What are pivot points in trading?
Pivot points (PP) are an effective indicator used by many traders. Although they are calculated automatically, you can measure them by hand. There are four main types of indicators, and other types are being developed. Unlike other indicators, every type of PP was developed by different analysts. Only one name is known: Nicolas Scott developed Camarilla pivot points in the 1980s.
Pivot points in trading
The pivot point indicator predicts support and resistance levels in the current or upcoming session.
The standard indicator consists of five lines:
- A pivot point (PP) stands for the middle line and determines the overall trend.
- Two levels above it (R1 and R2) reflect the resistance levels.
- Two levels below it (S1 and S2) stand for support levels.
These levels are calculated based on the previous trading day’s high, low, and close prices.
Pivot Point (PP) = (Maximum + Minimum + Close)/3
Support 1 (S1) = (PP x 2) – Previous Maximum
Support 2 (S2) = PP – (Previous Maximum – Previous Minimum)
Resistance 1 (R1) = (PP x 2) – Previous Minimum
Resistance 2 (R2) = PP + (Previous Maximum – Previous Minimum)
If the price is above the pivot point, it’s likely to reach the first resistance level. If it’s broken, the next resistance will become a target. Vice versa, two support levels will become targets for upcoming price movements when the price falls below the pivot point.
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Pivot points: types
There are four types of pivot point indicators. The standard one was discussed above. The other three types are:
1. Woodie pivot point
It adds more weight to the closing price.
R2 = PP + Maximum – Minimum
R1 = (2 X PP) – Minimum
PP = (Maximum + Minimum + 2Close) / 4
S1 = (2 X PP) – Maximum
S2 = PP – Maximum + Minimum
2. Camarilla pivot point
Camarilla pivot points also put more weight on the closing price, but there are nine levels – a pivot, four resistance, and four support levels.
R4 = Close + ((Maximum – Minimum) x 1.5000)
R3 = Close + ((Maximum – Minimum) x 1.2500)
R2 = Close + ((Maximum – Minimum) x 1.1666)
R1 = Close + (Maximum – Minimum) x 1.0833)
PP = (H + L + C) / 3
S1 = Close – ((Maximum – Minimum) x 1.0833)
S2 = Close – ((Maximum – Minimum) x 1.1666)
S3 = Close – ((Maximum – Minimum) x 1.2500)
S4 = Close – ((Maximum – Minimum) x 1.5000)
3. Fibonacci pivot point
This type uses Fibo levels for the calculation of support and resistance targets.
R3 = PP + ((Maximum – Minimum) x 1.000)
R2 = PP + ((Maximum – Minimum) x 0.618)
R1 = PP + ((Maximum – Minimum) x 0.382)
PP = (H + L + C) / 3
S1 = PP – ((Maximum – Minimum) x 0.382)
S2 = PP – ((Maximum – Minimum) x 0.618)
S3 = PP – ((Maximum – Minimum) x 1.000)
How to use pivot points in trading
Pivots are applied to various assets and timeframes. Pivot points can be daily, weekly, monthly, or yearly. The levels change depending on the period you choose.
For example, if it is Tuesday morning, daily pivots will be calculated using high, low, and close asset prices set on Monday.
When learning how to use pivot points in day trading, you may be confused. However, the names of pivots don’t correlate with the timeframes they are used on. For example, you should apply daily pivots to trade on timeframes up to 30-minutes. You should use weekly pivots to trade on hourly, 4-hour, and daily charts. The weekly levels are changed only once a week and are calculated on the previous week’s high, low, and close prices.
When trading on a weekly timeframe, you should use monthly pivots. They are built on the previous month’s data. If you plan to hold a position for months, you should use yearly pivots. It uses the high, low, and close of the previous year.
Pivot points are mainly used by day traders because daily pivots change every day while weekly, monthly, and yearly levels are updated rarely. Therefore, they can’t be accurate and don’t provide reliable signals.
Pivot points: pitfalls
Some pitfalls should be considered to use the indicator effectively.
- Static. Unlike most indicators, including moving averages and oscillators, pivots change only at the beginning of the next day. It’s dangerous for trading decisions when volatility is high.
- No 100% accuracy. There is no indicator that will provide fully accurate levels to enter and exit the market. Therefore, you should combine some technical tools to forecast price movements effectively. For example, the level becomes even stronger if any of the pivots overlap or converge with a moving average or Fibonacci extension level.
The pivot points indicator provides accurate levels that intraday traders mostly use. Although they are broken often, the breakout is short, and the price turns around eventually.