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Pivot Point Trading: Identifying Support and Resistance Levels with a Pivot Indicator

Pivot Point Trading: Identifying Support and Resistance Levels with a Pivot Indicator

To improve your trading skills, minimise risk and successfully trade forex it is important to take advantage of the numerous forex trading tools available to you. One of the many tools available includes the highly convenient pivot point indicator, a widely used and popular concept in forex trading that enables traders to take advantage of small price movements.

What is a pivot point?

A forex pivot point is a technical analysis indicator that is used to establish the overall trend of the market within a given timeframe. Pivot points are widely used by technical analysts to help determine market trends, short-term support and resistance levels as well as the high, low and closing price averages from a given trading day.

Identifying these levels is extremely useful in giving traders a clearer understanding of when to enter or exit the market, whether to go long or short, and where to place stop loss or take profit orders. As with standard support and resistance levels, traders can choose to trade the bounce or the break of the levels.

Pivot points are the ideal way to minimize risk and are therefore used by many traders from across the globe on a daily basis as guidelines for stop loss and profit target placements. Though other traders prefer to focus their attention on other technical indicators such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD), it is important that you also focus on identifying areas that define risk, regardless of your level of trading experience, and this is easy to achieve with pivot point trading. You can read more about some of the many forex indicators to choose from in our article, make your trading profitable with the best forex indicators.

There are a number of options when it comes to pivot point analysis. Below we will focus on the calculation methods used for standard pivot points and Fibonacci pivot points.

Introducing standard pivot point calculations

A forex pivot point calculator enables traders to calculate pivot points in an effort to establish estimated support and resistance levels of a given day. It is straightforward to use, whether you wish to calculate pivot points for a current trading session or for an upcoming trading session.

To find the base pivot point (P), simply enter the pivot point formula using the previous period's high (H), low (L) and close (C) prices into the relevant fields. Once the information has been entered and you click 'Calculate,' the pivot point will be automatically presented. In addition to the pivot point you will also be presented with three support and resistance levels. The formula is:

P = (H + L + C)/3

Next, we derive two support and resistance levels from P. In order to do so you will need to calculate the difference (D) between the highest point (H) and the lowest point (L), or D = H – L.

The precise calculations are:

First support, S₁ = 2P - H

Second support, S₂ = P - D

First resistance, R₁ = 2P - L

Second resistance, R₂ = P + D

Using the below three price levels will enable you to find the pivot point and extend it to reach the next three support and resistance levels:

Pivot Point (P)

R1, R2 and R3

S1, S2 and S3

Fibonacci pivot points

To calculate Fibonacci pivot points, we begin, as with above, by calculating the base pivot point, or P.

Support and resistance levels are plotted a certain distance away from P, where D is the difference between the high and the low. To calculate support levels we subtract multiples of D from P. to calculate resistance levels, multiples of D are added to P, where the multiples are taken from the Fibonacci sequence of numbers.

The precise calculations are:

S₁ = P - 0.382D

S₂ = P - 0.618D

S₃ = P - D

R₁ = P + 0.382D

R₂ = P +0.618D

R₃ = P + D

Using pivot points within your trades

Once you have calculated the various types of pivot point and accompanying support and resistance levels, it's now time to use the results within our trades.

The first thing we can do is use the base pivot point to gauge general direction. If the prevailing market price has travelled above the base pivot point, this indicates a bullish trend. If the prevailing market price has travelled below the base pivot point, this suggests a bearish trend.

Pivot point levels can be used just like standard support and resistance levels. The more you see a currency pair touching a pivot level then reversing, the stronger that level is; and if a pivot level is holding, it could present some excellent trading opportunities.

Typically in pivot point trading, when the market reaches resistance levels and the indicator suggests a bullish market, the trader would look to close a long position. When the market drops to support levels, thus suggesting bearishness, the trader would look to close short.

Alternatively, some traders use support and resistance levels as indicators of when to open positions, going short once the market reaches resistance and going long once the market reaches support.

How to use a pivot point indicator

Pivots play a key role in trade management, and there are several ways to incorporate them into your pivot point trading strategy. In order to use them to their full advantage, you will need to download a pivot point indicator from the MetaTrader 4 platform.

Although the MetaTrader 4 platform features a selection of high-quality indicators, a pivot point MT4 indicator is not one of the tools that comes bundled as standard. Therefore, if you are looking for a high-quality pivot point indicator then it is recommended to first download the MetaTrader 4 Supreme Edition (MT4SE), a powerful, user-friendly platform that comes with a complete bundle of extra tools, features and indicators.

This free plugin for MetaTrader offers a vast selection of cutting-edge indicators, including the high-low indicator, Keltner channels and Donchian channels, as well as the pivots indicator, one of the best pivot point indicators available for MT4.

After downloading and installing the MT4SE, select Navigator to view your additional tools. Double click on Admiral Pivot to launch a window that allows you to alter various input values, along with aspects of how the platform displays the indicator. Select OK if you are satisfied with the default values.

Source: Admiral Markets MT4 Platform.

As displayed in the screenshot above, the default value for the pivot points' timeframe is set at D1, meaning that the high, low and close values are all taken from the previous day. This can be configured to a different value if you so wish, however, it's important to note that pivot points are typically intended for short-term analysis, whether that involves day trading or for even shorter timeframes than this.

Pivot point forex trading: Closing thoughts

The pivot point indicator for MT4 Supreme Edition is fully customisable, giving traders the opportunity to benefit from a more flexible, enjoyable and optimised trading experience. As the pivot point indicator cannot be regarded as a complete trading system in itself, it is advised to use this indicator in combination with others in order to back-up your findings from the pivot point indicator and determine the overall market sentiment.

As with any strategy you select, simplicity is always key. It's vital to make full use of the many tools available to you on the platform to determine what works best for you, and always practice different strategies on our demo trading account before getting started with live trading. Finally, be sure to remain scrupulous when it comes to money management, risk management, currency pair choice, market analysis and your forex education, as these elements cannot be ignored if you wish to achieve regular success from your trades.

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