculator will establish the following parameters:

pivot point levels

Pivot Points Trading by DeMark

There are three distinct ways to calculate the pivot point basis with this method.

Which Pivot Points calculation to be used depends on the comparison between the opening, and closing prices.

For these Pivot Points, we define an X variable, a value that depends on whether the opening is higher or less than the closing.

If the closure is less than the opening: x = H + 2L + 2L + C.

If the closure is greater than the opening: x = 2H + L + C.

When the opening is equal to the closing: x = H + L + L + 2C

This final formula is the most used Pivot Point strategy in Forex trading.

If you are looking at the daily chart for the whole week, closing and opening are just conventions. This differs from the stock market, where opening and closing are two distinct things, separated in time and price.

Once we have our value for x, we use it to calculate the Pivot Point Base (P).

P = x / 4

We also calculate support and resistance levels are also from x (the Pivot Point DeMark does not use over one resistance and support level).

S ₁ = x / 2 – H

S ₂ = x / 2 – L

The Camarilla 

The Camarilla is a system to calculate the pivot point, which requires the return of prices to the mean. It attracts the price of an asset to its average.

On many sites it is possible to find an automatic calculator that can generate Camarilla pivot points in real time, but if you want to try your hand at math, the equation is:

PP = (H + L + C) / 3

S1 = C – ((H – L) x 1.0833)

S2 = C – ((H – L)) x 1.1666)

S3 = C – ((H – L)) x 1,2500)

R1 = C + ((H – L)) x 1.0833)

R2 = C + ((H – L)) x 1.1666)

R3 = C + ((H – L)) x 1,2500)

We specify that C = closing price, H = high, therefore maximum, L = low, that is a minimum.

The Woodie

The Woodie is another system for calculating pivot points and is based on the concept that once these levels are exceeded, the trend should change direction.

As with Camarilla, we can find many automatic calculators online by following these equations:

PP = (H + L + (O * 2)) / 4

R1 = (2 * PP) – L

S1 = (2 * PP) – H

R2 = PP + (H – L)

S2 = PP – (H – L)

R3 = H + 2 * (PP – L)

S3 = L – 2 * (H – PP)

We specify that PP stands for the price of the pivot point, H stands for maximum, while L stands for a minimum.

Pivot Points: How to use them in trading?

During a range, trading phase pivot points identify support and resistance levels.

If a price touches a level multiple times without breaking it, it will mean that the price level is strong.

Once this is determined, you can place your order, depending on whether the price is about to touch support or resistance.

It takes pivot Points into consideration to determine the primary direction of the market by identifying the main levels of support (Pivot Low) and resistance (Pivot High).

Therefore, they are a useful tool to identify input and output signals and sensitive points in the graph from which it is possible to expect a significant rebound in prices.

We should not underestimate, however, is the possibility of a breakout, since these levels can always be subject to breakages. In case of a breakout, we adopt two strategies:

Conservative strategy: This consists more or less in waiting, which can, however, turn against the trader. The risk is, in fact, that of not exploiting the initial intensity of the trend and therefore moving late. However, the same strategy can save since it prevents you from placing orders.

Aggressive strategy: useful to make the most of the emphasis on a positive trend. In the event of a breakout, it is therefore also advisable to know when to place a stop loss to maximize profits and not to lose.

Pivot Points as operational signals

Pivot Points are used by more experienced traders, also as operational signals, as indicators to understand whether to buy or sell.

The four levels (R1, S1, R2, S2) generate the following signals:

R1: Sell signal if touched (Resistance rejects prices).

S1: Purchase signal if touched (Support rejects prices).

R2: Purchase signal if violated ( The Start of a bullish trend).

S2: Sell signal if violated (The Start of a bearish trend).

If the line given by the Pivot Points is broken from the bottom to the top, the sign will be to buy; if instead it will be broken from top to bottom, a sell signal will be determined (breakout strategies).

Pivot Points: How to use them in trading.

During the range, trading phase pivot points can be used as support and resistance levels.

If a price touches a level multiple times without breaking it, it will mean that the price level is strong.

Once this is determined, you can place your order, depending on whether the price is about to touch support or resistance.

Pivot Points are taken into consideration to determine the primary direction of the market by identifying the main levels of support (Pivot Low) and resistance (Pivot High).

Therefore, they are a useful tool to identify input and output signals and sensitive points in the graph from which it is possible to expect a significant rebound in prices.

We should not underestimate, however, is the possibility of a breakout, since these levels can always be subject to breakage. In case of a breakout, we adopt two strategies:

Conservative strategy: This consists more or less in waiting, which can, however, turn against the trader. The risk is, in fact, that of not exploiting the initial intensity of the trend and therefore moving late. However, the same strategy can save, since it prevents you from placing orders wrongly;

Aggressive approach: useful to make the most of the emphasis on a positive trend. In the event of a breakout, it is therefore also advisable to know when to place a stop loss to maximize profits and not to lose.

Pivot Points as operational signals.

Pivot Points are used by more experienced traders, also as operational signals, as indicators to understand whether to buy or sell.

The four levels (R1, S1, R2, S2) generate the following signals:

R1: Sell signal if touched (Resistance rejects prices).

S1: Purchase signal if touched (Support rejects prices).

R2: Purchase signal if violated (Start of a bullish trend).

S2: Sell signal if violated (starting a bearish trend).

If the line given by the Pivot Points will be broken from the bottom to the top, the sign will be to buy; if instead it will be broken from top to bottom, a sell signal will be determined (breakout strategies).

Pivot Point: Opening trading strategies

It is essential to keep in mind one important thing when trading with Pivot Points the trading session opens in most cases near the central Pivot, even if this is not a fixed rule. We consider this fundamental level as a natural point of attraction for prices.

Being aware of this aspect could prove essential for short-term operational strategies. If the opening price is above the central Pivot, we could consider it as a signal of strength. Therefore, the bullish strategy could be implemented.

If the opening price is below the intermediate level, we consider this scenario a signal of weakness, which could, therefore, allow the implementation of short strategies.

How To Use Pivot Points In Trading: Tricks 

We can use pivot points in various ways. We will focus on those most used by traders, daily ones. The hourly chart will apply these down, provided there is enough usable space between one pivot and another.

If the opening price is above the central Pivot Point (or Daily PP), during the day, they will not fall below it but will head upwards.

Conversely, if they open below the central Pivot Point, they will not rise above it during the day, but turn into a downward movement.

When trading, one should proceed in this way to make the most of the pivot points:

It is better to buy when the level R1 with target R2 is exceeded, or on the support S1 with lens AP;

It is advisable to sell in case of breakage of S1 with aim S2 or on R1 with target AP;

The area between S1 and R1 shows a congestion phase;

The exceeding of the S2 and R2 levels shows that the market has taken a precise, bearish, or bullish direction.

Usually, pivot points become stronger (and therefore indicative of a trend) depending on how many times the price bounces on it. For those who use timeframe low because they prefer fast forex intraday trading, it would be advisable to wait for a break of support or resistance provided by a pivot to trade up to the next.

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