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In my opinion one of the most important tool for your trading.
What is on the chart
We have few horizontal lines:
Pivot line – this is the middle line
R1, R2, R3… – resistance lines, above Pivot line
S1, S2, S3… – support lines, below Pivot line
We can calculate more higher levels like S4, R4 and so on but in practice you will need only levels 1,2 and 3.
These lines are calculated based on previous period (to be specific in formula we can find high, low, close). Because of that we have:
- 1-hour Pivot Points – calculated on high, low, close of previous hour
- 4-hour Pivot Points – calculated on high, low, close of previous 4 hours
- Daily Pivot Points – calculated on high, low, close of previous day
- Weekly Pivot Points – calculated on high, low, close of previous week
- Monthly Pivot Points – calculated on high, low, close of previous month
- Yearly Pivot Points – calculated on high, low, close of previous year
As you can expect, R lines work as resistance for price, S lines as support. Idea here is that price tend to move around pivot line. Even in an uptrend, after hitting a resistance we can expect a correction down to the pivot line.
Like in the example below. Price was moving around pivot line (black line). Then we saw a strong move down to the S2 area. Then a pullback and again move around pivot line. When there is no clear trend in place, we can see such behavior where pivot line is center for price action.
Which Pivots are best for you?
So we know that there are daily, weekly, monthly… Which one is best for you? Depends from your main timeframe and trading style. The most popular are of course daily Pivot Points. You have to test it by yourself which Pivots works best for your trading. As a little help, we can try separate them like this:
- 1h, 4h Pivots – suitable for lowest TFs
- Daily Pivot points – suitable for TF from 1m to 1h
- Weekly pivots – suitable for FT like 4h, daily
- Monthly – suitable for TF like 4h, daily, weekly
- Yearly – suitable for TF like weekly, monthly
Strategy based on Pivots
You can build your main trading strategy based on Pivots or you can use them as an addition to other strategy.
Few important notes about pivots.
When price is below Pivot line, this line may act as a resistance. Similar situation with price above Pivot, it will work as support.
Most important are second lines. So, in other words, there is a big chance that the main target for current move will be S2 or R2. These are levels where traders like to take profits. Because of that you can expect correction move from these lines.
R3, S3. There are times when trend is very strong and price move up to the R3 or down to the S3 line. In that case, you should take profit at S3 or R3. Do not hope for move to continue. In most cases it will end at S3 or R3. Of course, you can close part of your position at 3rd line and let the rest roll. Still, from my experience I can tell that it is very unusual for price to move higher than R3 line or lower than S3 line.
Pivots from higher time frame. There are times when it is good to check situation for higher time frames. I like to open separate chart for that. There are situations when lines from two different Pivots are near to each other. For example we may have daily R2 near weekly R1. This is very important information for us because we know where is the strong support and where we should take profits.
Pivot Points in Forex – trade examples
USD/JPY H1, weekly pivots
This is an hourly chart of USD/JPY with weekly Pivot points. Trend is up. Price is above Pivot line. After a range move there was a break above trend line and you can see strong move up. It ended exactly at R3 level. It is a rare situation. In most cases you will see that price respect resistance lines at R1 and R2. Sometimes there is news or some other reason for that kind of strong move.
GBP/JPY 5m daily Pivot lines
On chart above we have GBP/JPY, 5m chart with daily Pivot lines. It is an interesting situation. For the first part of a day price was above Pivot line which worked as support.
Later situation changed. Pivot stopped to work as support, there was also a resistance from moving average. Suddenly, GBP/JPY tanked. We can see that it went straight to the S2 line.
That chart shows why it is important to set take profit orders. It was only a moment when price was at S2 line and there was a strong bounce back. You would not be able to close it manually.
EUR/USD, 4h monthly Pivot Points
Last example is EUR/USD, 4h chart with monthly Pivot Points. It is rare when you check monthly pivot lines, but as you can see they also work. In this case Pivot line worked as a resistance, later move up ended at monthly R2.