By McOwidi FX

PIVOT POINTS
What are Pivot Points?
Pivot points are significant support and
resistance levels, which can define potential
trades. They were calculated by professional
floor traders (exchange members who execute
transactions from the floor of the exchange,
exclusively for their own account) to set the key
levels. These traders used to adapt rapidly to
the short-term changes in the market.
At the beginning of the trading session, they
looked at the previous day’s high, low and the
closing price to calculate a pivot point for the
current trading day. Afterward, support 1,
support 2, resistance 1 and resistance 2 were
calculated. The levels were used for the daily
trading. This is known as a traditional 5-point
system.
There are different ways to calculate pivot
points
Let’s start with the classics.

The main pivot point (PP) is the central pivot.

The central pivot is the main
support/resistance. This means the price is
expected to float around this level most of the
time. It is used as the base for all other pivot
levels.

Сlassical formulas
The pivot point is calculated as follows:

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

The rule behind this calculation is simple: we
take yesterday’s high, low and close price and
divide it by 3.

Support 1 (S1) = (PP x 2) – Previous High;

Support 2 (S2) = PP – (Previous High – Previous

Low);

Resistance 1 (R1) = (PP x 2) – Previous Low;

Resistance 2 (R2) = PP + (Previous High –

Previous Low).

Sometimes the opening price is also used in the

formula. In that case, the equation is:
PP = ((Today’s Open) + Yesterday’s (High + Low
+ Close)) / 4

The levels of support and resistance are

calculated the same as in the 5-point system.

The classic 5-point system is not the only way

of calculating Pivot points.

Let’s look at the other types.

Woodie Pivot Point formulas

Some traders use Pivots based on Woodie
formulas. They are calculated very differently:

R2 = PP + High – Low
R1 = (2 X PP) – Low

PP = (High + Low + 2Close) / 4

S1 = (2 X PP) – High

S2 = PP – High + Low

Some traders prefer them as they give more

weight to the closing price of the previous
period.

Camarilla Pivot Point

These levels are similar to the Woodie,
although they are calculated for 8 major levels
(4 resistance and 4 support).
R4 = C + ((H-L) x 1.5000)

R3 = C + ((H-L) x 1.2500)

R2 = C + ((H-L) x 1.1666)

R1 = C + ((H-L) x 1.0833)

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)
S4 = C – ((H-L) x 1.5000)

Fibonacci Pivot Point

The main point of this type is the usage of
Fibonacci levels in calculating the supports and
resistances.

R3 = PP + ((High – Low) x 1.000)

R2 = PP + ((High – Low) x 0.618)

R1 = PP + ((High – Low) x 0.382)

PP = (H + L + C) / 3

S1 = PP – ((High – Low) x 0.382)

S2 = PP – ((High – Low) x 0.618)

S3 = PP – ((High – Low) x 1.000)

The choice of periods depend on your trading

strategy
Pivot points levels change depending on the
period you choose. There are daily, weekly,
monthly and yearly pivot points.

Usually, we use daily pivots for trading on the

M30 and shorter intraday timeframes. They use
the previous day’s high, low and close. The
figures update every day.

We use the weekly pivot points on H1, H4, D1

charts. To calculate these levels, the previous
week’s high, low and close are used. Take a
note that they do not change until the next
week starts.

On the weekly charts, we recommend you to

use monthly pivots. They gather the data from
the previous month.

In case you analyze the monthly chart, it is

possible to apply the yearly pivots. It uses the
high, low and close of the previous year.

The usage of pivot points

There are a lot of strategies of using pivot
points by traders. Let’s look at the most
frequently used.

Support and resistance

Pivot points can be used as traditional support
and resistance levels. Range-bound forex
traders place a buy order near identified levels
of support and a sell order when the pair near
the resistance. The more times a currency pair
touches a pivot level then reverses, the
stronger the level is.

If price is moving towards the resistance level,

you can place a sell limit pending order and a
stop loss just above the resistance.
If the price is moving towards the support level,
you could place a buy limit and a stop below
the support
Keep in mind, that support levels become
resistances if the price is below them and
resistances become supports if the price is
above them.

Key levels
Breakout forex traders use pivot points to
identify the key levels that need to be broken
to determine a further direction of the price.
If you believe that you see a strong bullish
trend, you can wait until the pair breaks the
first resistance. As soon as the pair broke it, you
can open a buy position and place a take profit
at the level of the next resistance. Don’t forget
about the stop loss. The stop loss should be
placed below the first resistance. However, you
can move your stop loss manually if you see
that the price keeps rising.
If you see that price broke the support, you can
start selling the pair. The take profit will lie at
the level of the next support, stop loss should
be placed above the support the pair has
broken. You can move your stop loss here too if
you see a continuation of the downward
movement.
Be careful with this strategy as it is hard to
define whether it’s a breakout or fakeout.
Spikes are a common occurrence during news
events, so be sure to keep up with breaking
news and be aware of what’s in the economic
calendar for the day or week.
Market Trend
Pivots may be used to identify the overall
market trend.

If the price breaks through the pivot point to

the top, it’s a sign that there are a lot of buyers
on the market and you should start buying the
pair. The price being below the pivot point
would signal bearish sentiment and that sellers
could have the upper hand for the trading
session.
Market sessions
Another important thing to know is connected
with the market opening hours.

As we know, the Forex market is functioning 24

hours a day. There are four market sessions:
Australian, Japanese, UK and USA. You can find
the approximate time for each of them Time of
trading sessions.

When one of the markets opens, there is a high

possibility of breaking the pivot levels as a lot of
traders enter the market at the same time.
During the period when the US market is closed
and the Asian market opens, prices may remain
stable for hours between the pivot point and
either support or resistance. This gives
opportunities to range-bound traders.

To conclude, the pivot points are helpful for

trader in different ways. You can use them on
their own or in combination with other
indicators. The second option allows you to
create and practice your own unique trading
strategy.
By McOwidi FX