I often get a lot of questions after showing a chart with an indicator called pivot points. Pivot points should not be confused with pivot highs and lows. Pivot highs and lows are simply historical turning points in a market. Pivot points are tools that attempts to forecast daily support and resistance levels. Pivot points have been around for a long time and were developed many years ago by floor traders. These simple calculations allowed floor traders to estimate intraday turning points before calculators, or computers. Pivot point trading works in most markets and better yet, they work great in conjunction with candlestick patterns.
I find two different types of traders who use pivot points. Some swing traders will use a pivot point strategy to enter positions even when planning to hold their position for several days. Day traders are most likely to use Pivot Points as a part of their strategy.
Below are the calculations for the Pivot Points. As you can see they develop five points. The Pivot, S1, S2, R1 and R2. Many people, as well as many software packages, also add an S3 and R3 calculation. The PP’s are always calculated on the prior day’s data. The great thing about Pivot Points is the amount of information on the internet. Most people use them in a similar fashion, but they become more potent when used with candle reversal patterns.
Resistance 2 = Pivot + (R1 – S1) Resistance 1 = 2 * Pivot – Low Pivot Point = (High + Close + Low)/3 Support 1 = 2 * Pivot – High Support 2 = Pivot – (R1 – S1)
Traders use different time frames with their Pivot Point strategy on candlestick charts. I have found that they work extremely well with 15 minute candlestick charts, although I’m sure others may disagree with my preference. If you use a longer time frame you are often late with your position, or the turning point. A candlestick trader will consider a long position if the market opens above the Pivot Point, and a short position when opening below the Pivot Point. The calculated support and resistant points (S1, S2, R1 and R3) are then used as any other types of support and resistance such as horizontal chart or Fibonacci points.
When I’m trading a market and it opens above the PP and I take a long position I will watch The R1 level very closely for a candlestick reversal pattern. If price clears R1 I will follow the same procedure at R2. Let’s say we get a candlestick reversal pattern at R2 and I reverse my long position into a short. I will then watch the PP, S1 and S2 for another reversal. There are times that I will only play one direction because a strong trend on the daily chart.
The support and resistance points identified by Pivot Point calculations work amazingly well. I cannot explain why they work so well, nor do I care to take the time to figure out why — they just do. This trading method really becomes much more effective when you combine it with candlestick reversal patterns. Candlestick patterns really increase the odds that a reversal has taken place at one of these PP levels.
Pivot Points and candlestick patterns work FOREX charts, futures and in the stock market especially if you are trading indexes. Make a few paper trades and see how well it works for you.
New to candlestick charts? Check out Steve’s FREE video introduction on Candlestick Charting here.