Trading With Pivot Points
Pivot Points are an efficient method of predicting support and resistance areas for the trading day, using the close\high\low\close of previous days. It is one of the few strategies that project support and resistance areas that was not yet respected by price. In the following article we will explain the formula for calculation and trading with pivots points.
Calculation of Pivot Points
Central Pivot Point (P) = (High of previous day + Low of previous day + Close of previous day) / 3
First Resistance (R1) = (2*P) - Low
First Support (S1) = (2*P) - High
Second Resistance (R2) = P + (R1-S1)
Second Support (S2) = P - (R1- S1)
Pivot Points rawn on the GBP\JPY Forex Pair
Pivot Point Bounce
This is the simplest, most straight-forward trading system that incorporates Pivot Points. It requires price to touch a certain Support or Resistance point and to respect it - by going in the opposite direction. We will enter trade in the direction of the bounce, after confirmation from Japanese candlesticks.
Price touched R1 Pivot and bounced
Price touched S1 Pivot and bounced, Long entry marked on chart
Aggressive traders will take trades without extra confirmation, while conservative traders can maximize their win rate by confirmation trades will actual Support and Resistance levels. If one requires Support and Resistance at the Pivot level, his trades' quality will increase sharply. Another way of confirming trades is with Bollinger Bands - make sure that the Middle band of Bollinger is not in the opposite direction of your trade. It can be flat or in the trade's direction (best case), but if it is trending in the opposite direction it can serve as a block for price and prevent price's movement.
Pivot Point Breakout
This is a breakout strategy - trend-following in its core. Its main trigger for trades is the breakout of Pivot Points. We will trade only breakouts of the R1 and S1 levels as they are more reliable as trading signals. The S2 and R2 rarely break, and usually serve as a fierce barrier for price, that often retraces to them even if a breakout occurs. Trades are entered after price closes beyond a certain Pivot Support\Resistance level. Take profit for this trading method is set at the R2 and S2.
Price broke R1 Pivot Point, resulting in Long Trade. Note the pullback to Support after breakout.
Price broke S1 Pivot Point, resulting in Short trade