When trying to assess market direction and gauge potential key areas of support and resistance, Pivot Points are a fantastic tool to have to hand and we actually have a great free indicator which will automatically display the pivot points on your charts for you.
What Are pivot points?
Pivot points are simply the average of the highs, lows and closing price of a previous trading session and are displayed as as levels P (average closing price) S1,S2,S3 (to calculate the lows) and R1,R2,R3 (to calculate the highs).
Here is an example of Monthly pivot points on a Daily chart.
We can see here that price initially was caught between the S1 and R1 but we then got a nice big bullish expansion bar bar ( the fifth candle) which closed through the Pivot and above R1 indicating that the trend for the Month was likely to be higher and indeed we can see the market took of higher.
So this is one great way to use the Pivot Points: identify if the market is trading above or below the Pivot Point . Above pivot means you trade with a bullish bias for the month and below pivot means trading with a bearish bias for the month.
Tracking the position of price against it’s pivot point is a nice quick way to signal whether you should be looking for bullish or bearish setups.
Another fantastic way to use the Pivot Points is to use the levels as support & resistance. You will often observe a reaction at pivot points and this creates fantastic opportunity for trading, especially in range bound markets which are typically much more difficult to trade.
You can see on the chart above just how well price respects the pivot lines. If we drop down to a lower time-frame chart this is even clearer.
On the chart above we can see the Monthly Pivot Points displayed on a 4hour price chart and look at the amount of key reversals that come from price testing and retesting the pivot points. With just a little bit of work on stop placement and risk management you can easily build a great little trading strategy just off this basis. The gaps between each pivot price are generally around 100 pips or more using Monthly Pivots so there is nice profit to be made once you have a clear strategy to work from.
Remember this is a H4 chart so if we drop down to the Hourly these moves are clearer still.
The hourly chart really shows the scope there is for swing traders to use these levels for trades typically lasting around a day or two. The indicator also lets you flip between Monthly, Weekly and Daily Pivot Points so you can adjust the trade frequency, required stop size and typical holding time to suit your preferred trading style.
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